Cover Story 
 

Cover Story

Staying the Course

As a step in the right direction, the IMF program provides a framework to strengthen our governance, improve the fiscal system, and build capacity to implement reforms for long-term economic stability.

By Nadeem Karamat | November 2024


Lately, Pakistan has successfully signed up for the 25th IMF program to attain broader economic stability in the backdrop of taking some very tough economic measures in the last few quarters. Its currency has stabilized by implementing exchange control regulations, and foreign exchange reserves have improved, though only covering two months of imports, averting a default-like situation. It attained a current account surplus position and significantly lowered inflation at the cost of slowing the economy through high interest rates and import rationalization.

Notably, Pakistan has signed up for several fundamental policy changes, including increasing taxes on the existing filer, bringing non-filers into the tax net, and abolishing exemptions. Understandably, federal and provincial governments will agree to a mutual fiscal discipline on spending and impose new taxation measures to bring agriculture, retail and real estate sectors into the tax net. If all this is enforced, it can meet a significant requirement of the IMF to additionally generate taxes and improve the tax-to-GDP ratio by close to 12%. This has enormous political costs and challenges, and its implementation is yet to be seen.

Some critical areas that require supporting reforms are energy sector viability, divestment in loss-making state-owned enterprises, poverty alleviation, social reforms, population control, capacity building in the bureaucratic system, and private sector entrepreneurship development. Pakistan’s unchecked population growth of close to 3% while its economic growth is struggling to cross 3% can be assumed to mean that more people will be poorer and resort to support programs offered by the governmental and private sectors.

While the recent IMF program provides relief and stabilizes economic parameters, unless Pakistan addresses vital structural issues and implements reforms, it will have to meet external financing needs of about $146 billion in the next five years. Debt servicing imposes a considerable cost and burdens the exchequer. Pakistan’s reserves through export proceeds, remittances, or FDI are currently insufficient to cover the debt.

Considering core challenges, Pakistan needs to look beyond the IMF program and address the core issues of debt sustainability, improving the confidence of businesses by addressing the problems of the cost of doing business so they can achieve long-term competitiveness. A very recent announcement by Muhammad Aurangzeb, a technocrat Finance Minister who has successfully negotiated with the IMF and is not part of a political party), of declaring war against cash is a task that could not only bring down inflation but substantially improve the revenue collection hopefully through successful implementation of digitization of the economy. Although these measures are to some extent burdening the working classes and certain rent-seeking elite groups have benefitted from exemptions, it is yet to be seen whether the expected fall in oil prices, commodities and increase in remittances/FDI would outweigh the negative impact of some of the unpopular economic policies particularly the removal of subsidy on electricity and some essential commodities.


The current coalition government, led by Prime Minister Shehbaz Sharif, can be given full credit for the IMF program as it has provided macroeconomic stability and enhanced the confidence of businesses (local and foreign). Key partners of the country, China, UAE, and Saudi Arabia, have rolled over Pakistan’s debts on the backdrop of the IMF program. Pakistan’s commitment to stay on economic reforms would be very detrimental to the future stability of the economy and avert a default-like situation.

Domestic debt also requires restructuring and has a political cost. They eventually impact the balance of payments and net domestic assets.

The government has made tough political decisions due to economic stability as all stakeholders, including national security, rest on the country’s financial stability. Business groups believe that the program focusing on stabilization will increase their cost of production, which could slow industrial output and affect their exports. It is, therefore, imperative to provide relief through reducing interest costs and rationalizing import tariffs. Steps must be taken to create more economic competition, check on cartelisation, and develop strong and open markets through trade with India. An effective and sovereign parliament respecting democratic norms is essential for long-term stability and open trade. Home-grown economic program, which is a buzzword, can thus be achieved.

Besides the above, Pakistan firmly convinced foreign bilateral creditors, particularly China, with almost debt of $25 billion (including infrastructure and energy funded) and multilateral creditors (The World Bank, the Asian Development Bank, Islamic Development Bank, Paris Club, Eurobonds and Sukuk) with a debt of almost $54 billion for restructuring. This is not an easy task, but not doing so can slow growth and bring uncertainty. More crucial is Pakistan’s total public debt and liabilities, estimated at USD 224 billion, i.e., 74.3% of GDP, of which $87 billion as of June 2024 is owed to domestic creditors.

Domestic debt also requires restructuring and has a political cost to it. They eventually impact the balance of payments and net domestic assets. It has to incentivise exporters and diversify from traditional methods to avoid this crisis. This is a massive agenda and requires extensive brainstorming to bring in technology and concentrate on more service-oriented items than conventional manufacturing, as India and some other emerging market economies do.

To stay on course, we should view the IMF program as a step in the right direction. It provides a framework to strengthen our governance, improve the fiscal system and build capacity to implement reforms for long-term economic stability.

We should also view the program as an endorsement by our traditional partners, the US, in our country’s development since they are the largest shareholder in the IMF. Throughout history, we have received support in kind and cash from the US to develop our essential resources, including education, medicine, defence, water, oil and gas, banking and the financial system. G7 countries, including China and the US, have been supportive of our economic stability and the alleviation of poverty and consider nuclear-armed Pakistan’s economic security as pivotal not only for regional security but also for the entire world.

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