In eight months and one week of this fiscal year — between July 1, 2023, and March 8, 2024 — the federal government’s budgetary borrowings from commercial banks more than doubled to about Rs4.2 trillion from Rs2.01tr. Meanwhile, the private sector’s net borrowings slumped to Rs73 billion from Rs246bn.

Want to know more about why banks and bankers generally remain happy with the government and vice versa? The current hybrid democratic model, with the powerful establishment fully involved in day-to-day governmental affairs, provides room for implementing tricky economic decisions like containing imports.

Little wonder, then, that Pakistan’s current account deficit (CAD) in eight months of this fiscal year fell to $999 million from $3.846bn in the same period of the last year — thanks largely to contained imports.

Goods imports consumed only $34.1bn in 8MFY24 against $37.4bn in 8MFY23. But, once the country receives the last tranche of $1.1bn in April, out of a short-term $3bn International Monetary Fund (IMF) loan, and seeks another larger, longer-term loan, it will have to liberalise imports suddenly. How that would impact our CAD and foreign exchange rates isn’t hard to imagine.

Hybrid regimes will continue to superficially address economic issues, yielding short-term gains but exacerbating long-term problems

According to the State Bank of Pakistan (SBP), Pakistan’s overall balance of payments (BoP) deficit stood at $2.2bn during eight months of this fiscal year. This means that regardless of the gain in the current account, the country is still struggling with a shortage of foreign exchange.

This is also evident from our low foreign exchange reserves of around $8bn held by the SBP. This amount is sufficient to cover a little less than two months of merchandise imports.

The BoP deficit can expand in the coming months if snags occur in the proposed negotiations with the IMF for a three-year Extended Fund Facility of $8bn-$9bn and if foreign investment inflows do not rise dramatically.

Net inflows of foreign direct investment in the eight months leading to February 2024 totalled $819m, and that of portfolio investment was $113m. Together, they make up less than a billion dollars. The civil military-run Special Investment Facilitation Council hopes to materialise at least half a billion dollars of FDI from Saudi Arabia alone before the close of the fiscal year in June.

Moreover, Finance Minister Muhammad Aurangzeb and his team are confident in attracting a similar amount, or even more, of portfolio investments through the launch of Panda bonds in China.

Apart from the decline in imports, some increases in exports and remittances during this fiscal year have also contributed to bringing down the CAD. Merchandise exports (on free-on-board value basis) rose to $20.5bn in 8MFY24 from $18.6bn in 8MFY23. However, this export growth has been largely due to increased food exports ($4.9bn in 8MFY24 against $3.2bn in 8MFY23) and not due to value-added non-food items.

Between July 2023 and January 2024, large-scale manufacturing output posted a negative growth of 0.5pc

Going forward, Pakistan needs more diversified export growth, where the bulk of it is not coming through food exports, which fuel food price inflation and contribute significantly to overall inflation in the country.

Inflationary expectations are still high despite appreciable easing in inflation numbers in February. This is one reason the central bank kept its key policy rate unchanged at 22 per cent in its latest monetary policy review.

However, persistently high interest rates are among several impediments to industrial and business growth. In the seven months of this fiscal year (between July 2023 and January 2024), large-scale manufacturing output (LSM) posted a negative growth of 0.5pc, according to the Pakistan Bureau of Statistics.

Even if output rises a bit in the remaining five months of the year, as is evident from a 1.8pc year-on-year increase in January 2024, overall growth in LSM output for the entire fiscal year would still be insufficient from an overall economic growth perspective.

Moreover, energy prices continue to rise as the government struggles with managing the circular debt of the gas and electricity sector, interest rates are high, and the Federal Board of Revenue is all set to tax retailers harshly from the beginning of the new fiscal year.

In this environment, industrial output may not increase significantly, nor can domestic trade flourish. So, new waves of job cuts may soon hit most industries and businesses. And that will coincide with the still-high inflation of 23.1pc in February. Inflationary pressures are continuously building up through energy price hikes, drops in local food supplies due to larger food exports, and general inflationary expectations.

What does that mean for political stability in the country that has so far remained elusive? And what does that mean in the context of growing street crimes and national security?

Whereas there is little doubt left now about Pakistan seeking a larger, longer-term IMF loan, it remains doubtful whether the country can overcome the structural problems that keep its economic growth often slower than desired and force it to make external borrowings. This, in turn, increases the burden of external debt servicing to the extent that little is left for spending on development to fuel sustainable economic growth in the future.

Part of the problem lies in the governance model. Unless parliamentary democracy is allowed to function smoothly, hybrid regimes will continue to address economic issues superficially, producing some good results in the short run only to compound those and other issues in the long run.

The IMF has estimated Pakistan’s yearly external financing gap to be around $25bn a year for a few more years. An important issue is how such a large financing gap can be closed on a sustainable basis — if not during a year, in three to five years. And it must be debated finally at the right forum — a genuine, visibly functional, and supreme Parliament.

Published in Dawn, The Business and Finance Weekly, March 25th, 2024