Statements of support for progress achieved in stabilising the economy and advancing structural reforms agreed under the ongoing upfront, extremely harsh International Monetary Fund (IMF) programme conditions, has been forthcoming from staff and management of multilaterals, rating agencies as well as over 40 plus Pakistani Cabinet in general and the economic team leaders in particular.
There is no doubt that some macroeconomic indicators have visibly improved, as noted in the August Economic Update and Outlook uploaded on the Finance Division website on 29 August 2025. Remittances rose by 7.4 percent in July this year (USD 3,214 million in total) compared to the same month in 2024 (USD 2,994 million) due no doubt to remittance incentives executed by the State Bank of Pakistan (SBP), which include zero cost/free send model for sender and receiver on eligible residence transactions, reimbursement of 20 Saudi riyals for every USD 100 transaction growth over the previous year and an additional 10 riyals for transaction exceeding 10 percent or USD 100 million over the previous year.
It is, however, relevant to note that the Finance Division proposed to the Economic Coordination Committee of the cabinet (ECC) on 27 July 2025 to reduce these incentives, however the decision was rightly deferred subject to the outcome of an impact and sensitivity analysis.
There are obvious concerns that given the scale of destruction wrought by the floods this year the envisaged fiscal space, narrow though it was to begin with, would have further diminished and hence the need to reduce incentives would rise from the Treasury’s perspective.
It is relevant to note that the Update refers to the Bureau of Emigration and Overseas Employment registering 63,255 workers, reflecting a 23.9 percent increase from June 2025; however, the website of the Bureau indicates that in July 2025 399,697 Pakistanis proceeded abroad for the purpose of employment, thereby compelling one to distinguish between registration, which may reflect an intent to emigrate, as opposed to the actual numbers who went abroad for employment.
Fiscal policy, approved by the government, parliament, and the IMF, remained contractionary in July this year. The Federal Board of Revenue (FBR) registered a 14.8 percent increase in collections in July 2025–757.4 billion rupees against 659.8 billion rupees in July 2024. This rise was on the back of higher taxes, with reliance on indirect taxes remaining at a high of 75 to 80 percent of total collections – taxes whose incidence on the poor is greater than on the rich.
Chairman of FBR claimed during his interactions with select media outlets that enforcement measures were particularly successful in 2025, estimated at between 250 and 300 billion-rupee additional collection, and cited strategic crackdowns on non-compliant sectors like sugar and tobacco.
Sadly, the non-compliance of the two sectors related to sales tax, an indirect tax that is passed in its entirety onto the consumers. In other words, the enforcement measures may have contributed to the subsequent rise in sugar prices in the domestic market, no doubt exacerbated by the flawed decision of the committee headed by the Deputy Prime Minister to approve sugar exports, thereby creating a shortage domestically necessitating imports as well as contributing towards the 44.7 percent poverty levels in this country, rivaling Sub-Saharan Africa.
Monetary policy too remained tight, even though the discount rate was reduced from 21 percent in June 2024 to 11 percent today. This rate is too high by regional standards (India 5.50 percent, Bangladesh 10 percent and Sri Lanka 7.75 percent) even though ironically inflation calculated by the Pakistan Bureau of Statistics at 4.1 percent in July is lower than in India (4 percent) and Sri Lanka (experiencing deflation of negative 0.60 percent).
The Finance Minister in parliamentary committees maintained that the discount rate is likely to decline, which would provide credibility to his budgeted expenditure that accounts for mark-up of around 50 percent of total current expenditure. This indicates that the government reliance on borrowing domestically and externally in the current year is not expected to decline appreciably.
Tight fiscal and monetary policies no doubt explain the large scale manufacturing sector’s (LSM) negative growth – the last LSM calculation is dated June 2025 with negative 0.74 percent growth in spite of the reported decline in the negativity in the flow of credit to the private sector – from negative 317.3 billion rupees July to mid-August 2024 to negative 232.7 billion rupees July to mid-August 2025.
The rest of the credit by the banking sector is borrowed by the government, which may be raised by 1.275 trillion rupees due to the power sector’s intent to clear the 2.4 trillion-rupees energy sector circular debt (stalled due to the justified resistance by the Chinese Independent Power Producers). In addition, the National Savings Centres catering to the general public are used as a ready source of cash by the government and one can only hope that the private sector is also allowed to also borrow from these centres.
Direct foreign investment rose from USD 194.7 million July 2024 to USD 208.1 million in July 2025 (6.9 percent rise though in total inflow terms the amount remained insignificant) with government claiming that the decades long stalled Reko Diq deal will become operational from next year with an expected inflow of USD 2.5 billion annually, and portfolio investment actually declined from USD 168.7 million in July last year to negative USD 44.6 million outflows in July this year. And this is in spite of the massive rise in PSX index (88.89 percent), which strengthens the claim that credit used by the private sector found its way not into raising output but into the stock market.
And finally, the reserves’ situation has improved — from USD 9.3 billion in July 2024 to USD 14.3 billion in July this year, however with USD 16 billion rollovers this is debt-based.
There is an urgent need to iron out IMF design flaws through an in-house out-of-the-box thinking which would require slashing current expenditure by at least 2 trillion rupees (that would require sacrifices by the elite) and pension reforms that would generate fiscal space thereby allowing the government to reduce indirect taxes that are negatively impacting on LSM.
To conclude, leaving the IMF programme with its harsh anti-growth conditions is not an option for Pakistan as suspension of the programme would not only allow the friendly countries to freeze their roll-overs thereby reducing reserves to less than a week of imports but also raise the prospect of imminent default as rating agencies downgrade us to junk status.
Copyright Business Recorder, 2025
Comments
Comments are closed.