Pakistan’s fiscal policy is trapped between need to consolidate and political demand to spend
Since July 22, numerous unauthorised exchange outlets have been closed after the military intelligence agency summoned currency dealers to address the rising dollar rate in the open market. photo: file
ISLAMABAD:
After a string of diplomatic successes, there is some good news for Pakistan on the economic front as well. Islamabad and the International Monetary Fund (IMF) have reached a Staff-Level Agreement (SLA) to unlock about $1.2 billion-$1 billion under the Extended Fund Facility (EFF) and $200 million from the Resilience and Sustainability Facility (RSF).
Following the successful completion of the IMF’s Stand-By Arrangement and with two reviews of the current programme now cleared, Pakistan seems to have moved past the suspense that once surrounded every staff-level evaluation. The country has been meeting most of its targets without seeking major waivers. Inflation is easing, the rupee has stabilised, foreign-exchange reserves are inching upward, and the government has maintained a primary budget surplus – an achievement that merits recognition in these testing times.
This progress has not come easily. Over the past year, Pakistan has been running one of its most stringent stabilisation programmes in decades. Energy tariffs were adjusted despite political costs. Imports were rationalised. The central bank stayed firm on interest rates. And for once, the fiscal discipline demanded by the IMF was not entirely abandoned midway. These measures have begun to show results. The SLA is an acknowledgement that Pakistan has done enough, at least for now, to remain on course.
The agreement also helps restore confidence among development partners and investors. It signals that the country is moving away from the brink and that its reform effort is being taken seriously. In practical terms, it will trigger disbursements not just from the IMF but also from other multilateral and bilateral partners who wait for the Fund’s green light before releasing their own financing. The climate-linked RSF also offers new opportunities to fund projects that build long-term adaptation capacity, a critical need for a country repeatedly battered by floods, droughts, and heatwaves.
Yet while these developments deserve acknowledgement, it would be premature to declare victory. The IMF staff-level agreement signals stability, not recovery. The economy is out of the emergency ward, but it remains under close observation. Growth, both conventional and innovation-driven (this year’s Nobel Prize has changed the notion of growth), remains anaemic. Private investment is subdued, and the average household continues to struggle with rising costs. A single external shock, such as an oil price spike or a slowdown in remittances, could undo months of progress.
According to the IMF diagnostic, the most significant structural threat comes from the debt trap. Interest payments now consume almost two-thirds of federal revenues. When such a large share of income is spent on servicing past debt, there is little left for development, health, or education. Pakistan’s fiscal policy is trapped between the need to consolidate and the political demand to spend. Without genuine revenue reforms, including broadening the tax base, curbing exemptions, and improving compliance, this contradiction will persist. Every bailout will buy time, not transformation.
The energy sector remains another source of chronic instability. The circular debt, amidst the solar rush, continues to resurface despite repeated promises to clear it. Line losses, theft, and delayed recoveries erode the gains from tariff adjustments. Unless governance improves, energy will remain both a fiscal and political minefield. The challenge is not just to balance the books but to fix the system that keeps producing these losses.
Externally, Pakistan’s export base is far too narrow to sustain growth. The country still relies heavily on textiles and a few other low-value products. Depreciation of the rupee alone cannot make exports competitive when productivity is low and energy costs are high. A sustainable recovery will require investment in technology, skills, logistics, and consistent trade policies.
Political uncertainty compounds these economic vulnerabilities. Every time there is speculation about a rift in the ruling coalition or social unrest, there is a loss of market confidence. Investors want predictability. There is also the looming challenge of climate vulnerability. Pakistan ranks among the most climate-affected countries in the world, yet climate resilience remains marginal in its economic planning due to a paucity of resources. The RSF offers an opportunity to integrate adaptation measures into national policy, but it will require coordination across federal and provincial levels.
So, what should Pakistan do next? The answer lies not in new promises but in consistent delivery. We could not benefit from previous IMF programmes not because the prescriptions were wrong, but because implementation was half-hearted and short-lived. We often tighten our belts just long enough to get the next tranche, only to loosen them again.
As said earlier, this time it is slightly different. The Ministry of Finance is maintaining policy consistency regardless of political cycles. The challenge is to keep implementing the reforms in taxation, energy pricing, and public finance management, even if they are unpopular. A steady hand is more valuable now than new slogans.
The IMF programme, by design, is not a growth plan. It is a stability plan. Its purpose is to buy time. For now, the staff-level agreement is a welcome signal. It shows that discipline and seriousness can deliver results. But sustaining that discipline will be the real test. Pakistan has taken a small but important step towards stability. To convert it into recovery, we need one thing above all: persistent and consistent implementation.
THE WRITER HEADS SDPI, CHAIRS THE BOARD OF THE NATIONAL DISASTER RISK MANAGEMENT FUND AND IS A MEMBER OF THE ADVISORY COUNCIL OF THE ADB INSTITUTE
