OVERRELIANCE on foreign debts has landed Pakistan’s economy in the present perilous situation. Steering the economy out of this situation isn’t possible without laying the foundations for a new external economy that feeds itself more on non-debt-creating foreign exchange and less on foreign debts.

The realisation of this bitter fact led to the creation of the civil military-run Special Investment Facilitation Council (SIFC). However, the International Monetary Fund (IMF) and the World Bank (WB) are obviously not happy with including the top army leadership in the apex committee of SIFC. The two global financial institutions continue to pressure Pakistan to review the constitution of SIFC.

Meanwhile, Pakistan’s establishment has lately started feeling that by objecting openly to SIFC and its formation, the IMF and the World Bank are exerting undue pressure on Pakistan’s leadership. It also feels uneasy that the IMF often likes to deal directly and independently with the country’s central bank — the State Bank of Pakistan.

Pakistan’s external sector’s vulnerabilities are such that it would be naïve to expect the IMF and the World Bank’s attitude to change. Pakistan’s current caretaker and future elected leadership may continue to explain to the IMF and the World Bank that the creation of SIFC and its peculiar constitution is Islamabad’s prerogative. And the two global lenders may continue to share their concerns about SIFC or even resort to arm-twisting to force Islamabad to bring some changes in the constitution or the working of SIFC.

SIFC is a well-rooted reality that will not dissolve merely because of the concerns of theWorld Bank and the IMF

But SIFC is a well-rooted reality that will not go away merely because of the objections or concerns of the World Bank and the IMF. Those who conceived the idea of SIFC knew that at one stage, its peculiar constitution and whole-of-the-state approach to working would draw criticism from the West. They know how to deal with this criticism.

This said, another well-rooted reality is the independence of the SBP. Whether we like it or not, central banks of developing countries, particularly those dependent on the IMF for repeated balance of payments bailouts, get more autonomy only when the IMF backs it. Whenever these countries are under an IMF programme, the Fund routinely interacts with “the autonomous” central banks — often directly and independently. This practice shall continue in Pakistan, too.

So, whereas the IMF and the World Bank must realise that SIFC is here to stay, we also need to understand that SBP’s direct communication with the IMF, by passing the Ministry of Finance, is — and will be — a routine matter. The best we can do to safeguard our interests is to enhance parliamentary supervision of the central bank. The governmental supervision of a central bank is not a good idea anyway.

Rising above such debates, what the IMF, the World Bank, and Pakistan can do together is find ways to develop mutual trust. Unless that trust is developed and maintained, Pakistan will find it almost impossible to find a lasting solution to its balance of payments problems — and the two global lenders will find it increasingly difficult to convince other developing countries that the underlying interests of the West do not dictate their policies.

The Ukraine war and the Israel-Hamas war have sharply divided the world. Giant global lenders must avoid dictating too much to the debtor countries. Those seeking IMF-WB financial support for correcting structural issues of their external economies must also avoid the temptation of looking at everything with suspicion that originates from the Fund or the World Bank.

Pakistan needs not only the successful completion of the ongoing $3 billion short-term IMF loan but also has to negotiate a medium-term larger loan when the current loan expires in March next year.

Islamabad has learnt from experience that seeking bilateral funds from friendly countries becomes a headache when the country is not under an IMF programme. And, it goes without saying that the country needs to constantly secure bilateral state funding for a few years just in order to maintain its external debt servicing.

Securing commercial foreign debts is not an option now because of the low credit ratings of the country, but in the next fiscal year, starting from July 2024, this may become possible. Raising commercial foreign loans will become even more difficult if the country remains out of an IMF programme.

Pakistan’s total external debt and liabilities exceeded $128bn as of the end of September 2023. This massive sum of external debt and liabilities necessitates external debt servicing in large sums even after accounting for rollovers of some of the government’s external debt.

According to conservative estimates, Pakistan’s external financing gap will be more than $25bn in the next fiscal year. Bridging that gap with just foreign debts acquired from China, Saudi Arabia, and the UAE will not be possible. Pakistan will need a fresh IMF loan to contain the balance of payments deficit, secure bilateral loans from a wider spectrum of countries, and obtain sizable commercial loans.

It will also need massive volumetric growth in exports, remittances and inward foreign investment as well. That is where SIFC can play a crucial role. One expects it will live up to its promises of attracting huge foreign investment from the Gulf countries and the rest of the world in agriculture, energy, minerals and IT sectors.

How much and how soon the promised foreign investment starts flowing in will be crucial in keeping the balance of payments in shape. In the first four months of this fiscal year (July-Oct 2023), Pakistan reported a balance of payments deficit of $2bn even though its current account deficit fell sharply, mainly due to import contraction.

Published in Dawn, The Business and Finance Weekly, December 4th, 2023