Pakistan's economic options are all difficult, but failing to choose increases the costs of all.

 

The Finance Ministry's role necessitates making judgments based on information and economic fundamentals and translating these judgments into appropriate policy actions. These perspectives on achieving economic and financial stability with the overarching goal of preserving the general public's well-being should be shaped by research and experiences. The uncertainty of the environment and political considerations undoubtedly complicate decision-making, but there are few greater mistakes than being obstinately committed to a single set of ideas. Instead, when confronted with compelling circumstances that necessitate the adoption of a course of action that reflects that, policymakers must exhibit humility and be prepared to be flexible. 

The approach that Q-Block and Finance Minister Ishaq Dar have taken thus far suggests a lack of those qualities.

Dar is still obsessed with the idea of pegmatizing the value of the currency, despite the fact that the State Bank of Pakistan's foreign exchange reserves have decreased to $4.3 billion as of January 6, which is less than the value of a month's worth of imports. 

In the meantime, the government is preoccupied with political maneuvers regarding the upcoming elections and the dissolution of the provincial assemblies of Punjab and Khyber Pakhtunkhwa. Auto assemblers, pharmaceutical exporters, textile exporters, and a slew of other large and small businesses are facing partial or complete closure, adding to the economic devastation. Essentials such as medical supplies are running out, and inflation, which is currently above 24.5 percent, shows no signs of slowing down. According to the most recent data from the Pakistan Bureau of Statistics, inflationary pressures are intensifying. 

This time, it is being driven less by the global commodity super cycle and more by supply chain bottlenecks, which are partly caused by the currency's artificial peg and the lack of foreign currency needed to buy production inputs.

In order to release the next tranche of almost USD 1.1 billion and receive assistance from friendly nations, the successful completion of the ninth review of the IMF program is urgently required. 

At the World Economic Forum in Davos, Saudi Finance Minister Mohammed al-Jadaan made it clear that the kingdom's future support will depend on its alignment with multilateral agencies and the implementation of appropriate fiscal and investment reforms. These considerations are likely to apply to other nations that have a long history of friendship. 

To ensure long-term macroeconomic stability, policymakers are firmly responsible for credible reforms.

However, the government is hesitant to take the necessary steps to fulfill the IMF's promises to implement such reforms. 

Even though the Prime Minister and the Finance Minister frequently reiterate their intention to carry out the commitments, they have so far refrained from taking tangible steps to guarantee that the review will be completed. 

This could be due to the fact that it would further diminish the political capital of the ruling coalition at a time when provincial assembly elections are scheduled to take place in the next three months and national assembly general elections are scheduled for the fall.

Over the next six to twelve months, the likelihood of a disorderly default increases when necessary actions are delayed. Policymakers should ideally allow the exchange rate to adjust and raise policy rates to reduce consumption and generate the necessary savings to service the external debt at a time when Pakistan is effectively cut off from international credit markets. Policymakers, on the other hand, "can choose to approach creditors and initiate a debt restructuring process," as the think-tank Economic Advisory Group and other independent economists have suggested. This will once more necessitate meeting additional conditions stipulated by creditors, who will bear the restructuring costs.

New obligations with distinct characteristics will be exchanged for old claims as part of the debt restructuring process. It could be a combination of cutting coupons, lowering principal values, and/or refiling for a longer maturity period. What the creditors agree on will determine the final composition. 

The government and the lead creditors are likely to select advisers for the debt sustainability analysis (DSA), which may include the IMF. The restructuring process must be perceived as fair and transparent to attract a wide range of creditors and lessen the likelihood of holdouts. In addition, it will require structural changes that aim to instill fiscal discipline in the future. 

It takes a long time and a lot of effort to reach a final agreement with the creditors. Increasing debt repayment capacity and access to capital markets through successful reprofiling and, if necessary, principal haircuts would allow investments to resume and growth to gradually pick up.

There is no reason to believe that restructuring debt will not cause significant economic hardship. It will probably necessitate structural reforms that are deeper and more extensive than the current IMF program, which will likely lead to low economic growth in the near to mid-term. The country faces several difficult choices but failing to make any of them increases the costs of all of them.