EDITORIAL: Pakistan Bureau of Statistics data reveals that the trade deficit has widened by 15.97 percent during the first four months of the ongoing year compared to the same period the year before. Disturbingly, this indicates that the boom-bust cycle remains in operation and major changes that require structural reforms to the extent to arrest it remain pending.
Significantly, the International Monetary Fund (IMF) in October 2024 documents titled Article IV Consultation and Request for an Extended Fund Arrangement under the Extend Fund Facility for the first time referred to the boom-bust cycle attributed to “repeated attempts to boost economic activity through fiscal and monetary stimulus (that) have not translated into durable growth, as domestic demand increased beyond Pakistan’s sustainable capacity, resulting in inflation and depletion of reserves, given a strong political preference for stable exchange rates.
Each subsequent bust has further harmed Pakistan’s policymaking credibility and investment sentiment.” It should be of serious concern that the incumbent government is presently considering incentives once again to boost exports, which require higher raw material and semi-finished imports – a policy action that would, given the rising price of petroleum and products due to the ongoing Middle East conflict, increase imports at a much faster rate than imports thus widening the trade deficit further in months to come.
The IMF in the aforementioned document undertook a detailed analysis by using the Discretionary Policy Indicator (DI) that measures “the use of monetary discretion by the central bank to stabilize money supply for the achievement of a desired path in inflation and growth, excluding unpredictable exogenous shocks to M2.”
In economic theory, M2 is a measure of the money supply that includes all highly liquid assets as well as near-money assets that can be quickly converted to cash.
The DI analysis noted as per the document cross-correlations across the main indicators as follows: (i) “a discretionary M2 impulse (DI) is associated with higher inflation; while (ii) low frequency movements in M2 (DI) are not associated with low-frequency growth directly; and (iii) the associated inflationary pressures are detrimental to growth.” The Fund’s conclusion was that these findings “underscore the merits of strengthening the role rules play in the monetary policy framework.”
The contribution of fiscal policy in the boom-bust cycle was not highlighted in the Fund document perhaps because one of the major conditions in the ongoing programme, as in previous ones, is to meet the over-ambitious revenue targets set in the budget.
Anecdotal surveys carried out by the Business Recorder have revealed time and again that domestic industry is subjected to considerably higher input prices relative to their competitors abroad - due to the IMF conditions on all utilities to achieve full-cost recovery, a burden that administration after administration merely passes on to hapless consumers rather than checking inefficiencies within the sector – thereby justifying exemptions (zero ratings).
In the October 2026 third review documents relating to the ongoing programme, the Fund acknowledged that revenue gains from these interventions are likely to materialize in FY27. However, they continue to target primarily existing taxpayers—a burden that falls more heavily on the poor than the rich, as reliance remains on indirect taxes, which account for 70 percent to 75 percent of total revenue collected.
The Fund suggested that raising C-efficiency to 35 percent (still well below peers such as Turkey, Morocco, and Indonesia) would generate roughly Rs 2.1 trillion in additional GST revenue (1.8 percent of GDP). The GST C-efficiency ratio has declined from 27.4 percent to 22.8 percent over the past ten years.
Pakistan’s 18 percent standard GST rate is not low by regional standards; however, barely one-quarter of the theoretical base is taxed.
A broad set of basic goods remains exempt or concessionally taxed, historical zero-rating in export sectors has narrowed the base, and the post-devolution fragmentation of GST on services has added compliance and administrative complexity through four separate provincial regimes (estimated at 1.8% of GDP on an FY2024–25 base). Because GST is an indirect tax, it helps explain why poverty levels in the country have risen to 44.7%, a figure comparable to Sub-Saharan Africa.
Copyright Business Recorder, 2026
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