Correcting course
August 28, 2025
Nest month, Pakistan will complete the first year of its ongoing three-year IMF $7 billion programme, which is set to end in October 2027. The immediate objective of this Extended Fund Facility IMF programme — the 12th IMF programme for Pakistan in the last 35 years (only three were successfully completed) — was to continue the process of stabilisation started in July 2023 and, at the same time, undertake badly needed structural reforms to ensure sustainable future growth.
Today, the economy has stabilised and the threat of default is no longer looming, but the economic reform programme is still struggling to gain traction. However, the expectations of growth revival are deeply contested at a time when poverty and unemployment levels remain extremely high in the country and the emerging middle class faces serious threat of extinction.
Given the forthcoming IMF review, it is, therefore, the ideal time for the current economic team, headed by the finance minister, to reflect on the glaring challenges ahead and to not bask in the glory of having stabilised the economy, which as we have repeatedly seen, turns out to be ephemeral.
Top priority must be given to convince the IMF to shift gears at a pace much faster than envisaged — from stabilisation to rekindling growth. Given the growth statistics for our population and labour force, the targeted growth rate of 3.5pc for FY2025-26 — if, indeed, this goal is achieved in view of the catastrophic floods — is grossly insufficient to make any difference to the falling living standards of the vast majority or to provide jobs to meet the rising expectations of youth entering the labour market. Continuing low growth pushes the entire burden of the badly needed increase in our tax-to-GDP ratio onto the shoulders of the middle-class salary earners, who are already struggling to make ends meet.
The IMF must be convinced to shift gears.
First, we must, on an urgent basis, move away from the current, extremely cautious monetary policy stance — thanks to a very low rate of inflation — and lower the interest rate. While the targeted low fiscal deficit needs to be maintained, the composition of the currently shrinking Public Sector Development Programme needs to be altered in favour of more labour-intensive and less import-intensive expenditures. This basically entails moving a higher share of infrastructure spending, especially by the provinces, to the local level.
Second, the government and the Fund must both wake up to the harsh reality that the rural economy is undergoing a severe downturn. The economic conditions of the country’s 10 million farm households engaged in crop production have deteriorated drastically, and are dragging down large numbers of this segment into poverty. This is not just the outcome of the removal of the government support price for wheat and allowing market forces to dominate — without first developing a fair and well-functioning market. Higher input prices, including energy costs, are also squeezing the profit margins of all crops. Hence, there is a strong case to carry out an in-depth assessment, in which the provinces play the major role, to review current and planned reform in the agriculture sector under the ongoing IMF programme.
Third, there is a need to study the impact of the current tariff reforms on industrial and manufactured exports growth, keeping in mind that the binding constraints on sustained growth include the sudden build-up of imports, which is already beginning to surface, albeit with some visible increase in manufactured exports too.
Fourth and last, there is a continuing need to monitor the pace and sequencing of economic reforms. Some envisaged reforms, such as radically altering the structure of and recruitment to the civil services, need to be prudently implemented to ensure continuity and confidence in those civil servants who have worked hard to enter the service and deliver on the tasks entrusted to them.
Living under the IMF’s tutelage is a reality that we must accept for the next two to three years at least — with a strong chance of the ongoing programme being extended or a new one replacing it. Our economic team must deliver on the promises made to the IMF to ensure macroeconomic stability and implement structural reforms. But it must also identify the key shortcomings of the existing IMF programme, especially its adverse impact on the poor, in order to build up a strong case for the lender to make suitable but urgently needed corrections in the ongoing programme. Let us hope the Fund will listen.
The writer is a professor at the Lahore School of Economics and former VC of the Pakistan Institute of Development Economics.
Published in Dawn, August 28th, 2025
Labels: Faculty, IMF, Publications
posted by S A J Shirazi @ 8/28/2025 08:44:00 AM,
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