OPINION: Reconfiguring the IMF engagement

There is a common misunderstanding about what it means when a country engages with the International Monetary Fund (IMF). Such arrangements are often described as an “IMF programme,” a term that suggests policies devised elsewhere and applied wholesale. IMF-supported programmes are anchored in a familiar set of principles: restoring fiscal balance, establishing market-based exchange rate regimes, advancing privatization, liberalizing trade, and easing capital flows. These principles reflect the Fund’s accumulated experience across countries, crises, and economic cycles.

In practice, however, each economic programme remains largely national in character, designed in consultation with the country’s own authorities and supported by the IMF. Framing it otherwise obscures where responsibility for policy choices ultimately lies.

This is reflected in the Memorandum of Economic and Financial Policies (MEFP), the central document underpinning any engagement with the Fund and a core component of the Letter of Intent. Prepared by the member country in collaboration with IMF staff, the MEFP sets out the macroeconomic framework, indicative targets, structural benchmarks, and quantitative performance criteria to which the authorities commit. No document is submitted to the IMF’s Executive Board without the country’s explicit consent.

Seen in this context, the decisive variable for programme effectiveness is the country’s authorities’ capacity to design, implement, and own reform. This requires more than political intent; it demands sustained professional and technical capability within the state.

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However, where capacity is weak, engagement with the IMF risks becoming less a framework for reform than a convenient external reference - one that allows difficult choices to be deferred and accountability to blur.

It is also important to recognize the nature of the expertise the IMF brings to these engagements. IMF teams typically comprise highly specialized macroeconomists, fiscal, legal, and sectoral experts, many with doctoral training, supported by deep experience in technical negotiation and policy communication.

This expertise is reinforced through continuous professional development and exposure to a wide range of country cases, backed by extensive analytical resources at the IMF headquarters. By contrast, country’s authorities, even when capable, often operate with teams of generalists under far tighter institutional, political, and time constraints. IMF-related work is frequently handled alongside routine responsibilities, making it difficult to develop and advance a fully formed reform agenda. Pakistan’s experience is no exception.

Once ownership is firmly anchored in the country’s authorities and supported by adequate professional and technical capability, the focus must turn to substance. That capability is essential both for engaging with increasingly complex analytical frameworks and for articulating a nationally owned reform agenda.

Against this backdrop, the starting point must be a clearly articulated economic agenda defined by the country’s authorities and reflected in the MEFP under the IMF-supported Extended Fund Facility (EFF).

The IMF’s role should be to test assumptions, fill analytical gaps, and bring comparative experience - not to supplant domestic strategy. Ownership, communication, and implementation capacity remain decisive, as programmes ultimately succeed or fail not solely on design, but on execution.

In Pakistan’s case, giving this agenda substance requires confronting the constraints embedded in the country’s fiscal framework. The immediate challenge lies in reassessing its implications for growth and for a credible exit from IMF support once the programme concludes. Persistent reliance on distortionary taxation, narrow revenue bases, and quasi-fiscal levies has weakened incentives to invest, formalize, and expand economic activity.

Fiscal consolidation has too often come at the expense of growth rather than in support of it. A credible reform agenda under the EFF must therefore strengthen the fiscal position in ways that enhance productivity and competitiveness, creating the conditions not only for macroeconomic stability but for a durable post-programme transition.

This requires moving away from ad hoc measures toward a simpler, more predictable tax regime: phasing out super taxes; removing distortions such as the taxation of inter-corporate dividend income; bringing the general sales tax toward a uniform and moderate rate; rationalizing withholding, presumptive, and turnover taxes, particularly for new and growing firms; and simplifying personal income taxation, including raising the exemption threshold from its current level of Rs 600,000. Capital value taxation on foreign assets should be eliminated to reduce distortions and improve capital mobility.

Closing tax gaps in sales tax compliance, among high-income earners, and in the retail and wholesale sectors remains critical. In parallel, a credible provincial agenda covering agricultural income taxation and land value taxation is essential to restoring confidence in fiscal federalism. Existing trade agreements should be reviewed to ensure they reinforce, rather than undermine, domestic revenue mobilization and competitiveness.

Turnover taxation without timely refunds, which creates acute liquidity pressures for exporters, requires an urgent and credible resolution. Equally important, energy pricing must cease to function as a multi-layer tax system, with electricity bills no longer used to collect charges unrelated to consumption.

Given political and administrative constraints, many tax reforms will take time to implement. This makes expenditure reform an equally important - and often underutilized - pillar of adjustment under the EFF. Durable adjustment and a credible post-programme transition will not be possible without reorienting public spending toward productivity, service delivery, and core federal responsibilities.

This requires moving beyond across-the-board compression toward targeted rationalization, including the gradual elimination of untargeted electricity subsidies, particularly tariff differential subsidies of roughly Rs 375 billion and lump-sum power subsidy provisions of around Rs 400 billion that have effectively fiscalized inefficiency in the name of circular debt.

Reducing distortionary agricultural support, containing recurrent spending in devolved ministries and autonomous bodies, and refocusing federal development expenditure on clearly defined federal mandates will require sustained political commitment.

More balanced cost-sharing with provinces on social protection expenditures, estimated at Rs 734 billion, along with a gradual rationalization of the federal government’s size and footprint, would further reinforce fiscal discipline. These measures are not only fiscally necessary; they are essential signals of reform seriousness.

Debt reprofiling should be treated as a strategic instrument rather than a stopgap during the life of the EFF. A rollover of roughly USD 12.5 billion with friendly countries over a five-year horizon would ease near-term external financing pressures and create breathing space for the balance of payments.

By lengthening maturities, external debt service can be smoothed, rollover risks reduced, and vulnerability to shifts in market sentiment lowered. When combined with credible fiscal adjustment and growth-oriented reforms, such reprofiling can strengthen reserve buffers and place external sustainability on a more durable footing.

These are not prescriptions for the IMF to impose, but ideas for how the country’s authorities can frame a more purposeful engagement with the Fund. The reform agenda should be articulated independently and owned domestically, and only then reflected, where appropriate, within the IMF-supported EFF.

Ultimately, engagement with the IMF is best understood not as a surrender of policy autonomy, but as a test of domestic resolve. Countries’ exit reliance on IMF support not because conditions are relaxed, but because institutions strengthen, credibility is rebuilt, and reforms are internalized. The challenge - and the opportunity - is to ensure that the program remains what it is meant to be: a nationally owned reform effort, supported but not substituted by the IMF.

Copyright Business Recorder, 2026