Working for better policy outcomes

The government’s and the IMF’s approach to the Extended Fund Facility (EFF) program is set to be reviewed in March 2025. The program, which was negotiated in September 2024, contains a broad range of objectives aimed at addressing both macroeconomic stability and economic growth. However, the policies and strategies outlined in the program reflect a neoliberal approach, which has sparked significant concerns about its effectiveness in addressing the country’s pressing economic challenges. The program is heavily influenced by market fundamentalism, emphasizing deregulation of product markets, the removal of subsidies, and the relaxation of trade barriers. It stresses that growth should be led by the private sector with minimal government intervention, reflecting a neoliberal ideology. The focus on fiscal consolidation, austerity policies, and privatization, coupled with the removal of subsidies, may undermine public welfare and exacerbate inequality. The program sets ambitious fiscal targets, including a primary surplus of Rs. 2.7 trillion and a high target for tax revenue collection by the Federal Board of Revenue (FBR). However, these goals are viewed as unrealistic given the country’s economic context, including high inflation, low growth, and poverty. The program relies on cuts to development spending and fiscal austerity, which may worsen economic conditions, especially for vulnerable populations. The focus on controlling inflation through tight monetary policy (raising interest rates) could lead to stunted economic growth. This is particularly problematic for a country with a high population growth rate and a large youth demographic in need of job creation. The lack of political pressure to reform the tax base, due to both monetary and fiscal austerity, hinders the ability to generate much-needed revenue in a more equitable manner. The program proposes taxing the agricultural sector in a way that could exacerbate its vulnerability, especially in the context of climate change and rising input costs (fertilizers and electricity). The plan to align provincial agricultural tax regimes with federal income tax laws could be detrimental to small farmers, who are already struggling with volatile prices and low income. The agricultural sector is critical for food security, and excessive taxation without addressing structural inefficiencies could harm it further. Institutional reforms are given limited attention in the program, even though stronger institutions are essential for improving resilience against external shocks, such as those caused by climate change or global crises. The neoliberal approach, which prioritizes market signals over government intervention, has been criticized for its failure to address broader systemic issues. The lack of government support for building strong institutions and markets weakens the economy’s ability to respond to crises like the pandemic or climate change. More robust institutional reforms are necessary to reduce transaction costs and foster more resilient economic systems, something that the IMF’s framework overlooks. Instead of rigid fiscal austerity, there could be a focus on reducing interest payments by lowering policy rates, thereby freeing up fiscal space for development spending and investment in social programs. A more balanced approach between fiscal responsibility and growth-driven public investment would help in creating long-term economic resilience. A more nuanced tax policy should be considered for the agricultural sector that takes into account the challenges posed by climate change and global supply chain disruptions. Supporting small farmers through subsidies and incentives for sustainable practices could help ensure food security. The government should play a more active role in driving economic growth through targeted interventions, rather than relying solely on private sector-led growth. Strengthening institutions and governance would create the conditions for more equitable and sustainable economic development. The program should place greater emphasis on institutional reforms to tackle corruption, improve governance, and create a more inclusive policy framework. Strengthening the fiscal framework and public sector institutions would lead to better policy outcomes.