Former finance minister Miftah Ismail has warned that Pakistan’s economic situation is expected to be extremely challenging in the coming months, with the central bank’s liquid foreign exchange reserves likely to fall below the critical level of $2 billion by the end of September. Speaking at a meeting with businesspeople at the German consulate, Ismail, who served as finance minister twice, stated that the current economic crisis differs from previous recessions.
Pakistan’s liquid foreign exchange reserves have already declined to $4.4 billion, with the $7 billion International Monetary Fund (IMF) loan program suspended for several months. Ismail explained that Pakistan faces upcoming debt repayment obligations of $3.7 billion in amortization and $400 million in interest payments within the next two months. Consequently, the outflow of dollars for external loan-related payments totals $4.1 billion, while the State Bank of Pakistan’s total reserves amount to only $4.4 billion.
Of the $4.1 billion, $1 billion is a safe deposit from China, which means it is money deposited by the Chinese central bank with the State Bank of Pakistan. China is likely to re-roll this amount, reducing the expected outflow to $3.1 billion. Islamabad also owes $1.5 billion to two Chinese banks, which may also be re-rolled, although the process will take time.
Ismail emphasized that the Chinese have a unique way of re-rolling loans, involving writing a check to them, keeping the money for a month, and then rerolling it. He expressed concerns that by October 1, Pakistan’s reserves could potentially drop to less than $2 billion, leading to significant difficulties for the country. Ismail also criticized the escalating domestic debt servicing costs, aggravated by high-interest rates. He pointed out the fiscal practices of the provinces, which show little effort in generating revenue through taxation of real estate, agriculture, and services.
Furthermore, Ismail suggested the creation of a province for each division across the country to devolve fiscal authority at the grassroots level. He argued that competition among the provinces, following American economist Charles Tiebout’s concept of people “voting with their feet,” would lead to significant improvements in governance.
German Consul General Dr. Rüdiger Lotz, also present at the meeting, highlighted the need for political stability in Pakistan to effectively tackle the ongoing economic crisis. He stressed that the inability of major players to reach agreements is detrimental to the country’s economic situation.
