The IMF Executive Board approved another 1.2 billion dollars for Pakistan on December 9. Along with the press release, the IMF also released future projections, which gives us a glimpse of the Fund’s expectations.
The projected foreign exchange reserves are expected to climb toward 17.8 billion dollars by June, inflation moderating, and growth accelerating.
Deputy Managing Director Nigel Clarke praised Pakistan’s “strong reform implementation” and noted improvements in fiscal performance, including a primary surplus of 1.3 percent of GDP. These reassuring statements travel well in global markets, reinforcing positive sentiment among lenders and investors.
The distance between Washington’s optimism and Pakistan’s economic reality, however, has rarely been wider. Four deep-rooted gaps threaten to upend those projections: a financing gap, a trade gap, a fiscal-expenditure gap, and a credit-investment gap. Unless all four are addressed simultaneously, the new inflows will only serve to postpone the pressures building in the external and fiscal accounts.
Starting with reserves, Pakistan’s USD 14.5 billion worth of SBP-held reserves has remained unchanged since June. Of these, nearly USD 5 billion consists of Chinese deposits and swap arrangements that cannot be used to pay for imports. Another USD 3.3 billion come from the IMF, hindered by structural conditionality. After subtracting Saudi deposits, which are also rolled over and restricted, Pakistan is left with roughly USD 6 to 6.5 billion in usable reserves. That is barely six weeks of import cover. The IMF projection of reserves rising to USD 17.8 billion assumes that external financing will flow.
As economist Hafiz Pasha notes, the government’s own monitoring data shows that only USD 2.3 billion of the USD 10.9 billion budgeted for new foreign financing has materialised in the first four months of the fiscal year, reaching merely 21 percent of the target. Commercial banks have not extended a single US dollar of the expected USD 3.1 billion in private loans, and the planned USD 400 million bond issuance remains unrealised. Even China has slowed to a symbolic USD 37 million in CPEC-related project disbursements.
Along with decreasing external financing, the export sector is weakening simultaneously. Merchandise exports fell 6.39 percent between July and November. Non-textile exports fell 14.45 percent in the first four months alone. Jewellery exports have collapsed by 99 percent and handicrafts by 94 percent while carpets fell 12 percent. Pakistan used to compete in these niches. Now these industries are suffering from a setback.
The Pakistan Textile Exporters Association has provided context that challenges any narrative of recovery. Textile exports peaked at USD 19.3 billion in fiscal year 2021, falling to USD 18 billion in 2022. In 2023, textile exports further fell to USD 17 billion. With this negative growth, it is only safe to assert that exports can fall below USD 16 billion this year.
What is even more troubling is the inverse relation between exports and imports. As national exports fall, Pakistan’s imports have increased substantially. The trade deficit has widened by 37 percent over the same five-month period, between July and November to USD 10.1 billion. The current account deficit widened from USD 206 million last year to USD 735 million this year.
The IMF expects the full-year deficit to remain within USD 1.5 billion. Present trends suggest somewhere between USD 2.5 and USD 3 billion. Pakistan is earning fewer dollars while its need for them rises.
Tax revenues have apparently increased, though only on paper. Finance Minister Muhammad Aurangzeb told the National Assembly that federal revenue rose 27 percent to 11.7 trillion rupees.
The tax to GDP ratio increased from 8.5 percent to 10.3 percent and he expressed confidence that it would reach 11 percent this year. The digital monitoring of sectors like sugar and cement produced 17 billion rupees in incremental taxes in just a few months. While there has been progress as far as compliance is concerned, the structure of the tax revenue seems biased.
The withholding taxes increasing to 28 percent shows that existing taxpayers are being squeezed further rather than genuine tax base expansion. The minister highlighted 200 billion rupees collected from retailers and wholesalers. In a sector worth more than 150 billion dollars annually, this means less than half a percent of turnover is taxed. The agriculture and real estate sectors remain largely exempt. The informal sector continues to thrive at the expense of the formal sector.
Another interesting point to note is how the IMF projects fiscal expenditure to come down from 21.2 percent in FY25 to 20.2 percent in FY26. This however does not seem likely. Civil administration costs rose 13 percent in the first quarter despite the abolition of more than 200 thousand government posts.
Pension costs have jumped 125 percent in five years and reached 249.5 billion rupees in just July to September. Subsidies rose six-fold to 120 billion rupees in the same quarter. Provinces are sitting on surpluses approaching 900 billion rupees while the federal government borrows to fund devolved functions. The 18th Amendment transferred responsibilities to provinces but not revenue authority. The federation carries the cost of defence and debt while provinces accumulate cash they hesitate to spend.
Private sector behaviour reveals the economy’s underlying stagnation. Bank credit to the private sector surpassed 1.2 trillion rupees in the first five months of the year. What looks like a revival is in fact a mirage. Bankers have reported that nearly all borrowing is for short-term working capital rather than new investment. Much of the credit was simply to finance the rice harvest and inventories. This reveals low investor confidence in expansion or modernization. The investment-to-GDP ratio confirms this. It collapsed to 13.1 percent last year, a fifty-year low, and is only 13.6 percent this year. Firms are borrowing to survive, not to grow.
The State Bank has chosen to keep the nominal exchange rate stable while inflation persists. The real effective exchange rate has risen to 103.95, moving above its long-term average and eroding export competitiveness at a time when Pakistan can least afford it. It subsidises imports when the country cannot afford them. If external financing and export earnings continue to deteriorate, depreciation becomes unavoidable. If the rupee falls, the cost of servicing IMF obligations denominated in Special Drawing Rights will rise sharply in rupee terms. The stabilization effort itself will become more expensive.
None of these weaknesses come as a surprise. Every government has known the same structural challenges. The National Finance Commission award must be restructured so that provinces that spend also collect tax. Continuing to borrow federally to fund devolved responsibilities is mathematically unsustainable. The tax base must expand into agriculture, retail, and real estate or the burden on the formal sector will hit its limit. Export industries will not regain competitiveness until the energy sector is repaired. Pakistani manufacturers still pay far more for power than competitors in Bangladesh or Vietnam. The circular debt exceeding 4.9 trillion rupees remains a systemic drag. The investment climate demands predictability in taxation and regulation. The habit of mini-budgets and sudden changes through statutory regulatory orders kills long-horizon planning.
Pakistan has avoided immediate collapse, and the IMF deserves credit for stabilising immediate crisis. The tranche helped the rupee from imploding and reserves from thinning. But avoidance is not a strategy for development. While the economy would not immediately collapse, it might keep shrinking under prevailing conditions.
Markets will decide which version of Pakistan is real. Currency traders pay attention to export receipts. Bond investors focus on financing gaps. Business owners respond to energy prices, tax burdens, and policy uncertainty. Their collective judgment will determine the country’s trajectory.
Pakistan has reached this moment before. It can continue pursuing stabilization through borrowed resources and heavier extraction from the formal economy. Or, it can finally confront the structural reforms that decades of stabilization programmes have written into fine print but never delivered. The choice remains Pakistan’s, though time is running out. The IMF’s projections do not fully reflect the ground realities. Unless action is taken, the economy would stagnate.
Borrowed stability eventually becomes borrowed time. The question is whether Pakistan will act before that time runs out.
Copyright Business Recorder, 2025
The writer is an economist and an educationist
Comments