Pakistan’s fragile financial and economic situation has landed the country into deep trouble. Businesses are apprehensive, growing political and economic unpredictability is having a negative effect on business confidence.
Interactions with the business community over the past six months point to a growing sense of despair and sorrow, which is strongly reflected in the most recent Gallup Pakistan Business Confidence Survey.
A bleak picture is painted by the survey, with two-thirds of respondents saying that their circumstances are bad or worse. And the index value is worst since its start in 2019. Sentiments were better even during peak Covid time.
Lurking fear of sovereign default, along with high energy prices and growing cost of doing business have an important bearing on the market sentiment, however, the core of the problem is fiscal. And successive governments have utterly failed to reform the tax system. The leakages are primarily caused by the energy sector. The fiscal federalism approach is currently unworkable.
The country’s foreign reserves have diminished to an abnormally low level. The government had made the decision to restrict the imports of engineering items, particularly machinery, in order to address this dire situation. The export volumes are decreasing as a result of the demand destruction in the buyers’ market, which ultimately makes the country borrow more. Already, Pakistan’s overwhelming part of tax revenue is consumed in debt servicing.
The current account deficit is still significant and foreign exchange reserves are steadily decreasing in a scenario of growing debt. Furthermore, a decline in the exchange rate and an increase in debt levels put pressure on foreign exchange rates. The debt restructuring of the Chinese loans is almost inevitable. Moreover, corruption continues to mount, and loss-making public sector businesses keep draining the country’s economy.
The decision-makers have to act fast as time is running out. The government needs to put things in order by controlling extravagant expenditures. The political temperature needs to calm down. It is imperative that the political leaders come to an agreement on “economic charter”, else, it will be extremely challenging to pay off the enormous internal and external debt. We cannot keep expecting the world’s lenders to make concessions or to delay, extend loan repayments. Before making more perceived or actual moves, the situation demands the powers to step back and take stock of the situation as there is no more room for any wrong decision.
