akistan’s close relationship with the International Monetary Fund began in 1950. Over the decades, governments have frequently turned to the IMF for assistance in meeting economic challenges. This has fostered a cycle of dependency on the lender of the last resort.

Since joining the IMF and signing its first Stand-By Arrangement in 1958—despite not drawing any funds—Pakistan is now engaged in its 25th extended fund facility (EFF) programme, involving SDR 5,320 million (approximately $7 billion). The IMF Executive Board approved the agreement on September 27, following a staff level agreement on July 12. Pakistan is currently the IMF member that has signed the highest number of agreements with the Fund.

The frequent engagements and perpetual dependency on the IMF highlights a persistent crisis facing Pakistan’s economy, riddled with fiscal deficits, high inflation and balance of payments issues.

Occasionally, the financial assistance from the IMF has been crucial for stabilising the economy. It has enabled the respective governments to address pressing economic issues. As Pakistan has embarked on yet another EFF programme, now is a pivotal moment to leverage the opportunity to build a more resilient and sustainable economy.

By implementing necessary reforms and addressing structural weaknesses, Pakistan can break free from its historical cycle of reliance on the IMF. This involves not only adhering to the programme’s stipulations but also fostering an environment conducive to growth, enhancing public sector efficienc, and promoting private sector development. Pakistan has a unique chance to transform its economic landscape and establish a foundation for lasting stability.

The programme’s approval, accompanied by an immediate disbursement of SDR 760 million (about $1 billion), was confirmed by the State Bank of Pakistan on September 27. In its press release, the IMF acknowledged the steps taken by Pakistan to restore economic stability through consistent policy implementation under the 9-month SBA. The statement highlighted improvements in terms of a contained current account, stable foreign exchange market conditions and a reduction in inflation and policy rates.

The deputy managing director’s statement and the acting chair noted: “The implementation of sound policies over the past year has been critical to restore economic stability, reduce near-term risks and rebuild confidence. Growth has returned, external pressures have eased with reserves doubling over the last year. Inflation has declined markedly. However, despite this progress, significant structural challenges remain. Ambitious and sustained efforts are needed to strengthen Pakistan’s resilience and economic prospects. The authorities’ EFF-supported programme provides a critical anchor to policies and structural reforms and provides a framework for partner financing.”

Under the new EEF, the IMF has emphasised the need for Pakistan to focus on rebuilding policymaking credibility and entrenching macroeconomic sustainability. This goal necessitates the establishment of a coherent framework that integrates fiscal, monetary and exchange rate policies effectively.

For devising a rational and pragmatic fiscal policy, Pakistan needs a multidimensional approach to ensure that government budgets remain balanced throughout economic cycles. This involves gradually reducing public debt levels and implementing strict budgetary controls to manage public spending efficiently, ensuring that funds are allocated primarily to essential services. In addition to fiscal discipline, monetary policies must align with the prevailing economic conditions.

The cautious approach adopted over the past 18 to 24 months has allowed Pakistan to navigate through a critical phase of its economy, fostering price stability and controlling inflation. By maintaining a balanced interplay between fiscal responsibility and responsive monetary policies, Pakistan has laid the groundwork for sustainable economic growth.

By implementing necessary reforms, Pakistan can break free from its historical cycle of reliance on the IMF. This involves not only adhering to the programme’s stipulations but also fostering an environment conducive to growth. 

This comprehensive strategy will not only restore confidence among stakeholders but also enhance the government’s ability to address pressing economic challenges while paving the way for long-term stability and resilience. In pursuing these objectives, Pakistan must remain vigilant and adaptable, ensuring that its economic policies are both effective and responsive to the dynamic global economic environment.

The exchange rate policies in Pakistan must maintain a flexible approach, with the primary objective of enhancing export competitiveness. Effective management of foreign exchange reserves can play a pivotal role in supporting this strategy, ensuring stability and resilience in the face of global economic fluctuations.

Over the past two years, Pakistan has made significant strides in improving its external position, reflecting a concerted effort to strengthen the economy. However, sustained financial support from development partners and bilateral allies remains crucial for the successful implementation of the programme’s objectives.

Data recently released by the SBP for June 2024 indicates a noteworthy development. Pakistan has not accumulated additional external debt and liabilities compared to levels recorded in December 2021. The external debt has remained relatively stable, hovering around $130.68 billion, illustrating a commendable achievement over the past 30 months. This stability bodes well for Pakistan’s economic outlook as it continues to navigate through challenging global economic conditions.

Tax reform is one of the most critical areas needing improvement. Although there has been some progress in tax collection and related indicators, they still fall short of meeting the country’s financial requirements. The current EFF emphasises the need to enhance revenue mobilisation by broadening the tax base, eliminating special sector regimes and ensuring a more equitable distribution of tax burden among previously under-taxed sectors, including industrialists, developers and large-scale agriculture.

During the negotiation of the SLA, the IMF proposed a “national fiscal pact” aiming to achieve a more equitable distribution of fiscal responsibilities between federal and provincial governments in accordance with the 18th Constitutional Amendment. Under this pact, provincial governments have to enhance budget allocations and expenditures for essential services such as education, healthcare, social protection and development projects.

The provinces are also required to intensify their tax collection efforts, including implementing taxes on services and agricultural income. In order to promote consistency, all provinces are required to align their agricultural income tax laws and systems with the personal and corporate income tax frameworks of the federal government, with corresponding legislation, set to take effect on January 1, 2025.

The EFF emphasises the critical importance of restructuring state-owned enterprises (SOEs) and implementing reforms in the energy sector. The government has been assessing the performance of various SOEs, identifying some for privatization. This is expected to enhance service delivery and alleviate the fiscal burden. However, this process has been sluggish, hindering the timely offloading of loss-making and inefficient entities.

Addressing inefficiencies in the energy sector is paramount for achieving macroeconomic stability. Effective reforms in this area may encompass restructuring pricing mechanisms, fostering competition within energy markets and investing in renewable energy sources. In recent years, the energy sector has emerged as a significant governance and financial challenge for the country. The escalating ‘circular’ debt and a lack of efficient governance have severely impaired the sector’s sustainability.

Historically, measures implemented by the government to meet the international lenders’ conditions have been predominantly tariff-related. Adjustments in fuel prices, tariff modifications and revisions have burdened the consumers. However, the latest EFF stresses the need for “deep cost-side reforms” to secure the long-term viability of the energy sector.

Reports indicate that the government has initiated negotiations to revise agreements with the independent power producer (IPP) and plans to retire certain agreements.

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.