In the last fiscal year, Pakistan managed to cut its goods’ trade deficit to about $24.1 billion from around $27.5bn a year ago because of a 10.5 per cent increase in exports and less than 1pc decrease in imports.

This reduction in the trade deficit is qualitative as it owes primarily to a rise in exports and must be appreciated. Similarly, the country’s home remittances grew 10.7pc in the last fiscal year to $30.3bn from $27.3bn a year earlier. This is also good news for forex-starved Pakistan.

But we must not forget that remittances have increased chiefly because more and more Pakistanis, frustrated with the deepening of the politico-economic crisis in their homeland, are going abroad. In 2023, 862,625 Pakistanis left the country for overseas jobs and 832,339 left in 2022.

Nevertheless, growth in exports and remittances — two main sources of non-debt creating forex inflows — offers some hope for a gradual improvement in our external economy dependent on external borrowings. Such borrowings made in the past have become too large, and our capacity to repay them has become limited over time. That is why Pakistan is once again seeking a new International Monetary Fund loan (IMF) of $6bn after fulfilling very tough conditions of the Fund.

While exports and remittances have resumed growth, foreign investment has not yet increased sufficiently to offset the rapid outflows of profits and dividends

Prime Minister Shahbaz Sharif says that the government has met these tough (and politically expensive) conditions to stabilise the economy and stop further borrowing from the Fund. But this is just a political slogan aimed at appeasing 241m Pakistanis who are bearing the brunt of the IMF-dictated energy and taxation reforms.

These reforms are not only keeping inflation elevated (23.4pc in FY24) but are also partly responsible for anaemic economic growth (2.4pc in FY24) and high unemployment (10.3pc in 2024 vs 6.3pc in 2021).

Pakistan’s external debt stocks are so large, its external economy is so weak and dependent on geopolitics, and the country’s political system is so much dominated by the interest of the ruling civil-military elite that “getting rid” of the IMF isn’t so easy. At the end of March 2024, the stock of total external debt and liabilities stood at $130.4bn, according to the latest State Bank of Pakistan (SBP) report.

Despite the roll-overs of billions of dollars worth of Chinese, Saudi and UAE loans Pakistan spent $3.33bn on external debt servicing in just one quarter (Jan-March 2024), the report reveals.

The recent rise in taxation rates and continually rising energy prices also challenge services exports as much as they hamper goods’ export industries

Such large quarterly external debt servicing is bound to become more difficult in future for three reasons. First, imports are set to grow faster this year than in the last year after the removal of tariff and non-tariff restrictions on the instructions of the IMF.

Secondly, repayments of relatively expensive external debts obtained in 2021 and afterwards are now becoming repayable. And thirdly, whereas exports and remittances have restarted growing foreign investment has yet to grow fast enough to take care of faster outflows of profits and dividends of multinational companies and foreign investors.

In eleven months of the last fiscal year net inflows of foreign direct investment totalled just $1.73bn and net foreign portfolio investment $116 million. These volumes are too low to leave anything substantial in the country after accounting for $1.8bn outflow in the same period on account of repatriation of profit and dividends earned by multinational companies in Pakistan.

On the IMF instructions, Pakistan has not only cleared the backlog of such outflows but has also decided not to hold them anymore. The country’s overall balance of payments was negative by $2.45bn in eleven months to May 2024 which indicates how serious the problem of forex shortage is. Foreign exchange reserves with the SBP ($9.41bn as of July 5) provide goods’ imports cover of just two months against the internationally acceptable minimum of three months.

One possible way of containing the growth of external debts and thus avoiding further deterioration in the external economy is to seek a restructuring of these debts. Pakistan has just initiated an exercise to explore this option and is negotiating the restructuring of $15bn in Chinese energy loans.

But the proposed restructuring is expected to provide just a little relief. It could reduce the Chinese debt servicing volume by $600m to $750m per year, and that too at a high cost: in the long run, Pakistan will have to pay $1.3bn extra.

Even if Pakistan somehow gets this condition waived, a reduction in annual debt servicing requirement by $600m to $750m would hardly make an impact on the overall balance of payments if imports start growing and if foreign investment does not come in in a big way. All eyes are, therefore, fixed on promised foreign investment inflows from Saudi Arabia and the UAE.

Perhaps a dramatic increase in services exports particularly in exports of IT and IT-enabled services (IT-es) can make a difference. And that is what the government and the central bank are aiming at. The government has set an ambitious target of $25bn IT and IT-es exports by 2029 (with the base exports of around $3.2bn in FY24). However, the recent rise in taxation rates and continually rising energy prices also challenge services’ exports as much as they hamper goods’ export industries.

Published in Dawn, The Business and Finance Weekly, July 15th, 2024