Much more is needed

AVERTING sovereign default is important, so let’s assume we manage to do it. A more relevant question is why is Pakistan facing default? Looking at the seven years from FY16 to FY22, Pakistan’s cumulative current account deficit was $74.5 billion, while the State Bank’s forex reserves fell by $3.6bn during this period. This means Pakistan needed financing of $70.9bn, and borrowed $65bn. Foreign investment barely financed the external deficit, so the government just kept borrowing. Since foreign creditors are reluctant to continue lending, Pakistan’s external sector has become unsustainable. Dollar inflows (exports and remittances) have always lagged behind outflows (imported goods and services). This gap narrowed in FY20 (the IMF programme started) and in FY21 (Covid-19 was a positive boost for the economy); excluding these one-offs, Pakistan needed $11bn per year to finance its external deficit. Unfortunately, the country did not use this money to build a dollar repayment capacity, and now we’re stuck. After decades of hearing the mantra that exports will double in the next five years, we have given up on textiles. Remittances have been a lifesaver, but these inflows cannot be managed, so Pakistan must reduce imports — and clamp down hard. There are two options: (1) emergency measures like delaying and prioritising imports; and (2) using orthodox policy tools to reduce import demand.