Tighter conditions

With the country’s next budget ostensibly less than a month away, the government and the IMF began high-level talks in Islamabad on Monday to discuss the upcoming budget. The talks will focus on ensuring that the budget meets the various targets and conditions Pakistan has agreed to under the IMF’s $7 billion Extended Fund Facility, with the country securing $1 billion from the Fund earlier this month and approval of a fresh $1.4 billion under the IMF’s climate resilience fund. While the help of the EFF in stabilising Pakistan’s economy is undeniable, the programme has required the country to make some pretty brutal adjustments and has arguably come at the cost of more growth. Now, with regional tensions mounting and an increasingly fraught global trade and economic landscape, the IMF has tightened the loan conditions Pakistan will have to meet going forward. Pakistan must reportedly seek parliament’s approval for the federal budget for the next fiscal year (FY25-26) in line with the IMF agreement by June, implement agricultural income tax reforms across all provinces and draft a plan for phasing out industrial incentives by the end of the year. The lender has also sought timely electricity and gas tariff adjustments, which are already proving too much to bear for many Pakistanis, and proposed legislation to convert the majority of the energy sector debt in a bid to reduce the financial burden on power firms. And while the government and IMF have reportedly tentatively agreed to a tax target of Rs14,307 billion, negotiations continue to potentially lower it to Rs14,100 billion. The lower tax target would be contingent on further expenditure cuts.

The country has also agreed to remove restrictions on the import of used vehicles and has committed to substantially reducing barriers to international trade, including through duty elimination under the new National Tariff Policy (NTP) and the auto policy. The NTP envisages substantial tariff reductions and simplification of the customs regime, including phasing out all additional customs duties (ACDs), reducing all regulatory duties (RDs) by 80 per cent and reforming the 5th Schedule to the Customs Act. The NTP is expected to come into effect on July 1. The picture that emerges from these developments is one of a government under greater pressure to reduce spending, raise revenue collection and limit incentives and protections for local industries. While these changes may indeed be essential for Pakistan to sustain its economic recovery, they will still be quite painful. As negotiations with the IMF progress, the government is expected to fight for more fiscal space. Among the most contentious items thus far are debt servicing and development spending. IMF projections put the former at Rs8.7 trillion for FY2025-26, though internal estimates suggest Rs8-8.2 trillion, below the current year’s Rs8.7-8.9 trillion allocation. And the finance ministry’s Rs921 billion ceiling clashes with the planning ministry’s demand for over Rs1,000 billion in development spending.

However, even if Pakistan makes all the tough adjustments the IMF is calling for, its economic future remains far from promising. Last year, the IMF estimated that the nation will need more than $100 billion in external financing until 2029, and it has also highlighted the risk that rising tensions with India pose to economic stability. This is without even mentioning the turmoil unleashed by US President Trump’s tariffs on the global economic landscape. IMF help alone, harsh as its price tag may be, will not be enough to secure the country’s economic future going forward. This does not mean that the EFF is not important. Staying in the programme remains crucial for Pakistan, but so does finding ways to secure more investment and revive growth in a climate where the government has less to spend. In that sense, the IMF’s urging for less protections and incentives for inefficient and uncompetitive local industries, something local analysts have been clamouring for for decades, might be a blessing in disguise. Averting default is not an achievement to be scoffed at, but it is a shield that can be used only so many times.