The International Monetary Fund (IMF) has approved the much awaited $7 billion in new loan but the package comes with tough conditions which Islamabad will not find easy to fulfil. The 37-month Extended Fund Facility for Pakistan is the second highest amount ever agreed upon under any IMF programme in terms of Special Drawing Rights (SDRs).

The Fund  has attached harsh conditions for the government to follow alongside the release of the first tranche of over $1 billion under the new Extended Fund Facility (EFF), including a focus on enhancing productivity and competitiveness. The new IMF programme lays out a wide range of policies and reforms aimed at helping the government achieve macroeconomic stability, tackle structural challenges and aim at  more inclusive and resilient growth. To quote the IMF ,“Rebuilding policy credibility and achieving macroeconomic sustainability: this requires consistent implementation of sound fiscal, monetary, and exchange rate policies.”

The IMF has identified a set of priorities for the improvement of the Pakistani economy, including better public spending, fairer and more efficient taxation — especially from under-taxed sectors — and creating fiscal space for increased spending on health, education, and social protection programmes. A major piece of reform is to improve the private sector business environment by removing state-created distortions and ensuring a fair and competitive playing field for all.

The steps to be taken in this connection include streamlining subsidies, improving the foreign direct investment regime, deepening bank intermediation, and increasing investment in human capital. The IMF has also demanded the restructuring of state-owned enterprises (SOEs) and improving public services. The reform and privatisation of SOEs, along with governance and transparency measures, will help enhance public service provision. Other suggested measures include reducing the cost of the energy sector and phasing out the government’s role in price setting.

There are other components in the IMF agreement which call for building climate resilience and implementing the C-PIMA Action Plan, along with supporting the National Adaptation Plan, which will strengthen the country’s response to climate change, focusing on sustainable agriculture infrastructure and disaster risk management and reduction. At the same time the IMF has called for reforms to strengthen the fiscal framework, including federal-provincial institutional arrangements; measures to ensure the energy sector’s lasting sustainability, including through cost-based tariffs and enhanced liquidity.

As a result of the agreed reform measures, the IMF expects real GDP growth of 3.2 per cent during FY25, with inflation at 9.5pc, a primary balance of 2pc of GDP, a current account deficit of 0.9pc, and reserves at $12.75bn by June 2025. As an additional bonus, the receipt of the first installment of $1.1 billion will further strengthen Pakistan’s foreign exchange reserves and may also assist in securing more bilateral and multilateral loans.

As many experts have noted, given the need for reforms, there is no room for policy slippages without undermining debt sustainability. No doubt, Pakistan has made good progress in restoring economic stability through consistent policy measures under the Stand-by Arrangement in FY24. Economic growth has improved to 2.4 percent in FY24, primarily supported by the agriculture sector. Inflation has seen a substantial reduction, reaching single-digit levels, due to tight fiscal and monetary policies. The buildup of reserve buffers has been bolstered by a stable current account and improved foreign exchange market conditions. Considering lower inflation and stability in domestic and external conditions, the SBP has reduced the policy rate by 450 basis points from June 2025.

So far so good but the real issue is that of debt sustainability. Pakistan’s debt, which puts the biggest strain on its $350bn economy, requires $90bn in repayments over the next three years, with the next major tranche due in December. Foreign reserves with the central bank currently stand at $9.5bn, sufficient to cover only two months of imports.

The harsh truth is that the IMF loan primarily aims to ease Pakistan’s debt repayments. The economic crisis Pakistan faces calls for visionary long-term solutions. A programme built around rollovers, expensive borrowing from commercial banks to fill in financing gaps and loans from friendly countries can hardly bring any sustainable solutions to Pakistan’s economic and financial woes. Pakistan’s economic crisis will continue to deepen  unless the ruling elites pursue a sustained roadmap of structural reforms designed to benefit the broad masses. It is important to protect people from the side-effects of stabilisation by creating new livelihood opportunities in agriculture and other sectors, expanding social protection and safety nets and better  governance at all levels of administration.

Needless to say, stabilisation should not be at the cost of poor people. The lower income groups should be protected from the impact of new tax measures to raise more revenue. The prices of essential items should be kept under control and energy prices should be made affordable for the common man.