The global connectivity and interdependence of economies have opened new horizons of growth and development. At the same time these have given rise to a phenomenon where economic and political turmoil anywhere in the world can adversely impact other countries.

Although Covid-19-related difficulties triggered a new recessionary situation for the world, weakening of the pandemic revived hopes for recovery. However, there are indicators that the global economy is again heading towards a recession. This is due to high inflation, supply chain disruptions, muted growth and stagflation expected to last longer unless timely corrective actions are taken.

The World Bank anticipates a slump in global economic growth in 2022, partly because of the prolonged war between Russia and Ukraine, global inflation, and increasing interest rates. It fears several years of high inflation and low growth that can have destabilising consequences for low-and-middle-income economies.

Pakistan is also experiencing this unfortunate situation due to increasing global energy cost and high commodity prices coupled with American dollar gaining strength against the rupee. These factors have unfolded multiple challenges for our economic managers and added to our macroeconomic imbalances.

Continuously depreciating Pak rupee, stagflation, rising bond yields, dwindling foreign exchange reserves and increased import restrictions have affected the overall economic situation of the country. Corrective actions taken by the government are proving insufficient to avert the risk of default.

Amendments in the State Bank of Pakistan Act, 1956, by the previous government are also posing difficulties to meet these monetary challenges. These have left the State Bank of Pakistan (SBP) with very limited administrative role for remedial intervention. The government can no longer resolve various issues, including price control and stabilising rupee-dollar parity.

Though the government of Pakistan has improved its monetary policy framework by strengthening the functional and administrative autonomy of SBP, prevention of government borrowing from the SBP and inserting price stability are the primary objectives of the new polity.

The government and the SBP need to take all stakeholders in confidence about the current situation and work out a way forward. The recent steps taken by the SBP appear to be desperate measures. It has restricted certain items from import adding to the condition of pre-approval and decreasing the amount for opening letters of credit—conditions severely affecting businesses in an import-based economy where the business community is finding it hard to get their goods cleared.

Concurrently, it has attracted demurrages at local ports and delayed payment penalties at the international level. Further, it has been reported that certain life-saving medicines are at risk of shortage due to non-availability of imported raw materials. Additionally, automobile manufacturers are announcing production shutdown amid political uncertainty and economic distress.

The recent aggressive steps taken on account of correction are taking a toll on the overall economic situation with inflation numbers and policy rates moving upwards at an alarming level. It is almost impossible for any business to leverage itself for growth or even bridge financing. If this situation persists, a wave of economic slowdown is expected. That can give rise to unemployment and hyperinflation culminating in civil unrest.

The government has signed a staff-level agreement with the International Monetary Fund (IMF). Its board meeting for the final decision is expected sometime in August. The government expects the release of IMF’s loan tranche to help normalise the situation. Import restrictions imposed by the SBP are meant to maintain foreign currency reserves at a certain level to avoid a situation leading to a default.

After the latest staff level agreement between the IMF and Pakistan concluded on a combined 7th and 8th successful review of the programme, it is hoped that the IMF board’s approval will soon follow and disbursement of funds will help alleviate the macroeconomic situation of the country.

Most experts say that contrary to prevailing hype, Pakistan cannot be clubbed with countries that are on the verge of default. Its foreign debt-to-GDP ratio and the short-term component of the same are still manageable. However, they warn that in the event of failing to devise a long-term strategy for economic revival, the national economy will head south.

The successful completion of the current review and disbursement of funds from the IMF is critical at this stage as it will help bridge external financing gap and transmit positive signals for Pakistan from international markets.

Mere release of funds from the IMF will not be enough to resurrect our economy. Pakistan’s needs are much greater than the amount expected from the IMF or Saudi Arabia. These can only be met by improved relations with the global community through trust-building measures. Our Foreign Office’s role is vital in restoring our relations with the rest of the world.

The present economic scenario requires that Pakistan reverse amendments made in the State Bank Act, 1956, related to free floating of the dollar. This can only be done when Pakistan has enough financial support from its friends so that the government can mobilise revenue without IMF’s support and repeal laws framed to meet its conditions. Sole reliance on the IMF without introducing structural reforms will cause further deterioration in our economic conditions, even pose a risk to national security.

In the face of worsening economic conditions, it appears that the government is not fully appreciating the significance of the economic challenge. That the SBP is still operating without a full-time governor since the departure of Reza Baqir after completion of his three-year term in May 2022, is not a good sign. An institution as important as the central bank of the country should not be run by an acting governor who has failed to control speculative transactions undermining the strength of the rupee.

Political stability should be the first priority in the roadmap to recovery. Persistent political turmoil is adding fuel to fire. If it is not checked expected foreign exchange inflows might get delayed. This can make the country extremely vulnerable to external shocks.

Pakistan is at a critical juncture in terms of dealing with its bilateral financial partners and international monetary institutions. All stakeholders must focus on these grave economic issues rather than diluting their energies in fighting political battles.

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Huzaima Bukhari is an advocate of the High Courts and adjunct faculty at Lahore University of Management Sciences (LUMS)