Following the IMF, Pakistan's economy faces difficult decisions and no room for political bluster.

 After attempting every other option with no success, the government has finally decided to implement the IMF's conditionalities for the revival of the ninth review. To meet the demands of the Fund, however, further fiscal consolidation and realignment of macroeconomic policies, including but not limited to the exchange rate, would be required.

On the revenue front, a minibudget is likely to include the imposition of additional taxes on petroleum products, imports, and bank foreign exchange gains. Additionally, the rupee's depreciation and rationalization of energy tariffs are likely to exacerbate inflationary pressures.

"We believe, these measures are likely to get the program back on track and pave the way for the release of the next tranche of USD 1.2 billion in February 2023," states the report from Arif Habib Ltd. Despite the possibility of further delaying the IMF's payment, the two reviews could still be combined. Also due in the first quarter of 2023 is the tenth review.

A flood levy of one to two percent on imports is anticipated to be included in the government's mini-budget. Our estimates indicate that this will contribute to the generation of additional revenue totaling PKR 90-100 billion in the second half of the current fiscal year. It adds, "The FX income of Commercial Banks will also be subject to an additional 40% tax, which will be collected in the amount of PKR 48 billion."

This has always been the case for Pakistan, but the country's ability—or luck—to seek geopolitical rent has always kept it in business. The absence of a conflict in the region and the flow of funds through CPEC projects, on the other hand, have significantly altered the situation this time around.

However, the program's continuation would not solve Pakistan's financial problems. The country will, at best, get a few months out of the influx before it finds itself in the same situation again.

Before considering Pakistan's economic future, however, it is necessary to comprehend that its deeply ingrained structural flaws are to blame for the country's dire situation. The country continues to import fuel and low-value-added goods like rice and textiles because it is not fully integrated into the global economy.

Additionally, domestic industries are not globally competitive, and high consumption and a low savings pattern continue to deprive the local market of much-needed investment. When we add in unresponsive government spending, we have the perfect recipe for disaster in the form of a fiscal and balance of payment deficit.

A 2019 study, A Twin Deficit Hypothesis, states: According to the Pakistan Case Study, "the budget deficit influences the trade deficit through a variety of channels, and trade deficits directly cause budget deficits." The most well-known link between trade deficits, inflation, interest rates, capital inflows, exchange rates (currency appreciation), and budget deficits is known as the causality. In order to reduce currency (rupee) pressure and avoid trade deficits, policymakers typically focus on devaluation as the policy prescription rather than the appropriate channels for reducing unproductive and non-developmental expenditures.

This has always been the case for Pakistan, but the country's ability—or luck—to seek geopolitical rent has always kept it in business. The absence of a conflict in the region and the flow of funds through CPEC projects, on the other hand, have significantly altered the situation this time around.

Pakistan is experiencing a liquidity crisis as a result, and the anticipated inflows from the IMF and other lenders will not be enough to meet the immediate obligations.

We had also emphasized that, in contrast to Pakistan's 2008 foreign exchange crisis, the current foreign exchange (FX) crisis was primarily brought on by obligations on external debt rather than trade. As a result, a Topline Securities report stated that "despite ongoing import controls, Pakistan’s FX reserves continue to dwindle to a 9-year low at US$4.6 bn only" as debt repayments "continue to come due and are serviced."

The report went on to say that "the recent monetary policy announcement of January 23, 2023 underscores the need for debt restructuring" because "the country's reserves are half of that" and "US$8bn of debt still needs to be dealt with in the next five months until June 2023." Even if the majority of this amount is rolled over, as the SBP implies, the meter will be reset on July 1, when rollovers resume for FY24.

The liquidity crisis has become even worse as a result of a flawed exchange rate policy and import restrictions on essential raw materials, which have had a significant impact on inflows such as remittances and exports. The State Bank has increased the policy rate and rate of return on Naya Pakistan certificates to attract flows of Hot Money, but these will not be sufficient.

As a result, the only remaining option is actively seeking a debt restructuring arrangement. One solution to the problem of repaying debt is to convert short-term rollover debt into medium-long term debt. "To note, US$40bn is short term debt out of US$73bn debt repayment obligations for FY23-25," read the Topline Securities research report.

According to a Financial Times article, "The primary goals of the debtor government are to obtain an IMF loan and survive to the next election." Stability is the IMF's primary goal for the three to seven years of its program. The primary objective of the bondholders is to minimize their immediate losses. The delay of the issue is the official bilateral lenders' primary objective.

"The primary goals of the main actors lead to insufficient debt relief, unsustainable long-term debts, a continuing cycle of crisis-debt restructuring, economic stagnation, and poverty," the statement continues.

 Additionally, it is necessary to reevaluate the domestic debt, which is responsible for the majority of the nation's public debt. The fact that over 75% of Pakistan's holders are licensed commercial banks makes the procedure relatively straightforward. "The government should look into progressive taxation of income from bills and PIBs, and also aim for maturity extension," tweeted economist and strategy consultant Muneeb Sikander.Former World Bank economist Dr. Arshad Zaman suggested six ways to restructure domestic debt in an article for the Business Recorder. Here are a few: i) breaking down debt stock; ii) estimating the gross debt relief target (DRT) required to restore debt sustainability and precisely identifying the domestic debt that must be restructured; and iii) subtracting the associated fiscal costs (such as financial institution recapitalization, subsidies, etc.). (iv) determining which claims should be restructured in order to reduce overall costs, (v) ensuring that the State Bank of Pakistan, including the payments system, can continue to function normally, and (vi) evaluating the broader economic costs of restructuring in order to achieve the net DRT.

However, in order to address the aforementioned issues and move toward long-term economic reforms, policymakers will need to carefully consider their options. They will undoubtedly be tempted to maintain the status quo with provincial elections and general elections just around the corner.