Economic stability has been achieved, and the country will not be deterred from implementing the reform agenda agreed with the International Monetary Fund (IMF) – a claim that has repeatedly been pledged by the country’s cabinet members.
The pros and cons of economic stability are stark in Pakistan: pros include strengthening foreign exchange reserves, rising remittances, plummeting inflation and halving of the discount rate in one year (21 percent in June 2024 to 11 percent in June 2025).
The cons negate these gains with (i) reserves entirely debt based as roll-overs are estimated at 16 billion dollars while reserves on 11 July 2025 reached a high of 14.525 billion dollars – a high achieved by the State Bank of Pakistan reportedly picking up 8 billion dollars from the open market that led to a severe dollar supply shortage in the open market leading to a fall in the rupee value in spite of the current account surplus; (ii) the rise in remittance inflows leading to the current account surplus is are not expected to end the boom bust trade cycle — “economic volatility has only increased over time, with a tight correlation between Pakistan’s boom-bust economic outcomes and its economic policies” was noted by the IMF in its September 2024 documents; (iii) declining inflation which has been unable to arrest the rise in poverty levels (44.2 percent at present as per the World Bank), and (iv) reduction in the discount rate that has been unable to lift the large scale manufacturing sector out of its negativity (with the latest data placing it at negative 1.52 percent).
This leads one to carefully review IMF’s first review documents dated May 2025 where it argues that external and domestic risks may “quickly eviscerate Pakistan’s hard won economic stability.”
The key question raised in nearly all twenty-three previous IMF programmes is: did the Pakistan team propose in-house out of the box suggestions to the IMF team and which, if any of their suggestions, were entertained? A quick glance at the Memorandum of Economic and Financial Policies (MEFP) dated 2024 shows no deviation from past conditions, except that they are harsher and more upfront for the reason specified in Fund documents notably that Pakistan’s implementation of agreed reforms has been poor – an opinion supported by the fact that the country either left the previous programmes mid-way or if any was completed (2016 three year loan) the government of the day quickly reversed all reforms necessitating another loan within the year of its completion.
Notwithstanding the foot-dragging by Pakistan authorities to implement politically challenging reforms, there is flawed policy advice given by the Fund staff premised on economic linkages that maybe relevant in several countries but not in Pakistan.
A long time Fund condition for Pakistan has been to link the discount rate to inflation – a linkage that is tenuous in Pakistan as the government remains the major borrower in the domestic market and any decline in the discount rate is seen as a means to reduce mark-up on loans secured to finance budgeted expenditure.
The government budgeted bank borrowing (treasury bills, Pakistan investment Binds, sukuk) at 5.142 trillion rupees in 2024-25 while total credit to the private sector was only 676.6 billion rupees – a mere 13 percent of government borrowing. So much for claims that private sector led growth is the policy thrust.
A State Bank of Pakistan Working Paper Series dated December 2022 titled “Time Frequency Analysis Determinants of Inflation rate” in Pakistan identified short, medium, and long term determinants of inflation as follows: (i) short term (4 to 8 months) policy rate, exchange rate, government borrowing and import growth; (ii) medium term (9 to 64 months) global commodity prices (specially petroleum whose impact on the public is exacerbated by the hefty petroleum levy as well as the carbon levy that was a condition to procure 1.4 billion dollar resilience loan from the IMF) and broad money supply; and (iii) Long term (above 64 months) government borrowing which continues to rise with the focus on extending the amortisation period rather than reducing the amount), global commodity prices and money supply.
The short term one may assume began soon after the 8 February 2024 elections and ended in November 2024 with three major observations that challenge the linkage between the discount rate and inflation: (i) the discount rate declined by a mere 150 basis points on 10 June 2024 (from 22 percent to 20.5 percent) even though it was claimed inflation declined by 8.1 percent (from 20.7 percent in March 2024 to 12.6 percent in June); reports suggest that the Fund may have opposed a further cut in the discount rate as it is clearly stipulated in the Fund’s loan documents dated September 2024 that “there are important shortcomings” in the source data available for sectors accounting for a whopping one-third of GDP and a Technical assistance will be provided that would address these weaknesses in Government Finance Statistics and Producer Price Index; (ii) IMF condition that the interbank open market rupee-dollar parity must not be in excess of plus/minus 1.25 percent during five consecutive business period. However, the dollar scarcity has been addressed by the stakeholders through implementing law enforcement measures; and (iii) imports were restrained during this period via administrative measures while domestic government borrowing continued – up to 53.46 trillion rupees by March 2025 (no further update is available).
Medium term is underway and is more dependent on global commodity prices as well as the rupee-dollar parity.
Long term has not yet arrived, but one may assume that government borrowing will continue to rise, though the economic team leaders have budgeted a decline in debt servicing due to the expectation that the discount rate will decline — an expectation that would entail convincing the Fund team that the real rate has declined – an assessment that may not be forthcoming till the end of the Fund TA on addressing data shortcomings (scheduled end in June 2026).
There is a need for existing researchers employed in the SBP as well as those in the federal government to not only provide accurate data to the leadership on a regular basis but also to ensure that they provide an updated analytical treatise on the outcome of reforms proposed by the Fund and those out of the box in-house measures that would achieve better results because they are premised on unique conditions prevalent in this country.
To date the government has focused on reducing subsidies, passing the onus of utilities reforms onto the end users through higher tariffs, raising revenue through indirect taxes and ceasing procurement and price setting of staple food items – measures likely to exacerbate the poverty levels, which together with unemployment at a high of 22 percent bodes ill for the general public and strengthens the risk associated with “political economy considerations and pressures from vested interests that could delay or weaken the reform momentum and put at risk the still brittle stability.”
Copyright Business Recorder, 2025