Pakistan is currently working to meet the stringent conditions set by the International Monetary Fund (IMF) as it seeks to finalize a $7 billion loan agreement, which Prime Minister Shehbaz Sharif hopes will be the last IMF borrowing for the country. The loan is seen as critical for stabilizing Pakistan’s struggling economy, but it comes with tough requirements, including structural reforms and the imposition of new taxes, particularly on the retail sector.
The IMF and Pakistan reached a staff-level agreement on a 37-month loan program in July. However, the program still requires approval from the IMF’s executive board. Finance Minister Muhammad Aurangzeb emphasized the government’s commitment to implementing all necessary conditions to secure this approval. He stated that the government is focused on structural reforms, broadening the tax base, and achieving self-sufficiency to avoid future debt dependency.
One of the most contentious aspects of the IMF’s conditions is the imposition of new taxes on Pakistan’s retail sector. These taxes were introduced in the June budget, aligning with the ambitious revenue targets needed to clinch the staff-level agreement with the IMF. However, these measures have sparked significant public backlash, particularly from retailers who staged a nationwide strike last week in protest against the new tax scheme and high electricity rates. Despite these protests, Finance Minister Aurangzeb made it clear that the government would not back down on the new tax measures, urging wholesalers, distributors, and retailers to contribute to the economy.
The government’s resolve to push through with these reforms and tax measures is rooted in the belief that they are essential for achieving macroeconomic stability and sustainable growth. Aurangzeb referred to these steps as “basic hygiene” for the economy, necessary to steer the country towards a more stable and self-sufficient future.
However, there are concerns about the timing of the IMF board’s approval of the loan program. While Moody’s recently upgraded Pakistan’s credit rating to Caa2, citing increased certainty on external financing following the IMF staff-level agreement, the loan approval was not included in the IMF Executive Board’s latest meeting agenda. This omission has raised concerns about potential delays in securing the much-needed funds, which are crucial for stabilizing Pakistan’s economy.
The delay in approval is reportedly due to unresolved issues related to financing assurances from Pakistan’s development and bilateral partners, as well as complications arising from unpaid energy sector subsidies. The eastern province of Punjab and the federal government have been involved in discussions about electricity subsidies, but according to Punjab’s information minister, Azma Bukhari, no formal communication has been made with the IMF regarding these subsidies. The IMF, along with Pakistan’s finance and power ministries, has not provided any immediate comments on the situation.
The power sector’s unresolved debt remains a significant concern for the IMF, which previously ended a $3 billion bailout program in April. That program led to increased tariffs, which adversely affected the poor and middle class, resulting in a reduction in household electricity usage for the first time in 16 years. Addressing these issues is crucial for Pakistan to secure the current loan and avoid further economic deterioration.
As Pakistan’s government navigates these complex challenges, it remains optimistic about securing the $7 billion bailout package next month. Prime Minister Shehbaz Sharif expressed hope that once the IMF board approves the program, the country will enter a new phase, marking the beginning of a more stable and self-sufficient economic era. However, this optimism is tempered by the harsh realities of implementing the required reforms and the potential social and economic fallout they may cause.
