Why Pakistan's IMF bailout won't be its 'last' as PM Sharif says

The International Monetary Fund (IMF) has once again agreed to extend a substantial $7 billion loan to Pakistan to stabilise its teetering economy. This deal, which marks Pakistan’s 24th IMF bailout since 1958, comes with stringent conditions and reforms.

Pakistan Prime Minister Shehbaz Sharif told his ministers that this would be the last time the nation would require IMF assistance. “This programme should be considered the last programme,” Sharif told ministers and revenue officials in Islamabad last week, “We should tax those who are not being taxed.”

However, this optimism may be premature. Despite the pledges and reforms, Pakistan’s deep-seated economic issues suggest that future IMF bailouts might still be on the horizon.

Structural economic problems

Pakistan’s economy is riddled with structural problems that have persisted for decades. Among the most pressing is the country’s chronically low tax base. In a nation of over 240 million people, only a fraction of the population contributes to income tax, with just 5.2 million individuals filing returns in 2022.

This abysmally low tax compliance results in inadequate government revenue, which undermines public services and infrastructure development. The latest IMF agreement requires Pakistan to implement far-reaching reforms to expand its tax base, including taxing traditionally untaxed sectors such as retail, export, and agriculture.

Pakistan now aims to raise nearly $46 billion in taxes during the 2024-25 fiscal year, a 40 per cent increase from the previous year.

Under the IMF bailout deal, Pakistan has to raise its highest tax rate up to 45 per cent from the current 35 per cent. In June, the talks had come to a breaking point after the Pakistani government hesitated to implement such a drastic tax reform proposal. 

The Pakistani government thought the 45 per cent tax rate was backbreaking for its salaried and non-salaried individuals on a monthly income of over Pakistani Rs 4,67,000 ($1,677). At present, the maximum rate of 35 per cent applies to a monthly income of over Pakistani Rs 5,00,000 ($1,795).

Political and economic instability

Political instability in Pakistan has also severely impacted its economic prospects. The country has experienced a series of political upheavals, including the dramatic removal of Imran Khan as the prime minister. That created an environment of uncertainty, which has continued despite an election and the installation of a coalition government under Shehbaz Sharif. His swearing in happened against the backdrop of equally dramatic legal clearance that his elder brother and former Pakistan PM Nawaz Sharif was given from the courts.

The resulting policy discontinuity has made long-term economic planning difficult. Additionally, Pakistan’s economy was devastated by the Covid-19 pandemic and subsequently the catastrophic 2022 monsoon floods, which further strained its already fragile financial system. These events highlight the volatility and unpredictability that continue to plague the nation’s economic landscape.

Reliance on external aid

Pakistan has taken two dozen financial assistance to bail out its economy since the late 1950s. Despite repeated assertions that each bailout would be the last, Pakistan’s reliance on external aid has only increased. Last year, the country narrowly avoided defaulting on its debt obligations thanks to last-minute loans from friendly countries and an emergency IMF package.

With public debt soaring to $242 billion and debt servicing consuming half of the government’s revenue, the economic outlook remains bleak. The current IMF deal is yet another attempt to stave off immediate financial collapse, but it does not address the underlying issues that have led to repeated bailouts.

Short-term relief, long-term challenges

While the IMF bailout provides short-term relief, it comes with conditions that require significant economic adjustments. Though Pakistan aims to raise 40 per cent more revenues in 2024-25 fiscal compared to 2023-24, this target seems ambitious.

The target of raising $46 billion in taxes will be challenging to meet for the Shehbaz Sharif government, particularly given the country’s informal economy, which constitutes a large portion of its economic activity. The government has also introduced unconventional measures, such as blocking the SIM cards of non-compliant taxpayers, to widen the tax net. However, these measures may not be sufficient to achieve the necessary revenue targets.

Public backlash and political consequences

The economic reforms mandated by the IMF are often unpopular and can lead to public backlash. The current government faces a precarious political situation, with widespread protests already erupting over tax hikes and increased household bills.

These austerity measures, while necessary for economic stabilisation, are hugely unpopular and risk further eroding the government’s support base. There are also practical problems associated with such drastic tax measures. The World Bank has warned that an additional 10 million Pakistanis could fall below the poverty line due to these measures, exacerbating social and economic tensions. In September 2023, the World Bank reported that 96 million Pakistanis (about 40 per cent of the population) were already below poverty line.

Patterns and outlook

The cyclical nature of Pakistan’s IMF bailouts raises questions about the effectiveness of these programmes in fostering long-term economic stability. Each bailout has been accompanied by similar conditions and promises of reform, yet the country continues to find itself in financial crises.

Analysts argue that without fundamental changes to the way the country is governed and its economy is managed, these patterns are likely to persist. The IMF’s latest loan, while necessary to prevent an immediate economic collapse, does not guarantee that Pakistan will not require future assistance.

Is there a way out?

For Pakistan to truly break free from its reliance on IMF bailouts, it needs to undertake comprehensive and sustained reforms. This includes expanding the tax base, reducing fiscal deficits, and addressing corruption within the tax authority.

In his recent interviews — both before the final IMF deal was agreed upon and after — Pakistan’s Finance Minister Muhammad Aurangzeb has highlighted the need to improve the Federal Board of Revenue’s reputation, which is currently marred by corruption and inefficiency. Furthermore, Pakistan needs to shift its economic model from one that is heavily import-dependent to one that fosters domestic production and export-oriented growth.

Prime Minister Shehbaz Sharif has paid visits to countries such as Saudi Arabia, the United Arab Emirates, and China recently seeking foreign investment. While these are steps in the right direction, these investments — if and when they come depending also on the internal security challenges due to growing terrorism in the country — would require channelling into productive sectors that can generate sustainable economic growth.

The Pakistani government also needs to ensure that these investments are managed transparently and effectively to prevent mismanagement and corruption. The country has faced allegations that it has diverted foreign aids and bailout packages to meet other ends, including for exporting state-sponsored terrorism to foreign lands such as India.

So, what it means

While the IMF’s latest bailout package provides much-needed financial relief, it is unlikely to be Pakistan’s last unless the country addresses its deep-seated economic and structural issues. The challenges are formidable, but with decisive action and sustained commitment to reform, Pakistan can hope to break the cycle of dependency on external aid.

For now, Pakistan has to go through the difficult path of economic stabilisation, balancing the immediate needs of financial solvency with the long-term goal of sustainable and inclusive growth. This may well have a political cost for the government of the day — clearly, not an easy task for Shehbaz Sharif.