EDITORIAL: On 27 March, exactly four weeks into the Middle East war with little prospect of a peace deal in the offing and the same day as Prime Minister Shehbaz Sharif rejected an Oil and Gas Regulatory Authority (Ogra) recommendation to raise fuel prices in synch with a rise in their international price the International Monetary Fund (IMF) announced that a staff-level agreement (SLA) had been reached with the authorities on the third review of the Extended Fund Facility programme and the second review of the Resilience and Sustainability Facility.
While the precise time-bound actions and structural benchmarks agreed would be released as and when the Fund Board gives its formal approval for the SLA leading to disbursement of about USD 1.210 billion.
It would not be unrealistic to presume that softening of the Fund’s insistence on harsh upfront conditionalities as done during the first two reviews of the EFF was motivated by the unforeseen mounting devastation wrought by factors external to domestic policy as was done during Covid pandemic in 2020 and also by the fact that elements relevant to Bretton Woods institutions were aligned in our favour because of our mediatory active role to resolve the Middle East war. Be that as it may, the press release issued by the Fund is disturbing on four counts even as it acknowledges efforts are ongoing to meet the fiscal year 2026 budget primary surplus of 1.6 percent of GDP, primary surplus defined as total tax revenue exceeding spending excluding interest payments on existing debt. First, notwithstanding impressive growth figures released by the Pakistan Bureau of Statistics key members of the large-scale manufacturing (LSM) sector continue to lament the closure of more than 150 units in recent months due to input costs being higher than those prevalent in regional competing countries – concerns that are prompting the administration to debate measures that would reduce costs but which would almost certainly violate the pledges made to the Fund. Any decline in LSM growth would negatively impact on GDP projected growth, which is expected to be further compromised due to the war. News that Pakistan has secured passage of 20 ships through the Strait of Hormuz is welcome though it is unclear whether all the cargoes are for domestic use or for re-export.
Second, with rising inflation that the country is witnessing at present, the policy rate will rise. The Fund notes that “the State Bank of Pakistan remains committed to keeping inflation within its target range and stands ready to raise interest rates should price pressures intensify or inflation expectations rise, including from pass through of recent volatility in global food and fuel prices.” A rise in rates, which are already double those in regional countries, coupled with the higher utility rates compared to competitors would imply a further rise in input costs that in turn would reduce GDP growth rate.
Third, fuel subsidy at present is not targeted towards the poor and vulnerable possible through the Benazir Income Support Programme (BISP) though the Fund press release in an obvious attempt to stave off future criticism stated that “the authorities are aiming their efforts to providing more targeted and sustainable support to the more effected households and are strengthening the generosity, coverage and delivery of BISP.” The use of the word ‘generosity’ for a programme that is funded entirely at the taxpayers’ expense is intriguing to say the least.
Fourth, the press release mentions that “exchange rate flexibility should continue to serve as the primary shock absorber, including from spillovers from the conflict in the Middle East,” which is inexplicable, given that the exchange rate has been held steady for the past several months to contain the debt servicing costs.
The press note by the Fund emphasised once again that achieving energy sector viability and preventing a recurrence of circular debt is critical – debt which has been considerably reduced not through sectoral efficiencies but by borrowing 1.25 trillion rupees from commercial banks already over-subscribed to the energy sector, with interest costs to be passed onto the consumers; the Fund note ends with an exhortation to avoid energy price subsidies, which incidentally accounted for nearly a trillion rupees in this year’s budget that was approved by the Fund.
These proposals or exhortations have been under active consideration by successive Pakistani administrations for the past three to four decades and yet remain relevant to this day with pledges agreed with the Fund that raises concerns whether economic imperatives would once again be rendered subservient to political considerations.
The SLA at this time must be appreciated as Pakistan would otherwise have struggled with meeting its external debt repayments as international trade is a challenge and remittance inflows from the Middle East are expected to decline.
Copyright Business Recorder, 2026