Pakistan's economic reforms a pushback against elite but it may backfire

The Print

2 days ago

For many, it is a 'wake-up call'. But at the same time, the script is all too familiar. Economic crisis, an eleventh-hour bailout from the International Monetary Fund (IMF), and a promise of sweeping reforms that mostly tank. It is Pakistan's 26th engagement with the IMF in 66 years.
Though the government hails the reforms as a 'historic step', economists, industry bodies, and editorials in national dailies have met them with cautious optimism, tempered by warnings of potential economic disruptions.
New Delhi: A crippling economy, an impatient IMF and a recent military conflict with India that exposed its vulnerability has introduced a sense of urgency in Pakistan vis a vis economic reform. Tariffs are being slashed. State enterprises are being privatised. Even the agriculture sector, long protected by subsidies and loopholes, is being pulled into the tax frame.
'The recent war with India has added further momentum to the reform efforts. This is because there is a clear belief in Pakistan that the country faces a real and existential threat emanating from the east,' Uzair Younus, Principal at The Asia Group, a strategic consulting firm based in Washington DC, told ThePrint
Trade and tariff overhaul
The centrepiece of Pakistan's latest reform drive is a dramatic overhaul of its trade and tariff policy. Starting 1 July, the government will begin reducing customs duties and tariff rates across thousands of products, and phasing out protectionist barriers that have shielded local industries.
The goal, government officials say, is to push exports, bring foreign investment, and modernise a muted industrial growth. According to the new plan under National Tariff Policy 2025–30, the average import tariff will be halved from 19 per cent to 9.5 per cent over the next five years, with high-impact sectors such as auto, steel, textiles, and plastics facing major disruptions.
Economists are calling it a 'pushback against elites in Pakistan'.
'Pakistan's slew of reforms is a 'wake-up call' and has seen greater momentum post the India-Pakistan conflict. It is also a pushback against the elites in Pakistan who have always downplayed reforms,' said Younus.
According to Younus, Pakistan has had many IMF bailouts in the past, but its ruling elites have always had the agency to resist reforms under pressure.
'This time around, the likelihood of these reforms going through is higher because this is something senior leaders in the government believe in,' he added.
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The skepticism
Pakistan's Finance Minister Muhammad Aurangzeb has described the reforms as vital to building an export-oriented economy. Prime Minister Shehbaz Sharif has also championed the effort, calling it 'a new economic direction.'
But not everyone is convinced.
'Industry is at a loss for words when describing what is about to happen. The plan is a radical one, no doubt. It may sound fine, but it does run the risk of turning Pakistan into a trading economy, since it will undoubtedly gut large sections of manufacturing, but may or may not spur exports in the way its proponents expect,' Pakistani business journalist Khurram Hussain wrote in a Dawn article.
'Frankly, I am not convinced that the economy can withstand the shock, especially to the reserves, that could come from the sudden surge of imports such a step could trigger,' he added.
The IMF's fingerprints are unmistakable on Pakistan's reform push. The country is currently under review for the release of the final tranche of a $7 billion loan programme, and the IMF has made privatisation and structural reform non-negotiable conditions.
The IMF projects Pakistan's economy will grow 2.6 per cent this fiscal year, rising to 4.5 per cent annually by 2030, driven by planned fiscal reforms and policy commitments aimed at long-term stability— but only if it adheres to every item on the checklist.
The tariff overhaul is a balancing act that is expected to disrupt industries long shielded from global competition, and has few takers for now. Critics have labelled it a 'death knell'.
'For a large number of industries that rely on these duties to make their products competitive against imports, this is nothing short of a death knell. The government is doing this in what it says is a bid to spur exports. The affair began as a duty reduction plan for raw materials and intermediate goods used in exports, but grew in scope as it travelled through the process of consideration and approval until it became a robust trade liberalisation plan,' Husain pointed out.
The Pakistan government has yet to release a detailed impact assessment. Critics say this lack of transparency, especially regarding potential job losses and foreign exchange outflows, risks turning a sound economic idea into a political liability.
Even Dawn, which called the plan 'a major positive shift' in its editorial, warned that unless accompanied by structural reform and improved governance, the policy could falter.
Other concerns loom. Customs evasion, under-invoicing, and smuggling are already rampant. Weak enforcement could allow liberalisation to reward bad actors while penalising compliant businesses.
'The concern is not the policy, it's the capacity to implement it,' Pakistani economist Javed Hassan told ThePrint. 'Without strong governance and investment in human capital, this could backfire badly,' he added.
Short-term risks
Pakistan's economy is under strain across the board. The power sector is crippled by circular debt, agriculture remains low-yield and untaxed, PIA, the national carrier, is buried in losses, and manufacturing suffers from outdated protectionist policies. State-run banks are inefficient, and food markets are distorted by subsidies and smuggling. Decades of mismanagement and elite capture have entrenched a system built to serve the few.
A 2021 United Nations report estimated that Pakistan's elite, including the corporate sector, feudal landlords, political class, and military, receive economic privileges worth $17.4 billion annually, about 6 per cent of the country's GDP.
The Business Recorder, an English-language daily in Pakistan, called the reforms 'Pakistan's last real chance to get it right.' But it also warned that failure to crack down on under-invoicing and GST evasion could reverse the reforms.
'There's a growing segment of elites in the country who now accept that the old ways cannot be sustained. As a result, we are seeing a reform orientation across sectors, although it is slow. The downside is that the status quo economy is great for a narrow segment of the elite,' Younus said, underlining the downside.
'The resistance is likely to be real and persistent, and it'll be up to the government and the military to not lose sight of the reasons why the status quo cannot be sustained,' he added.
That resistance is already visible. Business groups like the Pakistan Association of Auto Parts and Accessories Manufacturers (PAAPAM) are warning of mass layoffs. Meanwhile, the Karachi Chamber of Commerce and Industry (KCCI) has cautiously supported the reforms, pointing out that high tariffs have only encouraged smuggling, especially in auto parts, where the black market now accounts for an estimated 60 per cent of sales.
'The reduction of import barriers may widen the trade deficit in the near term, but as research has shown, import barriers are effectively a tax on exports. The way to manage the near-term pressure is to use the market-determined exchange rate as the first line of defence. Over time, the economy will adjust and things will fall into place,' Younus said.