IMF programmes’ progress report: some reflections—III

Moreover, the report points out that commitment to programme objectives includes ‘…maintaining a flexible exchange rate as the key shock absorber to support the rebuilding of reserves’.

Instead of following floating exchange rate regime, managed float exchange rate should be adopted, which will provide greater needed control to keep the domestic currency (Pakistan Rupee) reasonably appreciated for reducing the impact of inflation through imported- and cost-push channels, and for better anchoring inflation expectations.

This needs to be augmented with accommodative monetary- and fiscal policies. Fiscal space for this counter-cyclical policy is made available by following non-neoliberal, and non-austerity policies. For instance, lower monetary austerity would mean lesser interest payment related expenditure needs, which is a big ticked item on the expenditure side, while higher development expenditure would likely result in higher economic growth and, in turn, greater revenues.

READ MORE: IMF programmes’ progress report: some reflections—II

Here, non-neoliberal policies allow reaching greater productive- and allocative efficiencies, which allow removing supply-side bottlenecks along with improving productivity, and competitiveness, positively impacting sustainability with regard to enhancement of macroeconomic stability and economic growth.

Moreover, such policies which see greater role of public sector, including with regard to regulation and appropriately putting in place a symbiotic relationship between public and private sectors overall help reduce transaction costs, positively impacting stability, growth, inclusivity and resilience.

Moreover, non-austerity policies reduce the burden of interest payments – a big expenditure ticket item – and also positively impact public and private investment. In addition, instead of focusing on primary surplus, which has been done significantly by reducing development expenditure since its scope exclude interest payments, reduction in fiscal deficit should be targeted by reducing interest payments and non-development expenditure.

Another reduction that is seen to meet primary surplus has been through reduction in subsidy provision. Here, while subsidy provision should be rationalized away from serving higher income groups, understanding the limits of targeting subsidy in a developing country under overall weak economic institutional quality context is also important. Hence, over-emphasising the targeting aspect with regard to provision of subsidies should be avoided, in case doing that leads to lack of provision of subsidy where needed.

Overall, extensive subsidy in support of prices should be provided as reasonably needed support mechanism for the economy and welfare. Targeting primary surplus, once again, has negatively impacted adequate provision of subsidy.

It seems quite strange, and even insensitive on the part of IMF and authorities, that alternate sources of revenues and expenditure curtailment were not tapped through conditionalities. Alongside this, shifting primary surplus targets to aim for a smaller primary deficit in the wake of immense increases in oil prices—due to the Middle East conflict—should have been used as vital fiscal space-enhancing steps to provide necessary subsidies while improving macroeconomic sustainability.

Here, it needs to be pointed out, something which the Report should have indicated is that petroleum development levy (PDL) distorts price, and should be removed. Overall, distortion in prices from the taxation/levies side should be removed.

Moreover, it is strange that while IMF is concerned about provision of subsidy as price distortion – which has otherwise significant positive aspects in terms of contribution to growth and welfare, can be rationalized, and better targeted as far as possible given the weak economic institutional quality of a developing country context of Pakistan – and apparently not much about price distortion coming from indirect taxation/levy.

In addition, the Report should have highlighted through perhaps inclusion of conditionalities – even if non-binding to show directional emphasis – to shift from consumption-based (indirect) taxation, to income-based (direct) taxation, under some reasonable timeline, reached after discussion with the authorities, with regard to removing indirect taxation/levy from oil prices, given their significance in terms of likely negative impact for stability, and growth.

READ MORE: IMF programmes’ progress report: some reflections—I

From the Report, it could be seen that State Bank of Pakistan (SBP) has reduced its liabilities in terms of bilateral swap liabilities apparently from $4.3 billion to around $2 billion in net swap/forward position. Hence, around $2 billion is a liability in SBP net foreign assets in terms of net swap/forward position, which out of caution in the wake of the ME conflict should have led to increase in swap/forward position since the country is a net importer of oil, and especially since the country reportedly returned $3.5 billion to the UAE which, in turn, has reportedly only been replaced with financing of a similar amount from Saudi Arabia.

Hence, the country should have increased net swap/forward position to hedge against likely pressures on US dollar demands in the country in the wake of oil price rise in particular in an overall commodity supply shock due to the ME conflict. The author’s May 1, BR published article ‘ME conflict and the economic iceberg’ pointed out in this regard: ‘Pakistan should also approach US with similar currency swap line request for greater predictability of US dollar flows, both in terms of quantity, and higher swap frequency, given it is a net oil importer along with being highly prone to climate catastrophes, having significant gross financing needs, especially given it is already under difficult debt distress, not to mention the fact also looking to maintain three months of import cover under ongoing extended fund facility (EFF) programme with the IMF.’ Unfortunately, there is apparently no discussion with regard to establishing an appropriate level of ‘currency swap line.’

Another comment in the Report, for instance, is worth raising eyebrows, whereby it is indicated ‘Industrial power consumption remained very strong through February 2026 (averaging 25 percent yoy), driven by the ongoing captive power plant (CPP) transition to the grid and, likely, stronger underlying industrial activity.’ It is strange that IMF has no apparent concern for increase in reliance on grid by the industrial sector, especially given the need to transition to greener sources of energy like solar, as per the focus of the RSF programme; not to mention Pakistan being one of the top ten climate challenged countries, and also there are global commitments of IMF with regard to greening its programme focus.

Moreover, it is strange on the part of both IMF and authorities that they have negotiated such a low level of REF programme in terms of financing, whereby a little over two years (May 2, 2025 to September 15, 2027) only SDR 1 billion is being provided! Very strange that so little financing is being provided despite the fact that Pakistan is one of the top ten climate change vulnerable countries, and also where smog in a number of its cities is among the highest in the world; along with PM2.5 targets being missed significantly over vast areas in the country round the year, not to mention rising frequency and intensity of climate catastrophes, and elevated level of conflict in general over the years, producing significant oil supply shock, all requiring quick-paced transition away from reliance on fossil fuel to renewables/alternate sources of energy.

Also, the country is home to one of the largest glacier covers, which is already melting at a much fast pace than it should.

Already, climate catastrophes in terms of floods have twice wreaked havoc over the last five years. Rather than pursuing rather sporadic projects, with overall little climate finance being committed, it is necessary to adopt a cross sectoral, symbiotic relationship- and mission-oriented programmes for effectively dealing with climate change crisis.

(Concluded)

Copyright Business Recorder, 2026