Economic stability of any country depends on consistent economic growth, sound financial balance, low inflation, low unemployment etc. However, these indicators have been passing through ups and downs in Pakistan economy and thereby leaving inedible impacts on its economic stability. In July 2024, Pakistan signed an Extended Fund Facility (EFF) Agreement with the International Monetary Fund (IMF) in order to come out of economic instability. This agreement was contingent upon the introduction of the structural economic reforms, and outlines several conditionalities aimed at achieving fiscal consolidation and fostering sustainable growth.

External financial assistance is considered as one of the means to handle the financial crisis of any country. Pakistan has been the recipient of substantial financial aid from the IMF through its multiple programmes such as the Standby Arrangements (SBA), the Extended Fund Facility (EFF), since late 1980s. The country has been consistently experiencing regular balance of payments crises, fiscal deficit, inflation etc. which have been characterized by inadequate foreign exchange reserves to meet trade and financial commitments

The IMG has induced the concept of good governance. The IMF debt/loan is oftenly contingent upon implementing structural reforms aimed at achieving economic stabilization. The concept of good governance is a very comprehensive economic cardinalities mechanism.  It encompasses the fiscal consolidation, tax reforms, monetary tightening, subsidy reductions, energy sector reforms, privatization, anti-corruption measures, exchange rate flexibility, debt management, and social protection in the economic system of the financial recipient country.

In 2024, Pakistan signed the EFF to tackle its economic and financial challenges and achieve economic stability. The performance of its economic stability achieved through the Stand-by Arrangement (SBA) 2023, the IMF and Pakistan have come to a staff-level agreement on a 37-month EFF sanctioning approximately US$7 billion to Pakistan. The EFF offers extended assistance for a duration of 3 to 4 years, with disbursements occurring twice a year or every three months, and a repayment period ranging from 4½ to 10 years.

Enhancing tax revenues

The government has taken steps to broaden the tax base and remove exemptions. Initiatives such as simplifying tax laws and enhancing tax coverage across various sectors have led to a notable increase in tax collection. Efforts to modernize the tax system through the Income Tax Ordinance of 2001 and the Income Tax Rules 2002 reflect ongoing progress.   

Under the EFF 2024, Pakistan has committed to increase tax revenues by 1 1⁄2% of GDP in fiscal year 2025 and 3% over the duration of the program. The goal is to target a primary surplus of 1% of GDP and a headline surplus of 2%, along with effectively managing non-interest expenditures. For example, tax revenues rose from PKR 520.8 billion in 2003-2004 to PKR 7163.8 billion in 2022-2023. However, some inherent structural challenges have been impacting these tax reforms. In March 2022, Pakistan’s Prime Minister announced a five-year tax holiday for foreign investors and overseas Pakistanis to boost investment. This incentive, alongside tax benefits in Special Economic Zones and other sectors, aims to attract investment and revive industries while aligning with broader tax reforms under the EFF.

The EFF has also called for a fair distribution of fiscal responsibilities between federal and provincial governments, with an emphasis on signing a National Fiscal Pact to enhance provincial revenue collection and decentralize spending. The government has initiated steps to improve sales tax on services and harmonize Agricultural Income Tax with federal regimes.

Starting January 1, 2025, Pakistan's provinces are expected to take on more financial responsibilities, aiming to enhance efficiency in managing services such as education and healthcare. However, implementing the National Fiscal Pact and improving provincial revenue collection are likely to face practical hurdles given the centre-state financial relations.

It is also required for Pakistan to have a flexible exchange rate and improved external buffers to stabilize Pakistan’s economy. This includes managing inflation and adjusting monetary policy accordingly. The State Bank of Pakistan (SBP) has implemented tightening of monetary policy. It has started raising the interest rate from 7% in July 2020 to 15% by July 2022 and @20.5% in 2024. The Pakistani Rupee has been allowed to float more freely, moving from approximately PKR 160/USD in January 2021 to around PKR 278.25 US$ in August 2024. These measures aim to control inflation and address balance of payments issues. Given the high rate of inflation and volatility of currency have become major challenges for stabilizing the economic stability. The government has adjusted energy tariffs and worked on reducing circular debt. Privatization efforts, such as those involving Pakistan Telecommunication Company Limited (PTCL) and Oil & Gas Development Company Limited (OGDCL), have had mixed success. Circular debt in the energy sector decreased from PKR 2.3 trillion in 2019 to PKR 2 trillion by mid-2022.

In this way, the IMF’s conditionalities provide a framework for addressing Pakistan’s economic challenges, focusing on fiscal consolidation, structural reforms, and improved governance. While progress has been made, still significant challenges remain. Effective implementation, continuous monitoring, and the ability to adapt to evolving economic conditions will be crucial for achieving long-term economic stability and growth.

Peace begets progress

By adopting locally tailored strategies to enhance governance, promote inclusive growth, improve trade and investment, addressing energy sector issues, Pakistan can minimize its economic challenges and lay the foundation for a more stable and prosperous future. To enhance fiscal consolidation, Pakistan should focus on improving transparency and governance in tax administration. Strengthening audit mechanisms, combating tax evasion, and promoting digital tax filing can increase compliance and revenue. Additionally, expanding social protection programs and targeting subsidies effectively can help mitigate the impact of fiscal adjustments on vulnerable populations.

Peace and progress go hand in hand. To stabilize the economy, Pakistan needs a conducive political environment to focus on investment, education and health care. Whatever the economic challenges, the solutions would have to come from within. External funds, loans, debts are only temporary solutions; rather these can make the economy more vulnerable through imposed conditionalities. 

In order to make the economy stable and strong, local solutions would be more suitable, and that can come through robust manufacturing, science and technology innovation, supported by an inclusive education system.

(The author is professor, Department of South and Central Asian Studies, School of International Studies, Central University of Punjab, Bathinda, India. Views are personal. He can be reached at bawasingh73@gmail.com )