Pakistan’s missing graduation plan

Stabilization has become a habit. Graduation requires a plan.

Pakistan repeatedly reaches a familiar point. The International Monetary Fund (IMF) completes a review, releases a tranche, reserves edge up, inflation cools, and the authorities declare stability restored. As the programme recedes, imports recover, foreign exchange drains away, and another programme follows. Since joining the Fund in 1950, Pakistan has entered 25 IMF lending arrangements. The cycle remains unchanged: stabilization, relapse and another rescue.

The central omission is a credible national strategy to graduate from prolonged dependence on IMF support. Passing reviews demonstrates compliance; graduation means building an economy that can sustain growth, meet external obligations and attract productive investment without repeated exceptional financing. The measure of progress is not reviews passed, but dependence reduced.

Why stabilization does not become graduation

Pakistan has made measurable progress under its current Extended Fund Facility: a third consecutive primary surplus of 1.7 percent of GDP in FY26, a consolidated fiscal deficit of 2.6 percent, and a substantial decline in inflation. Reserves, built through market purchases rather than borrowing, cover about three months of imports. Rating agencies have upgraded the country, though it remains below investment grade. Pakistan has also entered China’s onshore capital market with its first AIIB-guaranteed Panda bond.

Stabilisation is necessary to restore macroeconomic balance, but its composition determines whether it advances economic transformation or merely manages immediate pressures. Higher levies, formal-sector taxation, interest-rate reductions and temporary fiscal measures may meet near-term targets without fixing weaknesses in revenue mobilisation and expenditure. Nor does an improving current account signal greater competitiveness when driven by import compression and remittances rather than stronger exports.

The limits of adjustment are evident in weak investment, productivity, job creation and exports. Investment fell to a decade-low 14.4 percent of GDP in FY26, private fixed investment stood at 9 percent, and FDI remained subdued. Banks hold around 70 percent of government domestic debt, financing persistent deficits at the expense of private investment. Private-sector credit has fallen to around 9 percent of GDP, against a historical average of about 20 percent during 1960–2010. Only 318,585 of nearly 7 million SMEs borrow from banks. The state is absorbing resources that should finance productive enterprise.

Labour productivity grew by just 0.4 percent annually between 2014 and 2024. Job creation has lagged annual labour-force growth of around 3.6 million, leaving many entrants struggling to find productive employment. Women’s labour-force participation remains exceptionally low at 24.4 percent. The social cost is stark: poverty rose from 21.8 percent in 2018–19 to 28.9 percent in 2024–25. Exports of goods and services remain around 9 percent of GDP, while external debt servicing has risen from 18 to 44 percent of these exports over the past decade.

These weaknesses in investment and productivity leave economic recovery import-dependent, repeatedly exposing Pakistan to external pressures and forcing demand compression. Reserves are a stock; external financing requirements are a recurring flow. Higher reserves provide a buffer, but lasting resilience requires stronger productivity and exports. Pakistan must fix the productivity weaknesses that make every recovery unsustainable.

What other countries teach

Four countries offer important lessons on graduating from IMF dependence. Morocco illustrates how structural reforms can support an exit from IMF borrowing; Jamaica highlights the importance and limits of domestic ownership; the Philippines shows how weak implementation can undermine reform; and India demonstrates how a crisis can catalyse wider economic transformation.

Morocco had nine IMF arrangements between 1980 and 1993, entered no further IMF engagement, and repaid its IMF borrowing in 1997. Reforms in taxation, public expenditure, public enterprises and regulation accompanied liberalization. “Gross national saving rose from 16 percent of GDP in 1980–82 to almost 23 percent in 1990–92.”

After its last IMF lending arrangement expired in 1996, Jamaica pursued a homegrown programme that supported fiscal discipline and external reserves. Yet debt remained high, real interest rates elevated and growth weak.

The Philippines had 23 IMF programmes between 1962 and 2000, yet external imbalances and debt crises persisted. Weak ownership, unrealistic timetables and implementation failures delayed progress. Programme compliance alone cannot substitute for institutional capacity and sustained delivery.

India’s 1991 balance-of-payments crisis catalysed reforms that opened the economy, lowered barriers to trade and investment, and expanded private enterprise. Growth in services, particularly information technology, generated new export earnings.

What graduation should mean for Pakistan

Graduation requires recognising the scale of change needed: reforming the state, removing entrenched barriers, reshaping incentives and strengthening market competition. This transformation in the current context rests on four pillars.

First, make stability productive. Fiscal discipline must fundamentally improve the quality of public spending, protect high-return investment and human development. Exchange-rate policy must prevent real overvaluation and sustain competitiveness. This requires fundamental state restructuring: right-sizing government, overhauling federal-provincial fiscal arrangements through a new NFC Award and functional Provincial Finance Commissions, and placing development resources with the level of government accountable for delivery.

Second, eliminate the structural sources of recurring fiscal and energy pressures. Circular debt, inefficient subsidies, loss-making SOEs and a narrow tax base cannot be managed indefinitely through higher tariffs and temporary financing. The headline deficit also masks wider liabilities from energy and public enterprises. This requires deep, technically grounded reform: integrated planning across power, gas, oil and renewables; power market restructuring; a comprehensive petroleum-sector overhaul; rational pricing, targeted subsidies, competition, and resolution of legacy liabilities. Shifting freight from road to rail through modern logistics can further reduce diesel consumption and the petroleum import bill.

Third, undertake a supply-side reset to expand productive capacity. Agriculture holds the key to this transformation through higher yields, water productivity, diversification, and value addition. Manufacturing needs greater investment in domestic intermediate goods production, deeper industrial linkages and competitive input costs to strengthen domestic supply chains, reduce import dependence and boost exports. Tradable services offer another avenue for export diversification. This requires eliminating unnecessary regulation, redundant licensing and compliance, opening protected markets to competition, dismantling tariffs that shelter inefficiency and lowering the cost of doing business. Skills development and greater women’s economic participation must also expand the productive workforce. This transformation requires coherent industrial and trade policies, backed by a capable, professionally equipped and delivery-oriented state.

Fourth, broaden the sources of productive finance. Pakistan must diversify beyond bank-dominated finance, where government borrowing crowds out private investment. This requires deeper equity and corporate debt markets, mobilisation of pension and insurance savings, and greater use of venture capital, private equity, leasing and risk-sharing finance. Modern cooperatives and producer organisations should also be developed to pool resources, achieve scale and improve smaller producers’ access to finance and markets. Foreign direct investment must bring technology, skills and export linkages, not merely foreign exchange. Capital must shift from financing the state and consumption towards enterprise, innovation, productive capacity and exports.

Graduation requires federal, provincial and local ownership, aligned resources, political consensus and private-sector engagement. Progress must be tracked against transparent milestones. Graduation is not a date attached to the end of an IMF arrangement. It is the outcome of a sustained transformation in an economy’s capacity to save, invest, produce and export.

Copyright Business Recorder, 2026