fter a prolonged period of alarming instability, Pakistan’s economy has made significant strides towards a recovery. Through gradual consistent fiscal improvements, the country has managed to steer away from a critical economic crisis. To consolidate these gains and ensure a more resilient and sustainable economy, implementation of sound fiscal and monetary policies must continue without any disruption. The challenges ahead leave little room for delays or slippage. A lapse could easily lead to a reversal of the gains towards macroeconomic stability.

Entering the current financial year, Pakistan had set a clear objective to secure a new long-term extended fund facility (EFF) programme from the International Monetary Fund. In view of this objective, the federal budget was aligned with the targets set in the IMF staff level agreement. Passage of this budget was one of the “prior actions” for the new programme. Other crucial measures in this effort included the annual electricity tariff rebasing and semi-annual gas tariff adjustments.

Approved by the IMF’s Executive Board on September 27, the EFF programme is centred on restoring trust in Pakistan’s economic policymaking and achieving long-term macroeconomic sustainability as per IMF Country Report No 24/310, released on October 10. The report emphasises the need for a cohesive strategy that integrates fiscal, monetary and exchange rate policies. At the core of this strategy is the optimisation of public spending, ensuring that allocation of resources to critical sectors such as health and education is consistent.

This approach will help generate additional fiscal space for investment in these areas. A key aspect of this strategy is the creation of a fairer and more efficient tax system, particularly by focusing on sectors that are currently under-taxed. By broadening the tax base, Pakistan can enhance revenue generation and promote equity within the economy.

Reforms to foster a more conducive environment for private sector growth are also essential to the programme. Eliminating distortions created by the state and establishing a level playing field for all businesses will encourage competition, enhance productivity and improve overall economic competitiveness. There is a significant focus on improving public service delivery, particularly by addressing inefficiencies in state-owned enterprises (SOEs).

The programme outlines a multidimensional strategy for SOE reform, which includes governance and transparency reforms to increase accountability and efficiency. Additionally, restructuring and privatisation of SOEs are projected as critical steps in reducing the fiscal burden on government and improving overall performance of these entities.

The IMF programme carries a detailed list of required actions. Many of those come with specific deadlines. Among the most important conditions is a restriction on offering new tax amnesties or preferential tax treatments, such as exemptions, zero rating or tax credits.

Pakistan has also committed to ensuring that the Special Investment Facilitation Council will not propose any regulatory or tax-based incentives that could distort the investment landscape. In order to maintain transparency and accountability, the government has committed itself to implementing best practices in SIFC operations.

For reinforcing fiscal discipline, the government has pledged not to allow any supplementary grants for unbudgeted spending beyond the parliamentary-approved levels for the fiscal year 2025, except in cases of natural disasters. Any expenditure exceeding the approved budget must receive ex-ante parliamentary approval. This stringent fiscal approach is vital for preventing unsustainable increases in public debt and ensuring long-term economic stability.

The reforms outlined in the IMF programme are necessary. Recent developments have highlighted the fact that many of these steps should have been taken several years, if not decades, earlier. Vested interests and misplaced priorities delayed these vital reforms. 

There has also been considerable discussion about the need to reassess governance and fiscal structure established under the 18th Amendment and the Seventh National Finance Commission Award. The current EFF programme highlights the importance of reorganiaing federal-provincial fiscal relations through a National Fiscal Pact aimed at rebalancing inter-governmental relationship.

The federal and provincial governments have agreed in principle to sign the NFP. The NFP seeks to transfer some financing responsibilities from the federal to the provincial governments, mostly in higher education, health, social protection and regional infrastructure investment.

Effective implementation of the NFP will help address the federal government’s current fiscal imbalance and ensure sustainability and fiscal consolidation. The provinces are expected to enhance their own tax-collection efforts by focusing on sales tax on services, property tax and agricultural income tax. However, NFP’s success will depend on strong political will, with all political parties prioritising national interests over short-term political gains.

A restructuring of federal-provincial relations is essential. After sharing the divisible revenue with the provinces, the federal government is left with inadequate resources for its needs, forcing it to borrow heavily to cover its current and developmental needs. This has been causing abnormal surges in debt levels. To mitigate this problem, the provinces must take on more responsibilities, generating additional tax/ non-tax revenue and reduce their reliance on the federal government.

Pakistan is also moving forward with its privatisation plan to reduce the federal government’s footprint in the national economy. Under the EFF programme, the government has made a commitment to privatise a range of SOEs, including Pakistan International Airlines, the Roosevelt Hotel, the First Women’s Bank, the House Building Finance Corporation and several electricity distribution and generation companies (DISCOs and GENCOs). The privatisation is expected to create additional fiscal space for the government while offloading loss-making entities that have caused a significant drain on public resources.

The government is also committed to revising agricultural income tax regime as part of the broader reform agenda. By the end of October 2025, the provincial governments are expected to update their agricultural income tax legislation to align it with federal personal income tax system. This will be a significant step towards creating a more equitable tax system and ensuring that previously under-taxed sectors contribute their fair share. Successful implementation of this reform will require a robust administrative framework to ensure compliance and effective enforcement.

The EFF programme also includes important measures to strengthen Pakistan’s anti-corruption framework. By February 2025, the government will introduce a system requiring high-level public officials (BPS 17-22) to digitally file and publicly disclose their asset declarations, including domestic and foreign assets owned by them and their family members.

The long overdue measure is necessary for improving transparency and accountability in public administration. For this, the government is committed to amending the Civil Servants Act, 1973, to provide for digital filing of asset declarations and making them accessible to public.

The reforms outlined in the IMF programme are necessary. Recent developments have highlighted the fact that many of these steps should have been taken several years, if not decades, earlier. Vested interests and misplaced priorities have delayed these reforms so that they have now become part of a “forced measure” by the IMF. Pakistan has a narrow path to redemption. There is little room for errors or slippage. The government’s efforts must focus on adhering to the programme’s benchmarks and timelines. A failure to do so could jeopardise the country’s economic stability.

The IMF programme presents Pakistan with an opportunity to address its longstanding economic challenges and build a more resilient and sustainable economy. From fiscal discipline and tax reforms to privatisation and anti-corruption efforts, these outlined measures are essential for stabilising the economy to lay the foundation for future growth. Success will depend on the government’s ability to implement these reforms in a timely and effective manner. The path forward is challenging, but with sustained commitment and political will, Pakistan can navigate its way towards long-term economic prosperity.

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.