Dangling Republic

Pakistan’s economic trajectory has long resembled a pendulum, swinging between brief spurts of growth and prolonged phases of crisis. Each recovery is often followed by fiscal stress, external borrowing, and renewed stabilization programs. Since 1958, Pakistan has entered more than twenty arrangements with the International Monetary Fund (IMF), reflecting persistent structural weaknesses in the economy. Today, the country is again operating under a $7 billion, 37-month Extended Fund Facility (EFF) agreed with the IMF in 2024. The central question remains: is Pakistan trapped in a cycle of dependency, or can it break the pattern and move towards sustainable stability?

The current IMF program aims to consolidate the fragile stabilization achieved after the 2023 balance-of-payments crisis. The EFF focuses on restoring macroeconomic stability, rebuilding foreign exchange reserves, reducing inflation, and creating conditions for sustainable growth. Its reform agenda includes broadening the tax base, strengthening fiscal discipline, restructuring state-owned enterprises, reforming the energy sector, and improving governance and transparency in public finances.

Fiscal consolidation lies at the core of the program. Pakistan has committed to increasing tax revenues by expanding the tax net, reducing exemptions, and bringing undertaxed sectors such as retail and agriculture into the formal system. At the same time, federal and provincial governments are expected to coordinate through a proposed National Fiscal Pact to strengthen revenue collection and rationalize public spending responsibilities. These reforms are intended to place public finances on a more sustainable footing while safeguarding social protection and development spending.

Despite these efforts, structural vulnerabilities remain. According to recent IMF assessments, Pakistan’s fiscal deficit is projected at around 4.1 percent of GDP for the current fiscal year, an improvement from 5.3 percent last year but still above official targets. Long-term pressures from rising pension and healthcare costs also threaten to widen fiscal gaps unless structural reforms are sustained. Encouragingly, increased tax collection and fiscal consolidation could gradually reduce the country’s public debt ratio from about 71.6 percent of GDP to around 60 percent by the end of the decade, but only if reform momentum is maintained.

However, domestic reforms alone may not determine Pakistan’s economic future. External shocks, particularly those linked to global energy markets and geopolitical conflicts, continue to shape the country’s economic vulnerability. Recent developments in the Middle East illustrate how quickly global instability can spill over into Pakistan’s economy.

The escalating conflict in the Middle East has already begun to affect Pakistan through energy prices and financial markets. In response to rising global oil prices linked to disruptions in the Strait of Hormuz, the government recently implemented an emergency Rs55-per-litre increase in petrol and diesel prices, highlighting how quickly global shocks translate into domestic economic pressure. Analysts warn that this may only be the first of several adjustments if volatility in oil markets persists.

Pakistan’s economy is particularly sensitive to energy shocks. Past episodes, such as the oil price surges of 2008 and 2022, show that attempts to shield consumers through subsidies often worsen fiscal deficits and fuel inflation once price adjustments eventually occur. In both cases, delayed price corrections contributed to macroeconomic instability and exchange-rate pressures.