Zafar Iqbal
The International Monetary Fund’s approval of the latest review of Pakistan’s ongoing programme arrives at a moment when the global economic order is under visible strain. Energy markets are unsettled by the continuing crisis in the Middle East. Supply chains are adjusting to the realities of a more fragmented and unpredictable geopolitical landscape. For most countries, this would be cause for heightened caution. For Pakistan, whose external position has long been among the most vulnerable in the developing world, the timing of this approval carries particular weight. It is not merely a bureaucratic milestone. It is a lifeline extended at a moment when the currents running beneath the surface of the global economy are unusually dangerous.
The approval itself was not in serious doubt. Pakistan has remained broadly on track under the programme, and Islamabad’s relationship with the Fund, however tense at moments, has followed a pattern of sufficient compliance to keep the process moving. The new tranche offers meaningful relief for a balance-of-payments position that depends heavily on external financing and the continued flow of remittances from overseas Pakistanis. Both of these are stable for now, but neither is immune to disruption. Remittances are sensitive to economic conditions in host countries. External financing is sensitive to global interest rate environments and investor confidence. The tranche buys time. It does not buy immunity.
What is more significant than the approval itself is the price attached to it. The government reportedly accepted a dozen new conditions in exchange for the review’s clearance, pledging to maintain its stabilisation commitments in the face of mounting pressure to ease. These conditions are not administrative formalities. They represent binding constraints on economic policy at a moment when political temptations to loosen the fiscal belt are considerable.
The most consequential of these commitments is the agreement to maintain a tight monetary stance despite growing domestic calls for interest rate cuts. The argument for cuts is not without logic. High borrowing costs suppress private investment, weigh on industrial activity, and make the government’s own debt servicing burden heavier with each passing quarter. But the IMF’s insistence on holding the line reflects a concern that is equally legitimate: if global energy prices continue to rise as a result of the Middle East conflict, the inflationary spillover into Pakistan’s import-dependent economy could be severe and rapid. A premature rate cut in such an environment risks reigniting the very inflation that the current programme has worked to bring under control. The Fund is asking Islamabad to choose macroeconomic stability over short-term growth impulse. That is a difficult choice, but it is the right one.
Equally difficult, and equally important, is the commitment to continue dismantling untargeted energy subsidies for lower-middle-income consumers. This is politically treacherous ground. Energy subsidies in Pakistan have historically served as a cushion against popular discontent, and removing them, even when they disproportionately benefit those who least need support, invites genuine public anger. The government has committed to pressing ahead regardless. Beyond that, it has agreed to deliver a primary budget surplus equivalent to two percent of gross domestic product. This is a figure that demands real fiscal discipline and leaves almost no room for the kind of expansionary manoeuvring that Pakistani governments have traditionally reached for when electoral calendars begin to feel near.
The IMF has praised the pace and direction of programme implementation. That praise should be received with gratitude but not with satisfaction. The current stability, such as it is, rests on an architecture that is externally financed rather than internally generated. It is not the product of durable gains in productivity, competitiveness, or the structural transformation of an economy that has long underperformed its potential. Macroeconomic indicators have improved, but they remain fragile. Reserves have recovered, but they remain thin relative to external obligations. Inflation has eased, but the conditions that historically generate inflation in Pakistan have not been resolved. Staying the course, as the Fund advises, is necessary precisely because the foundations beneath the apparent calm are not yet solid.
History counsels caution on this point. Pakistan’s relationship with the IMF has followed a recognisable and dispiriting rhythm over many decades. Initial compliance under pressure. Temporary stabilisation. A brief window of relative comfort. And then, when the immediate financing need eases and political priorities reassert themselves, a gradual reversal of the conditions that made stability possible in the first place. The country then finds itself, within a few years, back at the Fund’s door with a fresh crisis and a fresh set of humbling demands. The current external environment offers no room for that cycle to repeat. Rising oil prices alone carry the potential to widen Pakistan’s import bill sharply, drain foreign exchange reserves, and reignite inflationary pressures that have only recently begun to ease. Any premature loosening of fiscal or monetary discipline would not merely slow the recovery. It could erase it.
But the more profound challenge lies beyond the immediate calculus of reviews and tranches. Pakistan cannot permanently sustain an economic model in which structural weaknesses are financed by external lenders rather than corrected by domestic policy. Broadening the tax base, which remains among the narrowest of any economy of comparable size, is no longer a medium-term aspiration. It is an urgent necessity. Reforming loss-making state-owned enterprises, which drain public resources and crowd out productive investment, cannot be deferred indefinitely through political convenience. Improving energy efficiency, which would reduce both the import burden and the cost of doing business, demands sustained technical and regulatory attention. Enhancing export competitiveness, which alone can generate the foreign exchange earnings that reduce dependence on borrowed stability, requires investment, consistency, and a business environment that the country has not yet managed to consistently provide.
The world is entering a period of heightened uncertainty. External financing conditions may tighten. Geopolitical disruptions may multiply. In such a world, the countries that endure are not those that manage the next crisis most skilfully with borrowed money. They are those that have done the hard internal work to need less of it. Pakistan has been given another opportunity. The question, as it has always been, is whether it will use it.
The books by Republic Policy Think Tank, The Bureaucratic Coup, The books Fixing the Executive Branch of Government in Pakistan, Fixing the Legislative Branch of Government in Pakistan, and Fixing the Judicial Branch of Government in Pakistan are available at bookstores across Pakistan, particularly at Vanguard Books.
