In recent years, Pakistan has seen severe economic unrest marked by a declining economy, excessive inflation, unsustainable debt, poor investments, and a balance-of-payments problem.
The current turmoil can be attributed to a number of factors, including poor fiscal and economic policies, the post-Covid global energy and commodities price spiral, and the devastating floods of 2022. The political unrest that has persisted since the PTI was overthrown in 2022 has only made the economic turmoil worse. The nation just avoided defaulting last summer thanks to an emergency lifeline provided by the IMF.
This image highlights the enormous task that the PML-N’s incoming minority government and its chosen finance minister will face. Former prime minister Nawaz Sharif recognised it when he cautioned his party’s elected legislators earlier this week that political and economic unpredictability would make the next two years difficult for the new government.
Everyone agrees that the most pressing task facing the incoming finance minister will be to swiftly negotiate a new extended programme with the IMF to replace the current interim facility. In order to maintain stability in the external sector and secure loans from other creditors during one of Pakistan’s most difficult periods in history, the subsequent IMF bailout is essential. Over the next few years, it would be nearly difficult to close the enormous yearly financing gap of at least $25 billion without an extended package from the global lender.
The IMF will probably offer assistance, but only if the government agrees to take additional budget-cutting measures that are necessary to keep the nation on the path to recovery. The program’s objectives could prove to be very unpopular because they would restrict the government’s ability to help those affected by inflation or even appease investors seeking assistance to promote growth.
Reducing the fiscal deficit significantly is one of the finance minister’s most challenging objectives; it has averaged more than 7.3 percent over the previous five years. In the medium run, the fiscal authorities need to lower the deficit to 3-3.5 percent in order to minimise borrowing and the growing debt, and lower inflation to 5-7 percent in order to enable rate cuts that will encourage investment and growth and the creation of jobs.
This will be the most difficult reform to implement because it will force the finance minister to levy taxes on his party’s main supporters, which include large farmers, retailers, and real estate developers. It will also mean cutting back on unnecessary spending on public sector companies like PIA and cutting energy and other subsidies to influential business lobbyists. The interests of the ruling class also lay in these domains. In order to save the nation from impending financial disaster, the newly appointed finance team will need to put economic judgement ahead of political expediency and personal preferences.