Pakistan’s engagement with the International Monetary Fund (IMF) has been a cornerstone of its economic policy, aimed at addressing fiscal vulnerabilities and implementing structural reforms. Over the years, IMF programs have brought about significant changes, particularly in terms of exchange rate policies and subsidy removal. However, challenges persist, ranging from circular debt to loss-making State-Owned Enterprises (SOEs), raising questions about the effectiveness of IMF interventions.

Pakistan is currently seeking its 24th successor medium-term bailout package to facilitate a sustained drive towards implementing longstanding structural reforms. The IMF, in its end-of-mission statement, noted that the financially strained nation has expressed interest in such a programme to address fiscal and external sustainability weaknesses permanently. This initiative aims to bolster economic recovery and establish a foundation for robust, sustainable, and inclusive growth.

Discussions regarding the new program are anticipated to commence in the coming months, with primary objectives including:

(i) Strengthening public finances through gradual fiscal consolidation, broadening the tax base (especially in undertaxed sectors), and enhancing tax administration to improve debt sustainability and allocate resources for development and social assistance programs aimed at protecting vulnerable segments of society.

(ii) Restoring viability to the energy sector by accelerating cost-reducing reforms, such as enhancing electricity transmission and distribution, integrating captive power demand into the national electricity grid, improving governance and management of distribution companies, and implementing effective measures to curb theft.

(iii) Stabilizing inflation rates and fostering a more transparent and flexible foreign exchange market to support external rebalancing and replenish foreign reserves.

(iv) Promoting private-led economic activity through the aforementioned measures, as well as eliminating distortionary protections, advancing reforms in State-Owned Enterprises (SOEs) to enhance their performance, and increasing investment in human capital to foster resilient and inclusive growth, thereby enabling Pakistan to realize its economic potential.

However, labeling the 24th IMF programme as a permanent solution for longstanding structural reforms might be overly optimistic. Despite successive IMF packages, Pakistan’s economic and fiscal indicators have worsened over time. For instance, between the IMF reviews of March 2021 and March 2024, indicators such as power circular debt, national debt, SOEs’ losses, and GDP growth have all deteriorated significantly. Despite financial support from the IMF over the past three years through multiple programmes, the intended economic development and fiscal resilience have not materialized for the country.

One aspect that proved effective was the IMF’s condition of maintaining a market-based value for the Pakistani rupee against foreign currencies, along with its unwavering policy of eliminating government subsidies for industries accustomed to such support. The $3 billion agreement between the IMF and Pakistan, sanctioned in July 2022, mandated the removal of energy and fuel subsidies, transitioning to a market-driven exchange rate, and raising taxes. Consequently, gas and electricity tariffs soared, leading to inflation climbing from 9.5% in 2021 to 25% in 2024 according to government data. This, in turn, escalated the poverty rate from 22% to 40%, while the value of the US dollar surged from Rs163 to Rs278 against the Pakistani rupee from 2021 to 2024.

However, the IMF’s agenda regarding structural reforms in Pakistan’s fiscal and economic discipline did not yield favorable results. The persistent issues of circular debt and loss-making State-Owned Enterprises (SOEs) continued to drain the economy. Despite some superficial improvements, reckless government spending persisted, alongside prevalent issues of poor governance, confusion, and incompetence.

The incomplete reform agenda in Pakistan cannot be solely attributed to the IMF; however, one might ponder if the IMF could have maintained the same level of stringent oversight on economic and fiscal reforms as it did with subsidies. IMF lending, by its nature, serves as a temporary measure to bridge fiscal gaps and facilitate reforms aimed at enhancing the state’s revenue generation capacity through growth, with the intention of repaying IMF loans expeditiously, as witnessed in the successful cases of certain developing nations.

Pakistan’s reliance on IMF loans has diminished to a level merely sufficient to prevent default. However, this option may not be sustainable, as approximately 70% of state revenue is allocated to loan repayments, leaving a scant 30% for other essential expenditures. The 24th IMF programme, deemed unavoidable by the current government, may resemble previous IMF packages if the set targets are not met. Currently, there seems to be minimal progress on privatizing loss-making SOEs, restructuring or privatizing power distribution companies, or devising a substantive strategy to address circular debt.

Achieving a targeted 2% growth rate for 2024 appears challenging given the existing circumstances. The anticipated benefits from projects like the China Pakistan Economic Corridor (CPEC) and the planned Iran-Pakistan gas pipeline, aimed at providing cost-effective energy for industries, may face constraints under the IMF package. With a meager foreign direct investment (FDI) of $1.3 billion in 2023, Pakistan must expand its diplomatic outreach beyond its current focus on Riyadh and Beijing, particularly towards Western nations. While industrial growth may remain subdued due to high energy tariffs and lending rates, the country could capitalize on the potential in agriculture and information technology sectors.

While Pakistan’s engagement with the IMF has led to notable achievements, such as the removal of subsidies and the adoption of market-driven exchange rate policies, persistent challenges threaten to undermine progress. The country’s dependence on IMF loans as a temporary fix highlights the urgent need for sustainable economic reforms. Moving forward, Pakistan must address issues such as circular debt and SOE losses while diversifying its sources of investment and fostering a conducive environment for economic growth. With careful planning and concerted efforts, Pakistan can chart a path towards long-term economic stability and prosperity, reducing its reliance on IMF assistance.