In a move that could put a severe dent in Pakistan’s hopes of rescuing itself from one of the worst balance of payments crises’ the country has ever witnessed, the Financial Action Task Force’s (FATF) International Co-operation Review Group, recommended, on 18 February, to retain the debt-ridden nation on its ‘Grey List.’ Since late last year, Pakistan Prime Minister Imran Khan has been on a mission to rally support from the country’s allies like Saudi Arabia, China, Turkey and Malaysia to have it removed from the FATF’s grey list.

While the FATF will take its final decision on 21 February, the setback could yet further isolate the nation from the international banking mechanisms that it has employed time and again to protect itself from record levels of external debt.

According to research from the Asian Development Bank, Pakistan’s external financing requirements are expected to approach a peak of US$ 27 billion this fiscal year. The ADB had warned that unless the country undertook severe structural reforms to provoke an increase in exports, and reduce its reliance on imports, it would face an unsustainable level of external debt imbalance.

Pakistan’s balance of payments crisis has loomed for several years now, and since late 2017, the country has taken a number of steps such as increasing interest rates, curtailing its imports, and introducing new regulatory measures, to overcome it. However, exports have proved to be vastly inelastic as witnessed by the 2.2 per cent decline between the 2017-2018 and 2018-2019 fiscal year. What’s more, Pakistan’s foreign reserves had also fallen to just $7.3 billion by the end of 2019 – a sum capable of financing just 1.4 months of its import requirements.

2018-2019 saw the nation borrow a staggering $16 billion in foreign loans from bodies like the International Monetary Fund, the Asian Development Bank, as well as its allies like Saudi Arabia, Qatar, China and the United Arab Emirates. In the preceding year, Pakistan had secured $11.4 billion in foreign credit. Its move to depreciate its currency by 26 per cent of the US dollar in order to boost exports appears to have backfired, only making it more difficult to pay off its creditors.

Although the IMF in 2019 stated that Pakistan’s debt may still be within the levels of sustainability, a United Nations report published in 2019 revealed that the country’s level of public debt was nearly 70 per cent of its GDP, thereby breaching the Fiscal Responsibility Debt Limitation Act threshold of 60 per cent. The three-year bailout package of $6 billion that the IMF sanctioned in 2019 represented the 13th rescue package that the country has required in the last three decades.

With a projected growth rate of 2.4 per cent in 2020, the 220-million strong nation now faces a daunting challenge to escape the vices of an external debt crisis.