Much-needed reforms

LAHORE: The Pakistan economy continues to tread a perilous path, where every decision must be calculated with precision lest a single misstep trigger economic turmoil. The real reforms needed remain hostage to political considerations and vested interests.

Although the government has secured vital waivers from the International Monetary Fund (IMF) under its latest bailout, these have come at the cost of deferring essential reforms and worsening the long-standing fiscal imbalance between the federation and the provinces.

On May 9, 2025, the IMF Executive Board completed the first review of Pakistan’s Extended Fund Facility (EFF), allowing an immediate disbursement of about $1 billion, bringing total disbursements under the $7 billion programme to nearly $2 billion. Several days later, Pakistan received a second tranche of SDR 760 million (approximately $1.023 billion).

Simultaneously, Pakistan’s staff-level agreement with the IMF unlocked a $1.3 billion climate-resilience facility — pending board approval — alongside the release of an additional $1 billion under the main bailout. This brings potential disbursements to around $2 billion, providing a financial lifeline but underscoring the country’s growing reliance on deferred obligations.

These approvals reflect the IMF’s willingness to grant waivers — particularly in performance criteria and timelines — that offer temporary relief but weaken the urgency for reform. By rephasing access and modifying performance benchmarks, rather than enforcing strict compliance, the IMF has inadvertently reduced the impetus for structural change.

Moreover, the IMF has introduced 11 new conditions for the next tranche, including parliamentary approval of the FY 2026 budget, comprehensive tax reforms, energy sector adjustments, and the gradual removal of incentives for special economic zones. The fund also warned that escalating tensions with India could jeopardise programme stability.

Pakistan’s internal fiscal structure further complicates matters. Under the current National Finance Commission (NFC) Award, 57.5 per cent of collected tax revenue flows to the provinces, leaving the federal government with less than half — despite bearing responsibility for debt servicing, defence, external obligations, and macroeconomic stability. This imbalance discourages provinces from mobilising their own revenues while pushing the federal government towards unsustainable borrowing. The World Bank has repeatedly highlighted how successive NFC awards have eroded federal fiscal capacity without easing expenditure burdens.

Pakistan’s repeated reliance on waivers reflects political expediency rather than coherent reform planning. Loss-making public enterprises such as Pakistan Steel Mills, PIA, and power distribution companies continue to drain public funds, yet successive governments have avoided privatisation. The financial losses of these entities often surpass the size of IMF packages themselves.

True reform demands ‘nerves of steel’, the resolve to confront entrenched bureaucracies, challenge vested interests, and ensure fair, transparent accountability. Without such courage, Pakistan risks remaining locked in a cycle of bailouts, waivers and compromised economic sovereignty, while its structural vulnerabilities deepen.