FeaturedNationalVOLUME 19 ISSUE # 44

Structural reforms and revenue challenges

As Pakistan prepares to secure a new $7 billion bailout from the International Monetary Fund (IMF), the nation’s economic future hinges on crucial structural reforms and significant revenue generation targets. The IMF Executive Board’s upcoming meeting on September 25 is expected to ratify the loan, bringing relief to a crisis-hit economy. However, the road ahead is fraught with challenges, particularly regarding tax reforms and addressing Pakistan’s dependence on external borrowing.

The government’s plan to digitalize the tax system and restructure key sectors signals an ambitious attempt to stabilize the economy, but the burden on taxpayers raises questions about long-term sustainability.

The inclusion of Pakistan’s case in the IMF Executive Board’s upcoming agenda this month has finally put an end to the uncertainty surrounding the new $7 billion bailout package for the crisis-stricken nation. The IMF is scheduled to review Islamabad’s loan request on September 25, after Pakistan secured the necessary financial commitments from its development partners. This announcement follows almost two months after the IMF had reached a staff-level agreement with Islamabad. The delay in the approval of the 37-month programme led to widespread speculation that the government was struggling to meet key conditions, particularly the confirmation of $12 billion in debt rollovers from China, Saudi Arabia, and the UAE, as well as securing an additional $2 billion to bridge its external financing gap for the current fiscal year.

The recently announced power subsidy of Rs45 billion by the Punjab government had also been viewed as a sticking point in negotiations. Further tension arose when Deputy Prime Minister Ishaq Dar publicly accused the IMF of “deliberately delaying” the release of funds due to geopolitical factors, leading many to believe the bailout was at risk. However, the concerns have now been put to rest.

The IMF’s announcement, combined with the State Bank of Pakistan’s aggressive rate cut, brought a wave of optimism to the stock market, causing share prices to surge the following day. The financial package was welcomed as a “lifeline” for an economy on the brink of collapse, with Pakistan having narrowly avoided default last year, thanks to the IMF’s agreement to extend a $3 billion nine-month facility at the personal request of Prime Minister Shehbaz Sharif at the close of his previous term.

For the coalition government, the approval of the programme is not only vital for the economy but also for improving its political standing amid a deep legitimacy crisis. While it may buy the government some time to stave off default, perpetual borrowing is not a sustainable fix for Pakistan’s deep-rooted economic challenges. Nor does this development signal an end to the hardships faced by ordinary citizens.

With the government’s failure to address its fiscal mismanagement, there are reports suggesting it may introduce a supplementary or “mini” budget in the coming weeks to meet the IMF’s stringent revenue targets.

Reports suggest that a significant portion of the additional revenue measures will fall on the shoulders of taxpayers—both corporate and individual. However, this is hardly the way for crisis-hit nations like Pakistan to escape the vicious cycle of debt. In fact, it is likely that this new IMF loan will not be Pakistan’s last bailout.

Finance Minister Muhammad Aurangzeb expressed hope that this could be Pakistan’s final IMF programme, provided the country enacts the required structural reforms. “I encourage everyone to read this IMF agreement, which will be made public on September 25,” Aurangzeb said, highlighting that none of his five predecessors managed to secure such favorable terms with the global lender. He stressed the urgency of transforming Pakistan’s economy, stating, “We need to change the fundamental DNA of our import-dependent economy to achieve GDP growth beyond 4%.” Key elements of the IMF deal include maintaining a tax-to-GDP ratio of over 13% and implementing reforms in state-owned enterprises and the energy sector.

To reach the ambitious target of 40% growth in tax revenues, the government aims to digitalize the tax system, minimizing human interaction and increasing transparency. Aurangzeb also underscored efforts to ensure better tax collection from sectors that are either under-taxed or entirely untaxed. Additionally, he disclosed plans for government restructuring, revealing that five more ministries would be identified under a rightsizing initiative. He further advocated for public-private partnerships to support Public Sector Development Program (PSDP) projects.

The finance minister emphasized the need for import substitutions and highlighted the importance of attracting Foreign Direct Investment (FDI) in export-led projects. He noted that the agriculture and IT sectors would be given particular attention to fuel economic growth.

Earlier, the International Monetary Fund (IMF) confirmed that its board would meet on September 25 to discuss the approval of the $7 billion Extended Fund Facility (EFF) for Pakistan. The country had hoped to finalize the deal in August, after the IMF approved the 37-month programme initially agreed upon in July. To meet IMF demands, Pakistan raised its tax revenue target by a record 40% and increased energy prices.

Pakistan completed its previous $3 billion IMF loan programme in April, which led to a credit rating upgrade from both Moody’s and Fitch Ratings last month. At a press briefing, IMF spokesperson Julie Kozack confirmed that the Fund reached a staff-level agreement with Pakistan on the EFF in July. “We are pleased to announce that the board meeting is scheduled for September 25,” she said.

“This follows Pakistan securing the necessary financial assurances from its development partners. The new EFF arrangement builds on the successful implementation of the nine-month standby arrangement in 2023.” Kozack added that consistent policymaking in Pakistan had supported economic stability, resulting in renewed growth, significant disinflation, and a substantial increase in the country’s international reserves.

While the anticipated IMF bailout offers Pakistan a much-needed financial reprieve, it underscores the nation’s ongoing struggle with debt and fiscal mismanagement. Finance Minister Muhammad Aurangzeb’s optimism about this being the country’s final IMF programme hinges on successful implementation of structural reforms, particularly in taxation and the energy sector. However, as Pakistan continues to rely on external borrowing, deeper economic transformations will be essential to break free from this cycle. Achieving sustainable growth beyond 4% will require more than just financial packages—it will demand a fundamental shift in the country’s economic approach and policies.

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