inance Minister Muhammad Aurangzeb is optimistic about securing the approval of the executive board of the International Monetary Fund for the $7 billion 37-month Extended Fund Facility programme, for which a staff-level agreement was signed on July 12. However, he has indicated no definite date.

Despite positive trends and improving ratings from major credit agencies, the country faces ongoing challenges related to its balance of payments and dependence on multilateral and bilateral financial support. It is important for economic managers to address these issues, reduce reliance on external partners, adopt effective strategies to strengthen country’s foreign exchange reserves and improve its financial stability.

Pakistan faces significant challenges in enhancing its exports, continuing to rely on traditional goods rather than investing in value-added sectors, including the information technology and export of skilled human resources. The current regulatory environment is hindering business and economic growth, which is stifling both domestic investment and foreign direct investment (FDI).

The Special Investment Facilitation Council was established as a one-window platform to promote FDI by facilitating investor engagement, improving interdepartmental collaboration and expediting decision-making and project development. However, there numerous procedural hurdles still need to be removed. A crucial step in this process is the reform of the taxation system, which must be streamlined to create a more conducive environment for investment and growth.

The government should focus on improving fiscal management by implementing structural reforms to enhance revenue collection and manage public expenditures more effectively. Developing a strong domestic financial sector capable of mobilising savings and investment will be decisive in addressing the financial needs.

Minister Aurangzeb announced on September 3 that the government was in “advanced stages” of securing external financing assurances, a prerequisite for the IMF programme. The government is also negotiating a $12 billion rollover of loans from China, Saudi Arabia and the United Arab Emirates. It has requested an additional $1.2 billion from Saudi Arabia to cover a $2 billion financing gap.

The finance minister highlighted recent improvements, including a reduction in inflation from 23.7 percent last year to 9.6 percent in August 2024, which will allow a further reduction in the policy rate and benefit businesses. He also noted positive credit rating updates from Fitch and Moody’s. Despite these gains, he stressed the need for structural reforms and increased tax compliance, pointing out a significant shortfall of Rs 98 billion in tax collection by Federal Board of Revenue in the first two months of the current fiscal year.

Aurangzeb asked for greater contributions from sectors currently under-taxed and emphasised the government’s commitment to reducing its size and streamline procedures. Apparently, the targets have been set high and the government is optimistic about overcoming the financial challenges. However, everyone knows that tax collection is the major challenge as some sectors are grossly under-taxed and not contributing their fair share.

The finance minister, however, must acknowledge the challenges faced by sectors and individuals that are-overtaxed, particularly those subject to collection/ deduction at source. Salaried individuals, for instance, are subject to tax deductions directly from their salaries. Additionally, they must pay taxes levied on various utility bills and many other transactions. When these individuals file their tax returns, they frequently struggle to receive refunds for the excess payments. The government should either recognise that individuals whose taxes are deducted at source should not pay advance tax on utility bills and other transactions or ensure that excess payments are refunded within three weeks of filing the income tax return as is the practice worldwide.

The government is trying to secure a debt rollover to secure the IMF deal. However, the July-March quarterly report on foreign economic assistance released by the Ministry of Economic Affairs states that the government signed new commitments totaling $2.166 billion - $2.144 billion from multilateral development partners and $22 million from bilateral partners. 28 percent of these commitments were made for balance of payments and budgetary support, 26 percent for programme financing, 37 percent for project financing and 9 percent for commodity financing.

The largest single financing amount, $253 million, was secured for energy and power sector. During the same period, disbursements totaled $6.904 billion, primarily from multilateral and bilateral sources. The World Bank, the Asian Development Bank, and the Islamic Development Bank contributed $1.482 billion, $666 million and $304 million, respectively. Saudi Arabia and China disbursed $657 million and $576 million, respectively. As of March 31, Pakistan’s total external public debt stood at $86.683 billion. The government paid $8.086 billion in debt servicing - $5.363 billion in principal repayments and $2.723 billion in interest payments. Net transfers to the external public debt resulted in a positive balance of $909 million.

Fostering public-private partnerships can enhance infrastructure projects, improving overall productivity and competitiveness. Failure to implement these strategies could result in prolonged economic stagnation.

The sectoral distribution of project financing, totaling $2.182 billion, highlights the government’s priorities and reflects the composition of its active project portfolio. From July to March 2023-24, the disbursements were: $404 million for energy and power; $234 million for ecovery from the 2022 floods; $200 million for construction; $155 million for agriculture; $154 million for transport and communication; $144 million for health and nutrition; $105 million for governance, research and statistics; $97 million for water; and $61 million for physical planning and housing. $628 million was allocated to other sectors. This distribution highlights the focus on critical areas of development and recovery.

As of March 31, Pakistan’s total external public debt amounted to $86.683 billion. Out of this approximately 64 percent was sourced from multilateral and bilateral partners, featuring concessional terms and extended maturities.

The breakdown of the external public debt comprises $38.603 billion from multilateral development partners; $17.121 billion from bilateral development partners; $5.578 billion from foreign commercial banks; $7.800 billion from Eurobonds; $7.740 billion from the IMF; $4.000 billion from China SAFE deposits; $5.000 billion from Saudi time deposits; and $841 million from other sources.

From July to March 2023-24 the government allocated $8.086 billion for servicing external public debt—comprising $5.363 billion in principal repayments and $2.723 billion in interest payments.

The distribution of debt servicing among various creditors shows that the IMF received $1.239 billion in principal and $4 61 million in interest, the total amounting to $1.700 billion; Saudi Arabia was paid $1.107 billion in principal and $46 million in interest, totaling $1.153 billion; the ADB received $645 million in principal and $388 million in interest, for a total of $1.033 billion; the World Bank was paid $606 million in principal and $299 million in interest, totaling $905 million; China received $185 million in principal and $238 million in interest, amounting to $423 million.

Foreign commercial banks received $343 million in interest, bonds received $331 million in interest, and China SAFE deposits were paid $236 million in interest. Other notable payments included $225 million in principal and $29 million in interest to Japan, $156 million in principal and $30 million in interest to France; and $152 million in interest for Saudi deposits. The NPC was paid $625 million in principal and $34 million in interest, totaling $659 million. Other sources received $575 million in principal and $136 million in interest, amounting to $711 million.

The government realised a net transfer of $909 million in its external public debt stock from July to March 2023-24, reflecting an increase in the debt stock. Net transfers are calculated as the difference between external loans received and repayments made. For this period, the breakdown of net transfers indicates that multilateral loans resulted in inflows of $2.711 billion and outflows of $1.548 billion, yielding a net transfer of $1.163 billion. Bilateral loans inflows were $780 million and outflows $1.951 billion, resulting in a negative net transfer of $1.171 billion.

The IMF outflows were $1.239 billion with no inflows, leading to a negative net transfer of $1.239 billion. The SFD Time Deposit saw inflows of $2.000 billion with no outflows, contributing a net transfer of $2.000 billion. The NPC had inflows of $781 million and outflows of $625 million, resulting in a net transfer of $156 million. Overall, the grand total of inflows was $6.272 billion, with outflows at $5.363 billion, resulting in a net positive balance of $909 million.

Pakistan should prioritise investing in technological innovation and infrastructure development to stimulate economic growth and reduce its dependency on external debts. By advancing in technology and renewable energy sectors the country can create high-value industries that attract foreign investment and drive domestic economic activity.

Fostering public-private partnerships can enhance infrastructure projects and improve overall productivity and competitiveness. Failure to implement these strategies could result in prolonged economic stagnation, continued reliance on external financing and increased debt servicing burdens, ultimately undermining long-term economic stability and growth.

Dr Ikramul Haq, an advocate of the Supreme Court and writer, is an adjunct teacher at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA