Criticism of International Mon etary Fund (IMF) prescriptions are long-standing - levelled by Nobel laureates Stieglitz and Krugman as well as independent economists in borrowing countries, with the main criticism being that the ‘one-size-fit-all’ approach is not tenable.
An example of one size not fitting in Pakistan’s context is the Fund staff’s persistent adherence, continuing to this day, to an economic principle: an inverse relationship between policy rate and inflation. In twenty-four programmes, including the ongoing 7 billion-dollar Extended Fund Facility, the linkage was with core inflation (non-food and non-energy and therefore the outcome of domestic elements) with the exception of the 2019 programme when the linkage was with consumer price index (during the tenure of Reza Baqir as the Governor State Bank of Pakistan).
The economic principle maintains that a rise in the cost of borrowing will curtail borrowing with a salutary effect on inflation (core) while a decline would automatically fuel credit. According to a conservative estimate, about 75 percent of total credit is appropriated by the government, which is overwhelmingly spent on current expenditure (projected at 93 percent of the budget outlay this year though by the end of the year this percentage may rise as the allocation on development expenditure is routinely curtailed to ensure a sustainable deficit) – an outlay not backed by output and therefore highly inflationary.
Current expenditure includes three major allocations. First, running of civilian government is budgeted at 1.071 trillion rupees in fiscal year 2027 (with a significant portion spent on salaries) while employee-related expense of the defence services was budgeted at 967,548 million rupees or together equal to 13 percent of total current expenditure. This includes an annual increase in the salaries of public sector employees and defence personnel, accounting for only 7 percent of the total work force, by an amount equal to if not higher than inflation.
In contrast, the remaining 93 percent of the work force has been struggling with no salary raise and rising unemployment since almost COVID-19 in 2020 – a claim reflected by the rise in poverty levels to 44.7 percent as per the World Bank.
Secondly, once retired government employees and defence personnel are paid pensions that cost the taxpayers’ another 7 percent of the total federal current expenditure with no employee contribution. Long-standing demand to compel state employees to contribute to their pension funds as is the case in other countries finally led to reforms whose effects would be apparent as and when those hired from last year onwards retire – a period of, on average, not less than 35 years. Civil employees are contributing 10 percent of their pensionable pay with accounts available to employees from day 1, with the government contributing 12 percent against the previous policy of the government contributing 20 percent. It is not clear where the amount collected would be invested, if at all, which would imply that the 12 percent government contribution would have to come at the taxpayers’ expense. The process of roll-out of the reforms to the armed forces is ongoing as consultations and security considerations are under discussion.
And finally, mark-up payments, money that would be recycled into the economy is estimated at 46 percent of the total in this year’s budget. Borrowing is from mainly three sources: (i) issuance of Pakistan Investment Bonds reflects the policy rate, which in turn increases the percentage of the budget that needs to be earmarked for debt servicing; thus any rise in the policy rate would raise the mark-up payable, thereby increasing the deficit which is a highly inflationary policy; (ii) public savings schemes are appropriated by the government which channels it back into the economy for payments due; and to encourage private savers the schemes offer lucrative interest used for consumption; and (iii) mark-up on foreign debt as well as yield on the issuance of debt equity (Eurobonds/sukuk) with repayments contained through intervening in the foreign exchange market.
The obvious pro-growth suggestion would be for the government to allow the private sector access to the money in the national savings centres and reduce debt not by converting short-term to long-term debt, as has been the practice, but by slashing current expenditure. Today, the focus of the Fund is on primary surplus, minus the repayment due on debt, which has generated nervous watchers as this is a licence for the administration to borrow more from where ever available.
Krugman facetiously noted that IMF stands for “Its Mostly Fiscal”, a sentiment that would echo in Pakistan. Federal Board of Revenue’s focus on enforcement measures is being touted as an attempt to catch the tax avoiders and evaders however these measures focus on sales tax collections, an indirect tax whose incidence on the poor is greater than on the rich and is passed on in its entirety to the consumers. Last year, FBR’s focus was on enforcement measures in three sub-sectors - sugar, fertiliser, and cement industrial units - a focus that led to a price rise of all three items though the Middle East conflict was also a major contributor. In the current IMF programme as in the last three programmes the most anti-poor and anti-growth condition was to insist on an over-ambitious FBR annual revenue target instead of slashing current expenditure.
Stieglitz argued that “Finance ministers and central bank governors have the seats at the table, not labour unions or labour ministers. Finance ministers and central bank governors are linked to financial communities in their countries, so they push policies that reflect the viewpoints and interests of the financial community and barely hear the voices of those who are the first victims of dictated policies.” In Pakistan, there is elite capture of most major productive sectors and sub-sectors: large scale manufacturing sub-sectors band together by formally registering with the SECP (for example, All Pakistan Textile Mills Association, Cement Manufacturers, Sugar Manufacturers) that enables a large number of producers to operate under imperfect conditions to their own benefit and the detriment of the consumers. Farm produce is largely secured by aarthis who then manipulate the market price to the extent possible.
The words of Jeffrey Sachs, the then head of the Harvard Institute for International Development, seem as appropriate today as in 1997, “In Korea the IMF insisted that all presidential candidates immediately “endorse” an agreement which they had no part in drafting or negotiating, and no time to understand. The situation is out of hand … It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people.”
Today 44.7 percent of Pakistanis, a population of 260 million people, are living below the poverty level as per the World Bank, and it is about time that the economic team leaders—the signatories to all loans, most notably the Finance Minister and the Governor of the State Bank of Pakistan—initiated meaningful dialogue and presented innovative, out-of-the-box measures. These measures must require pushing back not only against elite demands for greater annual resource allocations but also against donor conditions that are eroding the quality of life for the common man.
Copyright Business Recorder, 2026
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