Pakistan’s post-IMF reality

(Ex-adviser, Ministry of Finance)

SINCE embracing the Extended Fund Facility (EFF) with the IMF on September 27, 2024, Pakistan’s economy has been behaving according to the book.

The current account recorded a surplus of $0.691 billion from July to February FY24, a significant improvement from the deficit of $1.73 billion experienced in the same timeframe the previous year. As of March 20, 2024, foreign exchange reserves at the central bank have climbed to $11.15 billion, covering nearly two months of imports.

Inflation has tapered off from a high of 38 per cent year on year in May 2023 to 1.5 per cent in February 2024, and financial conditions have markedly improved.

These developments can broadly be regarded as macroeconomic stabilisation. The staff-level agreement (SLA), marking the completion of a six-month review, will further solidify this stabilisation process. However, this stabilisation has come at the cost of subdued economic growth, with data for the first half of FY25 showing a low real GDP growth rate of just 1.5 per cent. Engagement with the IMF has stabilised the rupee and helped bridge Pakistan’s external financing gap through bilateral, multilateral, and friendly nations for FY25. While assistance through commercial funding has also become possible, international bond issuance remains out of reach.

A key driver of the current account surplus has been an impressive 32 per cent increase in remittances during the first eight months of FY25, despite a larger trade deficit in goods and services and 13 per cent uptick in primary income outflows. However, the financial account of the balance of payments still shows less promise, and there is hope that the SLA will stimulate inflows in this area.

For the populace, this hard-won stability has not come without sacrifices, including heightened taxation, substantial price adjustments for electricity and gas, and increased levies on petroleum products. These measures have been coupled with a restrictive monetary policy and a flexible exchange rate regime, implemented to curb imports while bolstering exports. More recently, authorities have also moved to phase out Pakistan’s long-term financing facility portfolio of Rs330 billion.

Looking ahead, it is imperative to preserve the IMF engagement for the duration of the EFF while tweaking the programme to reduce the tax burden on the manufacturing sector, as well as on both salaried and non-salaried individuals and reconsider design on undertaxed areas.

It is pertinent to note that FY25 saw a 21 per cent increase in the current expenditure of the federal government. Thus, right-sizing the federal government and devolving responsibilities are essential steps to lessen the fiscal strain on the exchequer and achieve meaningful fiscal consolidation.

A thorough review of development budgets across government tiers is necessary to enhance service delivery and move out of input-based budgeting. The current EFF has been more inclusive, seeking to involve provincial governments in agriculture taxation -- an area that has eluded Pakistan since its inception.

The emphasis on climate reforms signals a progressive shift towards integrating environmental considerations into the country’s core economic strategies; however, considerable work remains in this arena to figure out the right set of policies.

Macro stabilisation is a necessary but not sufficient condition for sustainable growth. Deep, structural reforms are necessary to transform Pakistan’s economy fundamentally. Engagement with the IMF has afforded Pakistan both time and space to undertake structural work, both within the programme’s purview and beyond.

Implementing reforms such as deregulation -- setting timelines for phasing out unnecessary regulations, adopting market-based pricing in energy and agriculture sectors while relying solely on direct subsidies, resetting the energy sector, and facilitating privatisation -- can significantly improve investment and job opportunities for the people. The nation must hold policymakers’ feet to the fire on all these counts to ensure a broad-based development agenda in the coming years.

Pakistan’s journey towards economic freedom and sovereignty -- and its ability to disentangle itself from reliance on the IMF’s support -- are intricately linked with the formulation and execution of a serious reform strategy. The stakes are high, and the time is ripe for Pakistan to rise to the challenge.

[The writer was part of the team that negotiated the IMF programme successfully implemented in 2013-2016.]