Pakistan, IMF and half-told fiscal story

Negotiations between Pakistan and the International Monetary Fund (IMF) over the release of a USD 1 billion tranche have reportedly stalled again. The reason is familiar: weak tax collection and doubts about the credibility of the current budget. The IMF has once more pointed its finger at Pakistan’s tax machinery, arguing that revenue targets are unlikely to be achieved.

The concern is legitimate. Pakistan’s tax system has long underperformed. The country’s tax-to-GDP ratio remains stuck around 9–10 percent, one of the lowest among comparable emerging economies. The tax net is narrow, the informal economy is large, and compliance remains weak.

Yet this recurring dispute raises a more uncomfortable question: is Pakistan’s fiscal crisis only about tax collection, or is the IMF focusing on the easier half of the problem while overlooking the harder one?

At the centre of the debate is the Federal Board of Revenue (FBR). For decades, every IMF programme has demanded Pakistan improve tax administration, broaden the tax base, and increase revenue targets. The prescriptions have been repeated so often that they have become predictable—documentation of the economy, digitization, stronger enforcement and expansion of the taxpayer base.

Despite these repeated efforts, results have been modest and the reasons for it are well known. What is unknown is why they are not being addressed. The formal sector continues to bear most of the tax burden while large segments of wealth—particularly retail, agriculture and other venues —remain lightly taxed or outside the system.

The informal economy, often estimated at 40 percent of GDP, remains largely untouched.

The IMF’s frustration with this reality is understandable. But the emphasis on tax collection often obscures the other side of the fiscal equation: how the state spends money and where it loses it.

Pakistan’s fiscal problem is not only that the government collects too little revenue. It is equally that massive financial leakages continue across the public sector without decisive reform.

The most glaring example is the persistent drain created by loss-making public sector enterprises. Institutions such as Pakistan International Airlines and Pakistan Steel Mills have accumulated staggering losses over the years. Their liabilities are ultimately absorbed by the national exchequer through subsidies, guarantees, and debt restructuring.

These enterprises survive largely because governments hesitate to confront the political costs of restructuring or privatisation. Yet their financial losses run into hundreds of billions of rupees, quietly draining public resources every year.

Strangely, while IMF programmes frequently emphasize revenue targets with great precision, the urgency surrounding public sector enterprise reform often appears less forceful.

Privatization plans move slowly, restructuring deadlines slip, and fiscal support to failing entities continues.

An even larger financial sinkhole lies in Pakistan’s energy sector. The country’s infamous circular debt—a complex chain of unpaid obligations within the electricity system—has grown to trillions of rupees. Each year the government injects additional resources to keep the system going.

The structural causes are well known: poor bill recovery, electricity theft, transmission losses, weak governance of distribution companies and politically influenced tariffs. Yet reforms remain slow and partial.

The IMF has often insisted on raising electricity tariffs to reduce the financial gap. But higher tariffs alone cannot fix a system plagued by inefficiency and poor governance. Without deeper restructuring of power distribution companies and improved management, the circular debt simply regenerates.

Another aspect that rarely receives sustained scrutiny is extravagant or non-productive public expenditure. Federal and provincial budgets continue to carry significant administrative overheads, subsidies that are poorly targeted, and politically-driven development schemes with limited economic value.

Fiscal discipline cannot rely solely on extracting more revenue. It must also involve serious scrutiny of how public money is spent.

When taxpayers see persistent financial waste alongside rising tax demands, public trust in the fiscal system erodes. Salaried individuals and documented businesses already shoulder a disproportionate tax burden. Increasing pressure on this narrow segment without expanding the base or controlling spending only deepens resentment and encourages informality.

Pakistan’s tax machinery certainly needs reform. The FBR still struggles with outdated processes, fragmented data systems and governance weaknesses. Modern tools such as digital invoicing, integrated databases and data-driven audits could significantly expand the tax base.

But tax administration reform alone cannot solve Pakistan’s fiscal dilemma if structural financial drains remain untouched. A credible reform agenda would therefore require three parallel steps.

First, decisive restructuring or privatization of loss-making public sector enterprises. The state cannot indefinitely finance institutions that consistently destroy value;

Second, deep reform of the energy sector. Reducing circular debt demands improved governance, stronger bill recovery, reduced transmission losses and professional management of distribution companies; and

Third, serious rationalisation of public expenditure. Fiscal consolidation must involve cutting waste and prioritizing investments that enhance productivity, such as infrastructure, technology and human capital.

The IMF’s role in Pakistan’s economic management is significant because its programmes shape policy priorities. But effective reform requires equal attention to revenue and expenditure.

If IMF negotiations focus primarily on tax targets while overlooking inefficient spending and structural financial drains, the result will be familiar: temporary stabilization followed by the next fiscal crisis.

Pakistan’s economic challenge is not simply a matter of collecting more taxes. It is fundamentally about how responsibly the state manages public resources.

Until both Islamabad and the IMF address this broader fiscal imbalance with equal seriousness, Pakistan will remain caught in a repetitive cycle—negotiation, conditionality, temporary relief, and yet another return to the Fund.

Copyright Business Recorder, 2026