fter witnessing a severe spell of financial hardships and multiple challenges on the external and internal fronts, Pakistan is now beginning to show some encouraging indications of microeconomic stability. Inflation, which had been a major concern, has dropped to a single digit.

The policy rate, previously set at 22 percent, now stands at 17.5 percent. The reduction is aimed at inducing growth and stabilising the financial system. Economic managers of the present government have also been working relentlessly on improving foreign reserves, eliciting confidence in the country’s ability to meet future obligations.

Despite achieving a number of positive microeconomic stability indicators in recent months, Pakistan still faces several diplomatic challenges. Improving relationships with important bilateral partners, like the Gulf countries, China and the United States, is critical for driving foreign investment and improving bilateral trade. Additionally, managing the complex relationships with neighbouring countries, particularly Afghanistan and India, remains a concern.

While economic indicators are showing some improvement, for fiscal stability and a long-term sustainable growth, we still need to work very hard for domestic recovery and improvements in international relations to boost foreign direct investments for promoting bilateral trade through transfer of technology to produce exportable goods of international standard.

These are two key areas to ensure sustained stability and growth. However, the most critical area is the energy crisis. Without having affordable energy, we can neither revive the local industry nor produce competitive exportable goods.

On July 12, Pakistan reached a staff-level agreement (SLA) with the International Monetary Fund for a 37-month extended fund facility (EFF) programme of about $7 billion. This agreement marked a significant milestone as, compared to previous IMF programmes, the process was quite smooth. Unlike in the past, the government and the IMF reached a broad consensus in a relatively short time. However, the agreement carried a necessary condition of final approval of the programme depending on IMF Executive Board’s decision, and the timely confirmation of financing assurances from Pakistan’s development partners.

While Pakistan has been managing its external financial obligations, meeting deadlines for debt repayment, sustainability remains vulnerable. It is largely contingent on financial rollovers and increased support from its bilateral partners. The IMF is closely monitoring these commitments, as Pakistan’s ability to avoid an acute financial crisis hinges on the cooperation and assurances from these partners. Moreover, continued external financial backing is critical to ensure Pakistan’s economic stability and recovery, especially in the context of the ongoing global financial pressures and the challenges of maintaining steady inflows of foreign investment and aid.

The prolonged delay between SLA and its approval by the IMF Executive Board has raised concerns about the future of Pakistan’s new EFF programme. There was speculation that Pakistan had struggled to secure the necessary financing assurances from its development and bilateral partners. Although the economic situation has improved compared to the crisis Pakistan faced in 2022, the country is still unable to sustain its recovery without continued support from global lenders and bilateral allies. A successful implementation and completion of the IMF programme remains important for economic stability.

The uncertainty surrounding the EFF was addressed when, in a recent Press briefing, Julie Kozack, director of the IMF’s Communications Department, confirmed that the Executive Board meeting was scheduled for September 25, to consider the SLA for approval. Ms Kozack also stated that this development came after Pakistan secured the required financing commitments from its development partners.

Kozack further acknowledged that steady policymaking in Pakistan had contributed to economic stability, leading to improvements in key economic indicators. Inflation has significantly declined, growth has shown signs of recovery and the country’s international reserves have increased. All these signal a positive direction for Pakistan’s economy, though external financial backing remains essential to sustain this progress.

The full scope and specific ‘to-do’ list for Pakistan will only be revealed once the IMF Executive Board approves the EFF programme. The SLA has already emphasised the need for better coordination between federal and provincial spending in line with the Eighteenth Amendment. A key focus of the new programme will be increasing tax collection efforts by the provinces, especially in areas like sales tax on services and agricultural income tax.

In order to address the issue of agricultural income tax, all provinces have agreed to reform their tax systems to align fully with the federal income tax frameworks for both personal and corporate taxation. This alignment, aimed at streamlining and simplifying tax structures, is to be implemented through legislative changes that will take effect from January 1, 2025. These measures, expected to increase provincial revenues and contribute to the broader fiscal stability of the country, may prove detrimental for the farmers having up to 25 acres of land and living at mere subsistence level.

Pakistan’s inefficient energy sector has long drained national resources, reaching a point where its sustainability, and that of the economy, is now in jeopardy. The authorities had previously committed to addressing these risks through timely tariff adjustments, implementing cost-reduction reforms and avoiding unnecessary expansion of power generation capacity. At the time of the SLA with the IMF, the government reaffirmed its dedication to providing targeted energy subsidies, primarily through the Benazir Income Support Programme and pledged to eliminate cross-subsidies.

However, recent developments indicate a departure from these commitments. The Punjab government has announced a blanket two-month electricity subsidy of Rs 14 per unit for households consuming between 201 and 500 units per month. Although the provincial government has claimed it would fund this subsidy by reallocating resources from other projects, thereby causing no additional budgetary strain, this approach has gone against the original commitment on subsidies. Such deviations undermine the broad reform goals, raising concerns about the effective execution of fiscal discipline in Pakistan’s energy sector.

Pakistan’s recent economic performance has promising signs of improvement. The current account deficit has narrowed significantly and inflation is easing at a faster-than-expected pace. In August 2024, the Consumer Price Index dropped to 9.6 percent, the first-time inflation has fallen to single digits since October 2021.

The downward shift in inflation has allowed for a reduction in the policy rate, which has been cut by 200 basis points, bringing it down to 17.5 percent. These developments mark important progress in stabilising the economy and creating a more favorable environment for growth.

However, federal tax collection remains an area of a grave concern. The Federal Board of Revenue collected Rs 1,456 billion in net revenues during July and August 2024, falling short of the quarterly target of Rs1,554 billion by Rs 98 billion. While there has been a 21 percent year-over-year increase in tax collection, the shortfall poses a risk to fiscal stability. The FBR remains optimistic about meeting its first-quarter revenue target, projecting a potential boost in economic activity and imports in September 2024, driven by reduction in the policy rate and other government interventions.

However, concerns linger over the possibility of a mini budget if revenue targets continue to fall short, that could lead to introduction of new taxes, further burdening businesses and individuals who are already strained by heavy and regressive taxation. A mini budget could also undermine the recent economic progress by dampening business sentiment and consumer spending, both of which are critical to sustaining the recovery. If corrective measures are not taken promptly, the pressure on Pakistan’s fiscal framework could intensify, threatening the economic momentum gained in recent months.

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.