Solution To Pakistan's Economic Problems Lies In Well Thought-Out Economic Reforms: EAG.

ISLAMABAD -- An independent Economic Advisory Council (EAG) has noted that the solution to Pakistan's economic problems lies in well thought-out economic reforms.

The EAG has observed that the country's leadership has continued to avoid this and instead relied on borrowing from all possible sources to deliver a false sense of prosperity to a rapidly growing population. It must not be forgotten that, in absence of reforms, this false sense of prosperity only comes at the expense of future prosperity. The sharp increase in the cost of both external and domestic debt servicing in recent years indicates that damaged future may have arrived.

The EAG, which is an independent policy group, comprising individuals from economics, policy and the private sector, has appreciated the government for taking the necessary decisions to remove subsidies and pass on the increase in the fuel prices to the consumer, and for announcing a gradual increase in (base) electricity tariffs in the coming months.

According to the EAG, budget document has also been revised to meet IMF conditions on fiscal targets. The staff level agreement reached with the IMF is an important development at a time when Pakistan's credit risk continues to increase, and its external debt is being traded at a steep discount.

However, despite the painful adjustment, the SBP's decision to use precious foreign reserves to finance current account deficits in recent months has put Pakistan in a vulnerable position. Fiscal slippages and rising international commodity prices increased pressure on the current account. With limited foreign reserves and impending debt repayments, it would have been prudent to allow the exchange rate to absorb these emerging pressures.

The fast depletion in foreign currency reserves as a result of the SBP's decision to finance the current account deficit and support the exchange rate, combined with the heightened political uncertainty, has worsened the nation's credit risk to an extent that Pakistan is one of the several countries that face a high probability of default. This has resulted in additional pressure on the exchange rate that could have been avoided had the policymakers adopted a more prudent...