Pakistan IMF programme underscores risk of prolonged adjustment without growth path

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Pakistan IMF programme growth risk

Highlights

Pakistan secured a staff-level agreement for a $1.2 billion IMF tranche, with macroeconomic targets broadly met but worsening poverty rising to 28.9 percent in 2024-25.
The IMF demands further energy tariff rationalisation and subsidy withdrawals, risking higher burdens on low- and middle-income households amid insufficiently targeted compensatory support.
Persistent narrow tax base, continued evasion by traders and retailers, and under-taxed real estate and agriculture hinder fiscal sustainability and limit growth and household welfare improvements.

Programme progress meets weak household outlook

As reported by Pakistan Business Recorder, Pakistan’s fourth review under the IMF’s Extended Fund Facility produces the expected staff-level agreement, with another $1.2 billion in financing expected subject to the Fund board’s approval.

Macroeconomic indicators offer some reassurance. Fiscal and external accounts are broadly on target, sovereign spreads have returned to pre-2022 crisis levels, and foreign exchange reserves have recovered to levels last seen before the crisis.

But these gains are not translating into stronger household welfare. Official estimates put poverty at 28.9 per cent in 2024-25, up from 21.9 per cent in 2018-19, while the Gini coefficient rises from 28.4 to 32.7 over the same period.

The pressure is intensifying as higher energy costs feed through inflation. Although the wider external environment has become more difficult as the Middle East war spreads and disrupts supply chains, Pakistan’s erosion in purchasing power predates the current conflict and reflects deeper domestic policy failures.

Tax burden and energy reforms test policy choices

The IMF is continuing to press for electricity and gas tariff rationalisation, the removal of cross-subsidies and better-targeted support for vulnerable households. While the economic case for cost recovery and lower circular debt remains strong, the withdrawal of existing subsidies before effective alternatives are in place risks shifting more of the burden onto low- and middle-income consumers.

The article argues that Pakistan should seek greater flexibility in two areas. One is the petroleum levy on furnace oil, introduced under the Resilience and Sustainability Facility reforms, whose rationale has weakened as LNG supplies are disrupted and furnace oil is again needed for power generation; the other is the planned withdrawal of the fuel subsidy for motorcycles, three-wheelers and small cars, which is seen as poorly targeted but difficult to remove without a credible replacement.

A temporary reduction in the overall petroleum levy during the external price shock is presented as a possible compromise, paired with more targeted income support. But any such move would require explicit fiscal trade-offs because it would reduce revenue and still benefit higher-income consumers as well.

The broader structural problem remains Pakistan’s narrow tax base. Traders and retailers continue to evade meaningful taxation, real estate remains undertaxed, and provincial agricultural income tax collections stay far below potential, leaving the formal corporate sector, salaried workers and petroleum consumers to shoulder a growing share of the burden.

That imbalance, combined with a policy response centred mainly on expanded social protection, leaves the economy stuck between fiscal compliance and weak opportunity creation. The central argument is that cash transfers cannot substitute for productive employment, better education, improved nutrition and reforms that expand private investment and household incomes.

Our earlier coverage of the Northern Territory cost-of-living study highlighted how essential expenses have outpaced household incomes over the past decade, with the sharpest strain on low-income and remote residents. It pointed to elevated food insecurity, rising power costs and frequent prepaid electricity self-disconnections, alongside steep rent increases and limited growth in social housing. The report also urged stronger income support and expanded subsidy measures to better protect vulnerable households from worsening affordability pressures.

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