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Even though a new government is in power, the same age-old debate continues to rage in Pakistan. Does the government have any alternatives to accepting the strict conditions of the IMF? In short, the answer is no. Unfortunately, for Pakistan, there may not be many viable alternatives than accepting the conditions of the IMF if the government wants to bring certainty and confidence into the economy. Pakistan faces a balance of payment crisis that is complemented with a rising budget deficit. Not only have the dollar outflows grown faster than the inflows, the confidence of the foreign lenders is also low as Pakistan is on the brink of defaulting on its external payments.

This low confidence creates uncertainty and leads to volatility in the exchange rate, which passes into the economy as it results in higher inflation rates, higher costs of borrowing and increasing macroeconomic instability. In essence, without the support of external financing, the reserves held by the State Bank of Pakistan begin a downward spiral, often leading to a balance of payment crisis. The question is whether Pakistan can build its reserves to a level that instils confidence for foreign lenders without the support of the multilateral institutions, such as the IMF.

A major contention of the IMF is the issue of fuel and energy subsidies provided by the Pakistan government to the masses. Although, these measures provide political leverage through lower fuel and electricity prices, they can incur a significant economic cost. The IMF requires the elimination of the subsidies as a prerequisite to their financial package, which will, in turn, provide stability to the currently volatile economic conditions.

The indecision of the government has already resulted in a sharp depreciation of the Pakistani rupee with respect to the US Dollar, which raises cost of financing, increases inflation and, subsequently, has a negative spill-over effect on the economy. Although, the rising fuel costs will have an impact on the economy, the delay in eliminating subsidies only adds to the overall costs as the increase in fuel prices is inevitable and indecision today can be costly in the future. The SBP recently increased its policy rate in order to improve dollar inflows and cater for the rising inflationary pressure. Financing from the IMF could stabilize foreign exchange reserves and eliminate uncertainty, providing much-needed confidence to foreign lenders.

According to the data on foreign currency reserves held by State Bank of Pakistan (SBP) and extracted from its (SBP) data portal, the foreign exchange reserves were at the highest level in August 2021, at $20.1 billion. They had decreased since to $10.5 billion by the end of April 2022. The sharpest decline came in March 2022, as foreign reserves held by SBP decreased by $5 billion. Although, the decline is mostly due to payments to creditors, the political and economic uncertainty results in a fall in the confidence of the lenders, increasing fear of a possible run on the foreign exchange reserves. This is evident by the sharp decline in the currency exchange rate of the Pakistani rupee to the dollar as currency market speculators fear the worst. Although, it is inevitable that the government will have to approach the IMF to reduce economic uncertainty, the delay in meeting the conditions only aggravates the situation.