ISLAMABAD: The International Monetary Fund (IMF) has stated that increasing revenue mobilisation by broadening the tax base, removing special sectoral regimes, and placing a fairer burden on previously undertaxed sectors (including industrialists, developers, and large-scale agriculture), will enhance fairness and efficiency and create needed space for essential investments in human capital, infrastructure, and social spending.
The Fund has projected Pakistan’s economic growth rate to rise to 3.2 per cent in the current fiscal year, compared to 2.4 per cent in the previous year. Further, it forecasts a sharp decline in inflation, with the average rate projected to fall from 23.4 per cent to 9.5 per cent. Unemployment is expected to decrease from 8 per cent to 7.5 per cent.
Following the IMF Executive Board discussion, which approved the 7 billion dollars Extended Fund Facility programme, Okamura, Deputy Managing Director and Acting Chair, made a statement that noted that significant structural challenges remain, and ambitious and sustained efforts are needed to strengthen Pakistan’s resilience and economic prospects.
IMF urges Pakistan to ‘move away’ from state-led growth model, calls for structural reforms
Directors urged steadfast execution of the planned continued consolidation in the fiscal year 2025 Budget and underscored the need for sustained gradual consolidation, underpinned by the strengthening of fiscal institutions, to durably improve debt sustainability. In this regard, some Directors noted that given the ambitious growth projections, there is no room for policy slippages without undermining debt sustainability.
He further stated the implementation of sound policies over the past year has been critical to restore economic stability, reduce near-term risks and rebuild confidence. Growth has returned, external pressures have eased with reserves doubling over the last year, and inflation has declined markedly. However, despite this progress, significant structural challenges remain, and ambitious and sustained efforts are needed to strengthen Pakistan’s resilience and economic prospects. The authorities’ EFF-supported program provides a critical anchor to policies and structural reforms and provides a framework for partner financing.
Continuing fiscal consolidation in fiscal year 2025 and beyond, through enhanced revenue mobilisation and prudent expenditure management, is critical to securing fiscal sustainability and reducing the crowding out of private investment. Increasing revenue mobilisation by broadening the tax base, removing special sectoral regimes, and placing a fairer burden on previously undertaxed sectors (including industrialists, developers, and large-scale agriculture), will enhance fairness and efficiency and create needed space for essential investments in human capital, infrastructure, and social spending. Complementary institutional and structural reforms will focus on strengthening federal-provincial institutional arrangements, improving tax administration and compliance, and making public investment management more effective.
The statement further noted that timely energy tariff adjustments under the previous programme have helped stabilise energy sector circular debt. Going forward, deep cost-side reforms are critical to securing the sector’s lasting viability and reducing its costs.
The recent marked decline in inflation is very welcome, allowing the SBP to lower the policy rate while maintaining an appropriately tight monetary stance. The buildup in FX reserves should continue, supported by inflows under the Extended Arrangement, as well as price discovery in the interbank market to help buffer external shocks, attract financing, and protect competitiveness and growth. Strong action to address undercapitalised financial institutions and, more broadly, vigilance over the financial sector is needed to ensure financial stability.
Overcoming Pakistan’s longstanding structural challenges—most notably low productivity and economic openness, resource misallocation, and climate vulnerability—requires faster implementation of structural reforms. Reform priorities include advancing the SOE reform agenda; scaling back distortive incentives, promoting a level playing field for all business; strengthening governance and anti-corruption institutions; and continuing to build climate resilience.
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for strengthening policymaking over the past year under the Stand-by Arrangement, which has delivered renewed economic stability. Noting the still high risks and narrow path to sustained stability, Directors urged continued strong commitment and ownership of sound policies and structural reforms under the Extended Arrangement to create the conditions for durable and inclusive growth and to put debt firmly on a downward trajectory. They emphasised in particular the criticality of sustained programme implementation, supported by capacity development and close collaboration with developments partners, to mobilise additional financing and restore market access. Directors also stressed the importance of vigilant monitoring of program implementation, close consultation with the Executive Board, and robust contingency planning to safeguard the programme’s success.
Directors also welcomed steps taken toward a fairer tax system and stressed the importance of additional revenue mobilisation efforts by broadening the tax base and enhancing tax administration. Alongside prudent spending management, this will create space for essential investments in human capital, infrastructure, and social protection. Directors also called for reforms to strengthen the fiscal framework, including federal-provincial institutional arrangements; measures to ensure the energy sector’s lasting sustainability, including through cost-based tariffs; and enhanced liquidity and debt management.
Directors supported continued tight and data-driven monetary policy to ensure that inflation continues moving toward the target range on a sustained basis. They emphasised the importance of allowing the exchange rate to serve as a shock absorber, buffering competitiveness and helping rebuild reserves. Safeguarding financial stability requires enhancing the bank regulatory and supervisory frameworks, monitoring risks associated with the sovereign-bank nexus, and addressing long-undercapitalized financial institutions. Directors also called for continued enhancements in the AML/CFT framework.
Directors noted that Pakistan needs to move away from its state-led growth model, strengthen the business environment, and ensure a more even playing field with freer competition to reverse the decline in living standards. Priorities include reforming SOEs, removing trade barriers and market distortions, and strengthening governance frameworks. Directors emphasized the need for further steps towards building climate resilience through the effective implementation of the C-PIMA action plan and enhanced climate adaptation investments.
Directors noted the Ex-post Peer Review assessment and the negative impact caused by deviations from programmed policies, and stressed the importance of strong ownership for program implementation and financing. They emphasized the need for effective communication to build broad consensus and support for reforms.
Key priorities under the EFF include: Rebuilding policy making credibility and entrenching macroeconomic sustainability through consistent implementation of sound fiscal, monetary, and exchange rate policies, better public spending, and raising fairer and more efficient taxes, especially from undertaxed sectors, while creating space for higher spending on health and education and strengthening social protection.
Advancing reforms to raise productivity and competitiveness by creating a more favorable private sector business environment, by removing state-created distortions and ensuring a fair and level playing field with increased competition. This includes streamlined subsidies, an improved FDI regime, deepened bank intermediation, and scaled-up human capital investment.
Reforming SOEs and improving public service provision, through SOE restructuring and privatization, governance and transparency reforms, measures to reduce the cost structure of the energy sector and phasing out the government’s role in price setting.
Building climate resilience through implementation of the C-PIMA Action Plan and supporting the authorities’ National Adaptation Plan.
The IMF has projected an improvement in Pakistan’s economic outlook following the approval of a $7 billion loan package.
In its latest data, the IMF predicted an acceleration in economic growth, a reduction in inflation, and a decrease in unemployment. However, the Fund emphasised that despite these improvements, Pakistan’s economy faces significant challenges that require comprehensive reforms.
Despite these optimistic predictions, the IMF noted that Pakistan’s budget deficit remains a concern. The deficit could reduce to 6.1 per cent of GDP from last year’s 6.8 per cent. However, government debt, including loans from the IMF, is projected to rise, with debt-to-GDP increasing from 69.2 per cent to 71.4 per cent.
Crude foreign exchange reserves are expected to improve, reaching $12.75 billion by the end of the fiscal year, providing some relief to Pakistan’s external sector.
The IMF has projected an increase in expenditure from 19 per cent of GDP in 2024 to 21.4 per cent of GDP in 2025 and revenue and grant is projected to increase from 12.6 per cent of GDP in 2024 to 15.4 per cent in 2025.
Copyright Business Recorder, 2024