During the last fiscal year, the government’s borrowings for budgetary support had almost doubled to Rs7.48 trillion from Rs3.75tr a year ago, according to the latest statistics released by the State Bank of Pakistan (SBP).

Last year, the government kept borrowing excessively, chiefly to service old domestic debt and not to spend on the country’s development. During this fiscal year, we may see the same happening again.

In just 40 days of the new fiscal year (between July 1 and August 9 2024) the government’s borrowings for budgetary support have increased more than 10 times to Rs556 billion, according to the SBP, from Rs51.2bn in the same period of the last year.

Since the central bank has already started reducing interest rates, the cost of domestic debt servicing may remain lower this year than in the previous year.

However, that doesn’t mean the government’s borrowing for budgetary support would decline significantly compared with the past year. Despite introducing a regressive and cruel tax regime in this year’s budget the government does not expect to generate enough revenue to meet its expenses (the largest component of which is debt servicing), installation payments for reducing the principal amounts of some loans, and meeting the interest charges on the entire stock of serviceable domestic and external debts.

Once a country is in a debt trap, it can hardly afford political unease and uncertainty to grow lest growth is hampered

Even the most conservative estimates show that almost all net tax revenue of this fiscal year will have to be used in servicing domestic and external debts, which means the current expenses of the government, including defence and administrative expenses, will have to be met by more debts. Behold, we’re in a debt trap.

Once a country is in a debt trap, it can hardly afford to grow because of political unease and uncertainty. Increased political stress may hamper the growth of domestic savings and impede the growth of local and foreign investment alike.

Besides, it can also affect the growth of exports and remittances depending upon how political strife and uncertainty unfold in due course of time. Isn’t it time for the establishment and the political class of this country to rise above their parochialistic interests and save the economy?

Both are aware of the dangers of a looming wider military conflict in the Middle East that may have an impact on Pakistan’s economy. Both have closely watched the recent revolution in Bangladesh that culminated in the humiliating exit of once-all-powerful prime minister Hasina Wajid.

Further delay in the restoration of a working relationship between the various segments of the political class could do irreparable damage to the country.

In July 2024, the goods’ imports bill rose to $4.82bn from $4.14bn in July 2023

The International Monetary Fund (IMF) money isn’t coming in before the end of September, according to Finance Minister Muhammad Aurangzeb. Friendly countries Saudi Arabia, China and the United Arab Emirates still appear to have reservations about rolling over their previous debts in full.

We should also not forget that the US-Pakistan relationship now is not as ideal as it was during the Musharraf era, particularly after Prime Minister Shehbaz Sharif has already said publicly that Pakistan wants “to reset ties with the US but not at the cost of China”.

Under these circumstances, pinning hopes on the ideal performance of the export sector or being optimistic about continued growth in remittances can offer an escape from harsh ground realities but nothing more.

In July 2024, the current account (CA) deficit fell to $162 million from $741m in July 2023, which is good news, but one must see how it has come to happen and whether it can be sustained.

The CA deficit has declined due to an increase in goods and services exports and a one-time fall in the import of services — particularly information technology (IT) and IT-enabled services.

However, two things must be kept in mind: the increase in goods exports during this fiscal year cannot be expected to grow faster than imports due to a very high cost of production thanks to energy price hikes, inefficiency of textiles, sugar and automobile sectors and an overall less export-friendly environment.

On the other hand, the goods’ imports bill is bound to surge as the import sector’s demand — suppressed during import restrictions — is opening, local cotton production is down 50pc, and growth-oriented industries are importing more agricultural and industrial machinery and technology.

In July 2024, the goods’ imports bill (on a fob basis) rose to $4.82 billion from $4.14bn in July 2023, according to the SBP statistics. Against this, goods’ export earnings (on a fob basis) increased to $2.39bn from $2.12bn.

This trend — faster growth in imports against exports — is what we may see throughout this fiscal year, which would belittle whatever gains we may see in remittances because of its volumes.

Remittances soared to $2.99bn in July 2024 from $2.03bn in July 2023. However, it is yet to be seen if this unusually high rate of growth can be sustained in the future.

During this fiscal year, services exports, particularly IT and IT-enabled services export, should also make a decisive impact on the CA. Within the past few weeks, Pakistan has already potentially lost about half a billion dollars in missed opportunities for freelancers and non-realisation of online and other business transactions due to massive disruption in internet services. Such things have lasting impacts.

Published in Dawn, The Business and Finance Weekly, August 26th, 2024