A crucial milestone in economic stabilisation

Express Tribune

18-05-2025

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Pakistan's economy has once again come under the international spotlight following the disbursement of a $1.023 billion tranche by the International Monetary Fund (IMF), part of a larger $7 billion Extended Fund Facility (EFF) aimed at stabilising the country's ailing macroeconomic landscape.
With foreign exchange reserves under pressure and fiscal reforms lagging, the IMF programme is both a relief and a significant challenge for Pakistan's policymakers.
The $1 billion disbursement, announced by the State Bank of Pakistan (SBP), is expected to bolster the country's foreign currency reserves in the short term. The reserves, which had dipped below $8 billion earlier this year, are vital for ensuring import cover, maintaining currency stability and fostering investor confidence in the economy.
With looming external debt repayments and a trade imbalance, the inflow has offered a temporary breathing room. However, it is the IMF's conditionalities that will ultimately determine the long-term trajectory of Pakistan's economy.
Among the most significant conditions tied to the EFF are fiscal reforms focused on enhancing domestic revenue mobilisation. Pakistan's tax-to-GDP ratio continues to hover around 9.5%, far below the regional average and insufficient to meet the country's growing public expenditure needs. In comparison, India and Bangladesh maintain tax-to-GDP ratios of approximately 16% and 12%, respectively.
The IMF has emphasised the urgent need for Pakistan to broaden its tax base by including previously untaxed or under-taxed sectors such as agriculture, retail and real estate. As part of the new commitments, the government has pledged to increase the tax-to-GDP ratio by at least 1.5% in the current fiscal year and by 3% over the life of the IMF programme.
Agricultural income tax reform has been a particular focus as agriculture accounts for nearly 20% of Pakistan's GDP but contributes minimally to tax revenues. The government has agreed to implement progressive tax rates on agricultural income, with rates reaching up to 45% by January 2025.
This move has been controversial, particularly among powerful landlords, who have traditionally resisted attempts to formalise and tax the sector. Nevertheless, experts argue that equitable taxation is essential for ensuring both revenue growth and social justice.
The energy sector, long a drain on public finances, has also come under IMF scrutiny. Chronic losses in state-owned power distribution companies (DISCOs) due to theft, line losses and inefficiencies have contributed to the ballooning circular debt, which now stands above Rs2.6 trillion.
To address this, the government has committed to privatising two DISCOs by early 2025 and phasing out power and gas subsidies, particularly those granted to influential industrial and agricultural groups. Furthermore, provincial governments have pledged not to offer new subsidies and to halt the establishment of additional Special Economic Zones (SEZs) and Export Processing Zones (EPZs), which have historically enjoyed tax exemptions and utility benefits.
Removing subsidies and increasing utility tariffs have sparked political backlash, especially among the middle and lower-income segments of society. Electricity prices have already been adjusted upwards multiple times over the past year, with further hikes likely in the near future. Inflation has eroded the purchasing power and led to widespread public discontent.
The government faces a delicate balancing act – meeting IMF conditions without triggering a social and political crisis. The IMF programme has also stirred geopolitical tensions. Following the recent loan disbursement, India raised objections, alleging that Pakistan might misuse the funds to support cross-border terrorism, especially in light of a recent militant attack in Kashmir.
In response, Prime Minister Shehbaz Sharif rebuffed the allegations, calling them baseless and politically motivated. He emphasised that the IMF's approval was based on Pakistan's fulfillment of stringent economic criteria and that any attempts to derail the programme had failed.
These tensions underscore broader regional complexities in which Pakistan's economic recovery is embedded. Despite the challenges, some positive developments have emerged from the IMF agreement. Improved transparency, better fiscal monitoring and the revival of stalled structural reforms are seen as signs of growing policy maturity.
The government has also committed to enhancing the autonomy of the State Bank of Pakistan, strengthening anti-corruption institutions and improving the accuracy of budget forecasting and reporting. These measures are critical for restoring the confidence of both domestic and foreign investors, many of whom have remained on the sidelines due to persistent economic uncertainty.
The IMF's involvement is likely to unlock additional financing from multilateral lenders such as the World Bank, Asian Development Bank (ADB) and Islamic Development Bank (IsDB). These institutions typically view the IMF approval as a signal of macroeconomic discipline and policy coherence.
Already, discussions are underway for the release of additional project-based funding contingent upon Pakistan's progress in meeting IMF benchmarks. This supplementary support will be crucial for financing infrastructure, health care and education projects that might otherwise be sidelined due to fiscal constraints.
The path to sustained recovery will depend on the government's ability to implement reforms consistently and inclusively. The private sector, civil society and provincial administrations all have critical roles to play in this process.
Without broad-based political consensus and institutional support, even the most well-intentioned reform packages risk faltering. Economic transformation cannot be achieved through donor-driven policies alone; it must be rooted in local ownership and guided by long-term strategic planning.
The government must prioritise social protection and inclusive growth to mitigate the impact of austerity measures on vulnerable groups. Expanding the targeted cash transfer programmes like the Benazir Income Support Programme (BISP), investing in education and skills development and supporting small and medium enterprises (SMEs) can help lay a more resilient economic foundation.
Only through such comprehensive efforts can Pakistan ensure that stabilisation leads to sustainable prosperity, not just temporary relief. The recent $1 billion IMF disbursement is a welcome development for Pakistan's strained economy, offering both immediate fiscal relief and a framework for structural reform.
However, the true test lies in execution. Meeting IMF conditions such as increasing tax revenues, eliminating subsidies and reforming state-owned enterprises will require political will, administrative capacity and public support.
With economic resilience hanging in the balance, the stakes have never been higher. The choices made in the coming months will shape not only Pakistan's financial stability but also its social and political trajectory for the years to come.
The writer is a member of PEC and has a Master's in Engineering.