FeaturedNationalVOLUME 19 ISSUE # 47

Restructuring economic framework: The only path to sustainability

Pakistan’s economy faces profound challenges, exacerbated by bureaucratic inefficiencies, overlapping governmental roles, and policies that disproportionately benefit the elite.

Despite constitutional reforms aimed at decentralization, the persistence of redundant federal ministries and a lack of decisive action undermine efforts to create a more equitable and resilient economic landscape. As international lenders underscore the need for structural reforms, the hesitation to enact meaningful changes raises critical questions about the political will necessary for transformation.

The Executive Directors of the International Monetary Fund (IMF) have asserted that Pakistan must “diverge from” its state-centric growth paradigm and bolster the business ecosystem. They also emphasized the necessity for authorities to “establish a more equitable playing field with enhanced competition to reverse the downturn in living standards.” The Washington-based institution articulated these insights in a comprehensive report, following the approval of Pakistan’s request for a $7 billion, 37-month Extended Fund Facility (EFF).

In this report, the IMF directors outlined key program priorities, including the reform of state-owned enterprises (SOEs), the removal of trade barriers and market distortions, and the fortification of governance frameworks. They highlighted the urgent need for additional measures to foster climate resilience through the effective execution of the C-PIMA action plan and increased investments in climate adaptation. The directors, recognizing the persistent high risks and the precarious route to sustained stability, called for a steadfast commitment to sound policies and structural reforms under the Extended Arrangement to cultivate conditions for durable and inclusive growth while ensuring that debt trends downward. “They particularly underscored the critical importance of consistent program implementation, bolstered by capacity development and close collaboration with development partners, to attract additional financing and restore market access,” the statement indicated.

Moreover, the directors emphasized the significance of meticulous monitoring of program execution, regular consultations with the Executive Board, and robust contingency planning to ensure the program’s success. They advocated for the resolute implementation of the planned continued consolidation within the FY25 budget and underscored the need for sustained gradual consolidation, strengthened by robust fiscal institutions, to enhance debt sustainability over the long term. In this context, several directors noted that, considering the ambitious growth forecasts, there is no latitude for policy missteps without jeopardizing debt sustainability.

The IMF directors have also advocated for reforms aimed at reinforcing the fiscal framework, which includes improving federal-provincial institutional arrangements. They stressed the need for measures to ensure the long-term sustainability of the energy sector, such as implementing cost-based tariffs, alongside better liquidity and debt management strategies. The officials underscored the importance of allowing the exchange rate to function as a shock absorber, enhancing competitiveness while aiding in the rebuilding of reserves. They also called for ongoing improvements to the anti-money laundering and counter-terrorism financing (AML/CFT) framework.

In light of the IMF’s approval of the $7 billion Extended Fund Facility for Pakistan, Finance Minister Mohammad Aurangzeb has emphasized the urgent necessity of implementing structural reforms to reshape the country’s “economic DNA,” declaring that this must be our final plea for assistance from the international lending institution. The finance minister’s appeal for reform has been bolstered by the IMF’s resident representative in Pakistan, who recently highlighted the critical need for the country to overhaul its development model, which is heavily influenced by state intervention.

This environment has facilitated a pernicious form of elite capture, where protectionist policies and preferential treatment through subsidies and tax incentives are enjoyed by a select few, leaving the majority to shoulder an unsustainable economic burden. This situation has rendered the country increasingly susceptible to both internal and external shocks, particularly environmental disasters that have inflicted severe damage on communities and infrastructure worth billions of rupees, resulting in countless lives lost.

In addition to the evident deficiencies within our taxation framework, a fundamental issue plaguing the economy is the relentless increase in current expenditure levels. A culture of extravagance pervades the public sector, with significant funds being allocated to unproductive endeavors, while government departments frequently exceed their budgets due to entirely avoidable expenditures. Moreover, a significant overlap of resources persists, as numerous federal and provincial departments and ministries, tasked with similar functions, continue to operate side by side.

Despite the 18th Amendment transferring various responsibilities and subjects to the provinces, many federal ministries and departments remain active, rendering them superfluous and contributing to considerable inefficiency. What is particularly troubling is that, even as awareness grows among the upper echelons regarding the ailments afflicting the economy, along with the recommendations provided by international lenders, there remains a notable reluctance and lack of political will to implement a structural overhaul of the economy.

The Pakistani bureaucracy is not particularly renowned for its agility, creativity, or willingness to implement measures that might threaten its own interests. There is significant resistance to efforts aimed at making the government more streamlined and efficient, even as the finance minister advocates for reforms designed to achieve just that. The reality is that an inefficient public sector, coupled with policies on taxation, investment, and other areas that disproportionately favor the elite, are the fundamental reasons for our ongoing economic decline.

If policymakers genuinely aspire to elevate the living standards of the average Pakistani and bolster economic resilience against various pressures, including climate disasters, there is no alternative but to fundamentally reshape the functioning of the economy. This necessitates curbing excessive public spending, enhancing tax equity, and promoting social welfare and human development programs.

To truly elevate the living standards of its citizens and build a robust economy capable of withstanding both internal and external pressures, Pakistan must embark on a comprehensive overhaul of its economic structure. This involves reducing excessive public expenditure, enhancing the fairness of its tax system, and prioritizing social welfare initiatives. Only through resolute action in these areas can the nation hope to secure a sustainable and prosperous future for all its people.

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