The Impossibility of Pakistan getting out of the IMF Bailout Cycle without Structural Reforms
The large budget deficit, mounting debt burden, political instability, high inflation, and rising prices of consumer goods have grappled Pakistan’s economy for the past few years. This has led to Pakistan reaching out to the IMF for financial hand-holding. Though massive, the IMF bailout is nothing but an unsustainable, stop-gap solution to the ailing economy. The ailing macroeconomic variable and deteriorating socio-economic conditions are the result of the issues systemic to the fabric of its polity, economy, and society.
To ensure the sustainability and effectiveness of aid and subsequently reduce its dependency on the same, an economy has to make changes to multiple economic indicators: whether it is taxation, education, tourism, health sector, trade and industries, or foreign affairs. The legislature and executive organs of the government have to ensure the framing and implementation of sound economic policies. Pakistan, despite its tryst with troubled destiny, hasn’t taken any effective measures to correct its course of action. For instance, Islamabad is consistently spending less and a lesser fraction of its GDP on education. The education budget has been shrinking. In 2022, the Pak government spent only 1.9 percent of its GDP on education compared to 2.65 percent in 2015, lying behind other South Asian and sub-Saharan countries, despite being well-versed with the fact that its 26.2 million children are out of school. Not just underspending, the education sector also suffers from misspending as any increase in the education budget is subjected to leakages through crony capitalism and corruption, and commission-based construction work contracts of schools, which provide fertile ground for corruption, along with other problems like teacher absenteeism and teachers-politicians’ linkages. Thus, unless reforms are executed in this sector, the state of education and the future of human resources will remain bleak, dwindling the possibility of the economy standing on its own.
On the fiscal policy front, Pakistan’s taxation system is highly regressive and another sector that needs urgent attention. With a low tax-to-GDP ratio, stuck around 10 percent, much lower than the Asia-Pacific average of 19.8 percent over the last couple of years, Pakistan’s tax system is often called out by experts as oppressive, lop-sided, flawed, corrupt, and a mockery.
Islamabad has failed to implement a straightforward solution to the problem, which is the expansion of the tax base. The state has been occupied with tax structures that lack economic rationale as the imports are heavily taxed, which makes it lucrative for firms to sell domestically instead of exporting, which in turn crowds out potential revenue from exports. This also disincentivizes the domestic producers to upgrade themselves to compete at the global level. This further hinders the chances of export-led growth, adding to the B-O-P problem.
The incentive structure is also lop-sided, which incentivizes investment in real estate, a non-tradable sector, rather than the production of exportable items. This crowds out investment in enhancing the production capacity. Moreover, tax incentives arising from investment in real estate benefit only the rich, as they can afford to deal with real estate. Thus, there is a lack of a strong political will to stop tax evasion and reform the system.
The economy’s annual budget should ideally indicate its economic objectives and development plan and reflect its plan to get out of the debt cycle. However, Islamabad’s 2024-25 budget, unfortunately, lacked any welfare or developmental agenda. The government again hiked its defense spending by nearly 15 percent (allocated amount of Pakistani Rs 2,122 billion in the 2024-25 budget), despite the fact that the economy is struggling to secure newer loans from the IMF to meet its fiscal deficits and external liabilities. The budget also perpetuates discrimination, as evident from the fact that about 18 percent tax has increased on essentials like flour, pulses, sugar, spices, and other food items like formula milk. The borrowing pattern is so excessive that nearly half of Pakistan’s annual budget is spent on interest payments.
On the international trade front, despite being on the list of EU’s GSP+ (Generalised Scheme of Preferences Plus) status, the benefits are not reaching the masses. Pakistani textile factory workers supplying big brands in Europe under the GSP+ scheme is being paid less than $35 a month, far lower than the legal minimum wages in Pakistan, along with other exploitations in the abusive work environment, where workers, especially women, suffer all forms of abuse, forced overtime, and denial of basic needs like sanitation facilities or medical and maternity leaves. On the energy sector front, as energy tariff hikes as per the IMF program, the cost of production is expected to rise up, further reducing industrial growth and compelling Pakistan to seek financial aid.
Moreover, the government borrows heavily from domestic sources for spending on its development and non-development expenses, adding to the ballooning up of domestic debt and interest repayment problem. The Pakistani economy needs a solution that ameliorates the structural issues related to patronage politics, elite capture, and excessive military control, as it hampers its domestic industrial growth, education, health sector, businesses, and everyday politics. Lest Pakistan’s economy is doomed to swirl in the never-ending spiral of more and more borrowing.
The economy seeks reforms, period. In a scenario where conditions of different sectors of the economy and society are in the doldrums, and there is severe inertia on the government’s part to bring reforms in the ailing sectors, IMF’s aid seems like a patchwork solution, with a recurring need to knock IMF’s doors as soon as you run out of current funds.
As mentioned by journalist Shahbaaz Rana, “The new IMF program for Pakistan aims to stabilize the country’s economy, but its potential to drive long-term growth and development remains uncertain. While the program addresses some critical issues…, it does not tackle the structural problems in Pakistan’s economy” That is what we mention here, the structural issues, which no amount of external help, intervention or organization can help. The economy faces a trade-off: whether to choose sound economic policies and strengthen its economy, or continue with its ways and benefit the selected few at the cost of millions of people. Borrowing from the Dickensian world, it is the ghost of the economic past that Pakistanhas to fix in order to helpits ghost of the economicfuture.
