Pakistan’s ongoing negotiations with the International Monetary Fund (IMF) have placed strict fiscal constraints on the government, forcing tough economic decisions. The Ministry of Finance has resisted demands for subsidies to struggling industries, aligning with IMF conditions. However, some provincial governments have begun implementing politically motivated financial incentives, raising concerns about potential violations of the IMF agreement. Given the country’s fragile economic position, such actions could have serious consequences.

The International Monetary Fund (IMF), in its latest World Economic Outlook Update, reported that global economic growth remains sluggish at 3.3 percent—falling short of the historical average of 3.7 percent from 2000 to 2019. This slowdown is largely attributed to the lingering effects of the Covid-19 pandemic and ongoing geopolitical conflicts, particularly the Russia-Ukraine war and the Israeli-Palestinian crisis. With global tensions persisting and a shifting geopolitical landscape, the IMF projects that the world economy will maintain a 3.3 percent growth rate in 2025 and 2026. However, the organization cautioned against protectionist policies, such as tariffs, subsidies, and other trade barriers, warning that such measures could provoke retaliatory actions and further strain global trade.

For Pakistan, the situation is particularly precarious. The country remains reliant on an IMF programme, with each disbursement crucial to avoiding a potential default. While foreign exchange reserves have improved—from under $2 billion in early 2024 to $11.75 billion as of January 10, 2025—they are still below the internationally recommended threshold of three months’ worth of import cover.

In the last two IMF-backed programmes—the 2019 Extended Fund Facility and the 2024 Stand-By Arrangement—it became clear that Pakistan’s key allies were unwilling to roll over approximately $11 billion in loans unless the country remained under strict IMF oversight.

The current IMF assessment highlights how subsidies—ranging from low-cost financing to industry-specific concessions—have skewed Pakistan’s financial landscape. The tax system has been manipulated to benefit select sectors, including real estate, agriculture, manufacturing, and energy, often through non-transparent exemptions and Special Economic Zones.

Government interventions in price controls, including those on agricultural goods, fuel, electricity, and biannual gas adjustments, coupled with high trade protectionist measures, have created an uneven playing field. Despite these extensive incentives, the private sector has struggled to drive economic growth. Instead, these policies have stifled competition and kept resources locked in inefficient industries, many of which remain dependent on state support rather than becoming self-sustaining engines of economic progress.

This is indeed a damning indictment and explains why the Ministry of Finance, the lead player in negotiations with the Fund, has denied fiscal, monetary and tariff subsidies to the “infant” industries as requested by other relevant ministries, including the Ministry of Commerce.

However, what is indeed a matter of serious concern is that some provinces have begun to openly violate the terms of the Fund conditions by offering politically motivated monetary incentives, zero interest rate loans, which were possible in the past when the economy had not reached the level of fragility that it has today.

To those who argue that the IMF agreement is with the federal and not the provincial governments it is relevant to note the following in the 10 October 2024 documents uploaded on the Fund website relating to the staff level agreement reached between the Fund and Pakistan, which led to the 7 billion dollars 37-month long loan approval: “provinces are committed to contributing more to strengthening public finances.

The federal and provincial governments have agreed on the program’s fiscal strategy and the required provincial surpluses, and for provinces to deliver surpluses of around 1 percent of GDP in FY 2025.

The federal government and the provinces have also agreed to enter a National Fiscal Pact that will devolve specific federal spending responsibilities to provinces, in line with the 18th Constitutional Amendment, and will enhance provinces own tax-collection efforts, including agricultural income tax (FY25), sales tax on services (FY26), and property tax (FY26).

The government has also established a dedicated committee, chaired by the Finance Minister, to prepare a comprehensive report on actionable items where responsibilities can be devolved to provincial governments, and with a specific implementation timeline.

It is hoped that the scions of the political families leading provincial governments desist from taking measures that are violative of the IMF agreement till such a time as the national economy is on a firm footing and able to withstand politically motivated though economically flawed policies in the long run.

With Pakistan still reliant on IMF assistance, adhering to the agreed-upon economic framework is crucial for long-term stability. While politically driven financial incentives may offer short-term relief or electoral gains, they risk undermining the country’s economic recovery. It is imperative that provincial and federal authorities remain aligned in their fiscal strategy, ensuring that Pakistan stays on the path to financial sustainability rather than jeopardizing its economic future for temporary political advantages.