Despite achieving a record 24th staff-level agreement with the International Monetary Fund (IMF) on July 12, Pakistan's economic troubles continue.
The fresh bailout amounting to US$7 billion over 37 months was followed by the approval of a heavily taxed budget for the 2024-25 fiscal year, aimed at boosting government revenues and reducing the deficit to meet IMF requirements.
The budget included higher taxes on agricultural income, which was criticised by analysts who argued that it would add to the country's debt burden and would not address core issues.
Pakistan's economy is still in shambles, with inflation rates reaching nearly 30 per cent in FY23 and 23.4 per cent in FY24, the highest in Asia. Previous IMF bailouts have failed to stabilise the economy, and the country now faces external debt payments of about USD 25 billion this fiscal year, while its foreign exchange reserves stand at around USD 9 billion. “Pakistan owes the IMF around USD 8.4 billion, to be repaid over the next 3-4 years. The USD 7 billion bailout package is short of this amount. Nothing to celebrate,” a leading economic commentator commented on Twitter.
The IMF's last staff report highlighted a 'narrow' path to debt sustainability, citing 'acute,' 'exceptionally,' and 'uncomfortably high' risks from high gross financing needs and limited external financing. This precarious situation has raised concerns about the impact of additional external debt, with some analysts predicting severe austerity measures.
The Pakistani people, already facing double-digit food inflation, a historic cost-of-living crisis and political instability, could face even more hardships. Socio-political instability could impede economic recovery and cause significant losses to external lenders.
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According to the IMF, Pakistan will have to repay an average of US$19 billion in principal annually over the next five years, which is more than half of its export revenue. Additionally, it needs at least US$6 billion annually to finance the current account deficit, taking its total external financing needs to US$25 billion per year by 2029. With total tax revenues barely 10 percent of GDP, it seems impossible to meet these obligations without taking on more debt.
Structural issues prevent Pakistan from attracting the necessary foreign direct investment (FDI), which is less than US$2 billion annually. Even the Special Investment Facilitation Council (SIFC), launched by General Syed Asim Munir to stabilise the economy by attracting FDI, has failed to secure meaningful investment. The growing involvement of the military in daily government operations further complicates efforts at logical economic reforms.
While the political leadership is celebrating the approval of new loans by the IMF, they are ignoring the fact that the country will have to repay more than US$8 billion to the fund over the next four years. As a condition for the new loan, Pakistani authorities assured the IMF that they would bring taxation on agricultural income at par with corporate and other tax rates. This is a significant challenge for the middle and low-income groups in Pakistan, where agricultural income is historically undertaxed despite its substantial contribution to GDP and employment.
Reports suggest that under the new IMF deal, the highest effective tax rate could rise from the current 15 per cent to 45 per cent by 2025. This increase is likely to lead to inflation, especially in food prices, which will hit consumers across the country and could reduce the popularity of ruling parties among rural voters. Amid an unfriendly budget and growing political strife, the focus in Pakistan has shifted from the economy to politics. Beijing has not yet approved Islamabad's request to restructure USD 28 billion in Chinese debt, a significant part of Pakistan's official debt. Chinese loans, which are more expensive than multilateral loans and have a shorter term, add to the financial strain.
According to the United Nations Conference on Trade and Development's World Debt Dashboard, Pakistan spends 6 percent of its GDP on interest payments, more than any other developing country. This leaves limited resources for social spending, making Pakistan one of the lowest spending countries in the world. Without addressing microeconomic indicators such as skills development and job creation, Pakistan remains dependent on new loans or debt forgiveness to avoid default. Growing political and security instability diverts attention from necessary economic reforms, limiting the benefits of new IMF loans.
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