Pakistan’s economy bears significantly greater risks associated with the ongoing Middle East crisis as the impact on the general public is considerably higher than on those nations currently not on as rigid and up-front an International Monetary Fund (IMF) programme as Pakistan – a design that takes account of the failures of successive Pakistani administrations, military and civilian alike, to implement agreed reforms due to persistent prioritising of political considerations over economic ones.
During the past three decades Pakistan has been administered by the military and civilian governments represented by all three major national parties – notably Pakistan Muslim League-N, Pakistan Peoples’ Party and Pakistan Tehreek-e-Insaf. And barring none all secured IMF loans: (i) Extended Credit Facility approved 6 December 2001 – postdating the 11 September 2001 terror attacks followed by Musharraf’s prompt acquiescence to support the US war on terror after President Bush’s ultimatum “you are either with us or against us.” The actual loan amount agreed was 1,033,700 SDRs with 861,420 SDRs disbursed. Total external loans increased from 32.37 billion dollars in 2001 to 40.5 billion dollars by June 2007 – a slow growth attributable to Pakistan’s geopolitical relevance after the 9/11 attacks, rather than improved economic performance and, as is the practice to this day, converting short-term debt into long-term debt; (ii) 24 November 2008 Standby Arrangement (SBA) approved in November with the agreed amount of 7,235,900 SDRs and the drawn amount of 4,936,035 SDRs – the difference due to abandonment of the programme mid-way for failure to implement the agreed conditions notably artificially keeping the rupee strong and continuing subsidies to the rich industrial sector; (iii) Extended Fund Facility (EFF) programme 4 September 2013 with the approved amount fully utilised – 4,393,000 SDRs though there was a rollback of all agreed conditions in 2007 and 2008; and (iv) EFF 3 July 2019 4,268,000 SDRs with the amount withdrawn 1,044,000 SDRs, an amount augmented due to the onset of Covid-19.
The incumbent government inherited the EFF in April 2022, which was followed by securing two further loans: a nine-month-long SBA and the ongoing 36-month long EFF. The question is whether prioritising politics over economics continues to this day? This requires itemising those by now routine annual outlays to specific groups/influencers which no civilian or indeed military government has been able to challenge. Two items consisting of around 20 percent of total budgeted current expenditure that should come under immediate review are: (i) employee-related expenses (civilian and non-civilian) and (ii) pensions (civilian and non-civilian). The former is limited to only 7 percent of the country’s total workforce (the remaining 93 percent work for the private sector) funded solely at the taxpayers’ expense. And their pensions are also funded solely at the taxpayers’ expense which for civilians starting July 1, 2024 and armed forces starting I July 2025 would entail 10 percent employee contribution limited to all new inductees. In other words, the actual impact of this policy would take a long time to be realised if that is a subsequent government does not reverse for political reasons. Needless to add, this is increasingly a source of public discontent as the poverty rate has risen to an alarming 42.4 percent as per the World Bank (with 3.65 dollar per day threshold) with approximately 1.9 million falling into poverty in 2025.
Subsidies particularly for electricity is another current expenditure item that has witnessed an annual rise based on the unchanged policy of the government to equalise tariffs throughout the country even though the costs attributed to poor performance of distribution companies differ. Last year total subsidies to the power sector (realised) were 1.190 trillion rupees while this year the government has reduced it to 1.036 trillion rupees with 49 billion rupees earmarked as subsidy to K-Electric, the privatised company, which is a powerful argument against privatisation of other Discos until and unless this policy is revisited.
Employee-related expenses and subsidies account for over 2 trillion rupees of the budget and if reduced by half would go some way in providing fiscal space that remains extremely narrow and a source of concern to the Fund staff under the ongoing programme.
The other major outlay under current expenditure is on debt servicing which traditionally has been controlled through two flawed policies: (i) keeping the rupee-dollar parity at a level low enough to reduce the debt servicing costs of external loans/equities (issuance of sukuk and Eurobonds), which generates serious balance of payment problems triggering a need for securing another IMF loan; and (ii) the case in the current year which envisaged a reduction in the policy rate that would in turn reduce the payments due on domestic debt – a factor that may be compromised with the ongoing Middle East crisis with rising inflation amid oil supply disruptions. It is relevant to note that the Deputy Managing Director of the IMF recently stated that central banks would have to “look at the incoming data and keep a very careful eye on both what we would call second-round effects. Meaning is inflation moving into broadening beyond just energy price inflation, and also our inflation expectations continuing to be well anchored.” Any increase in the policy rate from the existing 10.5 percent would increase the debt servicing costs and further choke output as borrowing costs by the large scale manufacturing sector rise making their productivity economically unviable.
A more appropriate policy would be to reduce domestic and external debt through slashing current expenditure items while ensuring that operational costs of both the civilian government and the establishment are fully met. Subsidies for the power sector must be cut and performance of the sector improved to bring down costs and prices.
The situation today however in light of the Middle East crisis continues and the IMF Communications Director when asked gave no definitive answer during her press conference on 19 March: “on Pakistan, what I can say is that we are currently in discussions with the authorities for the next review under the program. And obviously those discussions will be focused on, you know, all of the developments that may affect Pakistan’s economy, including obviously the situation in the Middle East, the increase in oil prices, increase in fertilizer prices, all of the different parts of the economic impact, including tightening of financial conditions, how all of that may affect Pakistan. And we’ll hear from the team as those discussions come to a conclusion.” Pakistan’s reported purchase of DAP fertilizer from Saudi Arabia in August 2025 was 30,000 tons at around 615 dollars per ton cfr. The IMF staff level agreement on the third EFF review and the second Resilience and Sustainability Facility review has been reached though specific time-bound conditions and structural benchmarks would be released once the Board has —approved the next tranche release.
The option that the incumbent government has taken so far reflects the same old policies of yester years: slashing development outlay by 10 percent (with a direct negative impact on growth), higher subsidies for petrol and products (with a rise in petroleum levy on petrol – a commodity whose price is largely felt by the poor to the low income levels) and setting up a fund from which to extend subsidies likely to raise the budget deficit, a highly inflationary policy, rather than slashing their own current outlay.
Copyright Business Recorder, 2026