Prime Minister Shehbaz Sharif’s recent budget has ignited widespread anger domestically, but it has also secured a crucial $7 billion package from the International Monetary Fund (IMF) to temporarily stabilize Pakistan’s struggling economy.
The IMF has announced a staff-level agreement with Pakistan on a 37-month Extended Fund Facility. This agreement will allow Islamabad to access the funds once the IMF Executive Board approves it, which is dependent on timely confirmations of necessary financing assurances from Pakistan’s bilateral development partners, particularly China. The program aims to build on the macroeconomic stability achieved over the past year by enhancing public finances, reducing inflation, rebuilding external reserves, and eliminating economic distortions to foster private sector-led growth.
While the government successfully crossed the initial hurdle by imposing heavy direct and indirect taxes on the urban middle class, the new program’s targets will test its commitment to reforms throughout the agreement’s duration.
Firstly, the IMF expects the government to target under-taxed sectors and properly tax exporters, retailers, and agriculturists to maintain fiscal consolidation and boost tax revenues by 3.5% of GDP. The current budget aims to increase tax revenues by 1.5% of GDP to achieve a 1% primary surplus this year.
Another controversial condition involves abolishing agricultural support prices, particularly for wheat, and associated subsidies. Past experiences have shown that farmers protest vehemently when wheat prices drop sharply due to state inaction on surplus purchases. Additionally, the government has agreed to phase out incentives for Special Economic Zones and avoid new regulatory and tax-based incentives or guaranteed returns that could distort the investment landscape. This could affect efforts by the army-led Special Investment Facilitation Council (SIFC) to attract investments from friendly countries.
Other program goals include periodic power and gas price adjustments, state-owned enterprise governance reforms and privatization, transferring more fiscal responsibility to the provinces, and implementing market-based monetary and exchange rate policies. These represent unfinished business from previous programs. While the agreement provides much-needed breathing space for the government, it also presents significant political challenges.
Although most of the agreed reforms are essential for future debt sustainability, some will likely impede economic growth and new investments in the short term. The country’s finance team may feel relief after securing the deal, but they should remain aware that this only postpones addressing deeper issues. If this reprieve is not leveraged into meaningful opportunities, the challenges facing Pakistan’s economy will soon become even more formidable.
