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The IMF Trap

Relying on the IMF package to address the economic crisis is not a long-term solution.

By Asif Javed | October 2024

The IMF Trap

Pakistan Prime Minister Shehbaz Sharif meets with IMF Managing Director Kristalina Georgieva.


IPakistan has been facing economic distress for the past few years, severely affecting the government’s overall performance. As per the Ministry of Finance statistics, the federal budget deficit may increase from Rs. 8,388 billion in FY 2023-24 to Rs. 8,500 billion in FY 2024-25. The manufacturing sector remained under pressure due to weak market sentiments, global supply disruptions, and heavy reliance on imports. Increasing input prices, lower government spending, higher inflation, and high policy rates further affected the economic conditions.

The major cause of worry is the growing debt levels, particularly the foreign debt. Foreign debt servicing during FY 23 was $20 billion, constituting 5.5% of GDP. During FY 24, PKR 7 trillion in interest will be paid to domestic and foreign creditors. This leaves little space for the government to spend on human resource development and infrastructure development.

Resource misallocation has affected sustainable economic development and forced successive governments to rely on short-term benefits while compromising long-term stability. Many factors, including government failure, ineffective policies and dependence on foreign financial support, affected Pakistan’s economic performance.

The business environment in Pakistan is not very promising, as tax distortions discourage investment and leave some sectors out of the tax net. Traders and wholesalers have resisted the government’s efforts to bring the sector into the tax net. New tax measures from FBR are facing challenges in implementing effective taxation in the retail sector. This can be resolved by collaboration with stakeholders, as sustainable economic growth is only possible when every stakeholder plays its part.

Pakistan and the International Monetary Fund (IMF) have recently reached a three-year $7 billion aid package to stabilize the government and protect it from sovereign debt default and economic challenges. Pakistan’s government has agreed to contain its fiscal deficit by 1.5% to 5.9% in the coming years. The previous IMF deals were mainly focused on stability instead of promoting investment and developing employment prospects. The government should engage the IMF to lay out an effective plan that should provide long-term sustainability and help promote economic growth.


The agreement between the IMF and the Pakistan government requires measures to decrease the government’s expenditure on fuel and electricity. This will increase inflationary pressure and put more of a burden on the general public, which is already facing resource constraints. Besides, the agreement requires monetary policy changes to curb inflation and to enforce effective structural reforms to promote economic efficiency.

The discussions between the IMF and the government revolved around addressing the economic challenges, as Pakistan desperately needs reforms. It was discussed that taking loans will put Pakistan under further debt pressure, making the economy more vulnerable and causing a cycle of borrowing.

The Pakistan government must consult with leading political parties and other state stakeholders to revive the economy and stabilize growth. The existing policies distort markets and create economic and wealth inequalities.

Additional funds can be generated at the provincial and local levels from undertaxed sectors such as real estate, agriculture, and retail to deal with the lack of revenue. This measure is expected to generate 3% of GDP. Expenditure savings can be ensured through efficient management of public resources. The state-owned enterprises that are in continuous loss are required to be privatized. Overlapping of spending between provincial and federal governments can be decreased. All these measures will help in saving around 3% of GDP every year.

All these measures can only be taken through an inclusive dialogue process where all the stakeholders have their say and express their confidence in the government to carry out the economic revival process. Through effective fiscal reforms, Pakistan needs stable economic growth to ensure additional resources that may help ease fiscal pressure. This will help focus on human resource development, investing in improving infrastructure and reducing public debt.

Relying on the IMF package to stabilize the government’s dealing with the economic crisis is not a long-term solution. For that, the government needs to focus on concrete measures that may help increase the growth rate and promote economic activities.

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