The news from Islamabad brought a collective sigh of relief. The confirmation of the IMF deal, encompassing both the first review of the Extended Fund Facility and the new Resilience and Sustainability Facility arrangement, felt like a much-needed shot in the arm for Pakistan’s struggling economy. The whispers and anxieties that had grown following the initial departure of the IMF team without the expected staff-level agreement finally subsided. The official statement from the IMF mission chief painted a picture of cautious optimism, acknowledging the progress Pakistan had made in meeting the program’s benchmarks.
The IMF’s assessment highlighted the significant strides made over the past year and a half. Despite a challenging global economic landscape, Pakistan had managed to restore a degree of macroeconomic stability and rebuild some lost confidence. While economic growth remained sluggish, the report pointed to a significant drop in inflation, reaching its lowest point since 2015. Financial conditions had improved, the risk premium on the country’s sovereign debt had narrowed considerably, and the external financial position looked healthier.
There was no denying the crucial role played by the previous short-term funding facility and the ongoing 37-month program in preventing a full-blown economic meltdown and bringing a semblance of order to the financial chaos. However, the question lingering in the minds of many was whether this stabilization was a genuine step towards long-term recovery or merely a temporary reprieve. History offered a cautionary tale. Pakistan had navigated similar IMF programs in the past, achieving short-term stability only to see it unravel due to the temptation to prioritize rapid growth over sustained reforms.
The IMF statement itself subtly underscored this risk, emphasizing the need for Pakistan to stay the course. Building resilience, they stressed, required strengthening public finances, maintaining price stability, bolstering external reserves, and dismantling distortions that hindered inclusive, private sector-led growth. This advice was particularly pertinent given the elevated downside risks that still loomed large.
The statement also hinted at specific concerns. The IMF seemed to be cautioning against potential “macroeconomic policy slippages” driven by pressures to relax policies. The government’s apparent inclination to offer tax breaks to sectors like real estate and retail, often criticized for their parasitic nature, likely triggered this warning. The failure to broaden the tax base, coupled with proposals to reduce transaction taxes on property and slash electricity tariffs for retailers, appeared to be at odds with the agreed-upon reform agenda.
Beyond these internally generated risks, the global landscape presented its own set of challenges. Emerging geopolitical shocks threatened to push up commodity prices, global financial conditions were tightening, and the rise of protectionism globally posed further risks. Adding to this complex mix were the ever-present and intensifying challenges posed by climate change, which could further destabilize the economy.
The underlying message from the IMF was clear: any premature push for rapid growth, before sustainably addressing the ballooning fiscal deficit, controlling inflation, making power affordable, creating a conducive environment for private investment, and building resilience against climate change, could ultimately prove counterproductive. The hard-won stability was fragile, and deviating from the agreed path of reforms could easily send the economy spiraling back into crisis. The shot in the arm was welcome, but the real work of ensuring a lasting recovery had only just begun.
A Step in the Right Direction
