Zafar Iqbal

During a press briefing on Sunday, Finance Minister Muhammad Aurangzeb lauded the ongoing efforts to implement reforms under the post-Staff Level Agreement (SLA) of Pakistan’s nine-month Stand-By Arrangement (SBA) with the International Monetary Fund (IMF). He credited the caretaker government for pushing forward with these efforts and emphasized that the government would not backtrack on crucial reforms. These reforms include steps to overhaul the energy sector, privatize state-owned enterprises, and ensure the collection of all budgeted taxes. Aurangzeb framed these reforms as homegrown solutions, asserting that they would be critical for the country’s economic recovery. However, upon closer examination, some key observations raise significant concerns about the sustainability and efficacy of these reforms, which seem to follow a well-trodden path that has been marked by repeated failures in the past.

A critical analysis reveals that the reforms Aurangzeb refers to are not groundbreaking or novel but rather standard IMF-mandated conditions that have been part of Pakistan’s economic framework for decades. This includes previous IMF programs—twenty-three in total—under which similar reform agendas were pursued but ultimately failed to produce lasting change. One of the key elements of these reforms is reducing the rise in current expenditure, a policy that has repeatedly faltered due to political constraints and entrenched elite interests. The 2024-25 budget, for example, highlights a 21 percent increase in current expenditure, which contradicts the government’s purported commitment to fiscal discipline. This is a telling example of how political considerations, such as maintaining patronage networks and sustaining elite consumption, often undermine the successful implementation of IMF-backed reforms.

Privatization, another cornerstone of the reform agenda, has similarly encountered years of delay. Despite numerous attempts to privatize state-owned enterprises, Pakistan has struggled to create the necessary investment climate to attract the requisite foreign or domestic capital. The failed bidding process for Pakistan International Airlines (PIA) serves as a recent example of this ongoing issue. Furthermore, the lack of empirical analysis on past privatization efforts means that future privatization initiatives may repeat the mistakes of the past. For instance, K-Electric, a major electricity supplier, continues to rely on a tariff equalization subsidy, which amounts to a staggering 171 billion rupees for the current fiscal year. This subsidy is paid for by taxpayers, further burdening the economy and highlighting the inefficiencies within privatized sectors.

The government’s heavy reliance on indirect taxes, which account for approximately 75 to 80 percent of total tax collections, is another point of concern. These taxes, often levied on consumption, disproportionately impact the poorer segments of society, exacerbating income inequality. As a result, Pakistan continues to struggle with high poverty levels, which have reached a worrying 41 percent of the population. This over-reliance on indirect taxes, rather than broadening the tax base through direct taxes on wealth and income, represents a fundamental flaw in the country’s fiscal policy. Instead of addressing these underlying structural issues, successive governments, including the current one, have prioritized short-term fixes such as tax hikes and tariff increases, which have failed to create a more equitable and sustainable economic system.

It is also important to recognize the limitations of the IMF’s reform agenda, which has been implemented by various administrations, including the current one. The IMF’s design, which often focuses on raising tariffs to achieve full-cost recovery in sectors such as energy, overlooks the inefficiencies that plague these industries. Moreover, the frequent reshuffling of board members in state-owned entities, often replacing them with loyalists, has failed to produce tangible improvements in performance. The government’s approach to reforms, while framed as homegrown, reflects a deep continuity with past practices rather than a break from them. There is little evidence that these reforms will meaningfully improve Pakistan’s economic outlook or alleviate the structural issues that have persisted for decades.

In terms of foreign exchange reserves, the situation remains bleak. Despite efforts to shore up reserves through import restrictions and the repatriation of export proceeds, the overall outlook remains fragile. According to the IMF’s staff-level agreement, the country faces continuing challenges in repatriating export earnings in a timely manner, which could further stress Pakistan’s external position. The contraction of the trade deficit, largely driven by these restrictions, provides little comfort when considering the broader economic picture. Inflation, though reported to be lower, is still understated by 3 to 4 percent, and the private sector remains starved of credit. With private sector borrowing negative, it becomes increasingly difficult for businesses to expand production, raise wages, or contribute to economic growth. Consequently, disposable incomes continue to contract, leading to a continued sense of economic stagnation among the public.

The second major point raised by Aurangzeb during his briefing concerns the perception that the failure to implement reforms over the past two decades is largely due to administrative shortcomings. While administrative discipline is undoubtedly important, it is only one component of the equation. More crucially, Pakistan’s reform failures are rooted in the design flaws of these reforms, which have been largely imported from the IMF rather than developed through a nuanced understanding of Pakistan’s specific challenges. These reforms have not been adequately adapted to the local context, and as such, they have failed to deliver the desired outcomes. Moreover, there is an ongoing mismatch between the skills and experiences of those tasked with implementing these reforms and the complex realities they face. Private sector experience, which is often heralded as a solution, does not always translate well into the public sector, particularly in areas like economic policymaking and negotiation with multilateral donors.

Aurangzeb also highlighted the pressing climate challenges facing Pakistan, calling for public support in tackling this issue. While it is true that Pakistan’s contribution to global climate change is minimal compared to its neighbors, the country is highly vulnerable to the effects of climate change, including floods, droughts, and rising temperatures. Pakistan must enact robust legislation to address these challenges, and more importantly, ensure effective implementation. While the Finance Minister’s statement on climate change was timely, it reflects a broader need for a coherent and actionable climate policy, which has often been sidelined in favor of more immediate economic concerns.

In conclusion, while the Finance Minister’s remarks may offer some hope for the future, the underlying issues facing Pakistan’s economy remain deeply rooted in flawed policies and structural inefficiencies. The reforms currently being pursued under the IMF’s guidance mirror those of past programs, which were ultimately unsuccessful due to political constraints, lack of investment, and poor design. The government’s reliance on indirect taxes, failure to address inefficiencies in key sectors, and inability to attract foreign investment all point to a continuation of the status quo rather than a meaningful departure from past mistakes. Until these systemic issues are addressed, the country’s economic future will remain uncertain, with limited prospects for sustainable growth and development.