Setting priorities right is important for both individuals and nations to pursue their goals. The state defines how and when individuals’ priorities clash with national priorities, and the state machinery prevents the eruption of such clashes and checks them when they erupt.

Keeping this in mind, it is important for Pakistan’s policymakers to set economic goals that not only conform to the changing needs of the nation but are also in line with the aspirations of most citizens. That is not possible unless democracy is allowed to flourish in the country and democratic institutions are strengthened.

Let the caretakers come next month and allow them to fulfil their constitutional duty of holding elections. Let free and fair elections be held and see which political parties form a new government. Only then can one expect what kind of democracy we will have, whether democracy will flourish and whether our democratic institutions will be strengthened.

Currently, the economic situation is chaotic primarily because forex-starved Pakistan has overborrowed funds from a host of foreign commercial sources and a few friendly foreign countries. The situation is also chaotic because the International Monetary Fund (IMF), whose lifeline lending has paved the way for external borrowings from other sources, directs us on what to do and what not to do.

In the current precarious economic climate, the government cannot afford to make mistakes to win the political approval of the masses

Since we are under a $3 billion IMF Standby Arrangement (SBA) fund facility that will be completed in March 2024, no caretakers or elected government can defy the terms of the IMF SBA until then. What is more troubling is that after March 2024, too, Pakistan will need to secure a large $7bn-$8bn IMF extended fund facility for three years.

The country doesn’t have any other options. Without such IMF lending, friendly countries that have provided forex support in recent months will likely not agree to offer more.

And we need lots of foreign exchange in the next three years because our own sources of forex earnings — exports, remittances and foreign direct and portfolio investment — are not strong enough to generate enough funds to match massive forex outflows, mainly via imports and external debt servicing. The situation is grim and may become grimmer with every single misstep on the economic front.

The PDM coalition government is about to end its term in mid-August. But last week, it okayed Rs51bn voter-influencing schemes recommended by parliamentarians. The federal government has clearly disregarded the IMF’s concern and concerns of all regarding the timing of such spending.

The government is about to end its term but last week it okayed Rs51bn voter-influencing schemes, clearly disregarding IMF’s concerns

Advancing such politically ambitious spending appears out of sync with the country’s fiscal position. In the outgoing fiscal year (July 2022-June 2023), the federal government borrowed Rs3.836 trillion from commercial banks, according to the State Bank of Pakistan’s provisional data. This amount equals more than 50pc of the Federal Board of Revenue’s tax collection in FY23. Within two weeks of this fiscal year (from July 1 to July 14, 2023), the government borrowed another Rs499.5bn from banks.

Pakistan has promised the IMF to let the exchange rates move in line with the demand and supply market forces. But the Overseas Investors Chambers of Commerce and Industry is still complaining about the painful delays the multinationals operating in Pakistan face in repatriating profits and dividends abroad. Resident Pakistanis make similar complaints about sending foreign exchange abroad to meet the educational and medical expenses of their dependents.

And import letters of credit (LC) are still not being opened freely though the pace of LC opening and financing has improved recently. Attempts to keep the rupee stable through such measures may prove counter-productive after some time.

In November, when the IMF will be reviewing the progress under $3bn SBA, Pakistan will have to make the exchange rate truly market driven. This means the local currency may fall dramatically. The forex crisis is still so acute that despite all efforts to keep the rupee stable, it recently touched a six-week low of about 288 to a US dollar in the interbank market.

Forex reserves held by the SBP currently stands around $8.727bn (as of July 14), enough to cover one and a half month of goods’ import bill. The reserves may start falling speedily once restrictions on all forex outflows are lifted. The caretaker government and the elected government to be installed after fresh general elections will have to work hard to raise the forex reserves equal to three months of import bill.

One good thing that the PDM government has done on the insistence of the IMF is that it has linked sales and transfers of all immovable properties to tax clearance. The move is expected to generate additional tax revenues. Any backtracking from this decision during the days of the caretakers or the newly elected government could hamper progress on IMF’s SBA besides depriving the country of additional revenue.

The introduction of any tax amnesty scheme by the caretakers or the newly elected government could be another misstep. Such schemes have always benefited political/establishment elite and business tycoons without adding enough to the state coffers.

Published in Dawn, The Business and Finance Weekly, July 31st, 2023