Can Pakistan live beyond bailouts?

Pakistan's reliance on the International Monetary Fund (IMF) has become a recurring necessity, with the country seeking a bailout from the global lender of last resort every three years.

Currently under its 25th IMF programme — a $7 billion Extended Fund Facility (EFF) — which has provided critical support to avoid external default. While this programme has provided short-term fiscal and external stability, the fundamental question remains: is the IMF's prescription truly a cure for our deep-rooted economic ailments, or its merely delaying the next economic crisis?

There have been significant positive developments. Inflation has dropped below 5%, and fiscal targets — including the primary surplus and overall deficit — are likely to be met. However, much of this is due to one-off revenue sources such as central bank profit and petroleum levy rather than sustainable revenue growth.

Inflation has eased primarily due to the high base effect, weakened demand, and erosion of the purchasing power of a large majority of the people. This enabled the State Bank of Pakistan to cut the policy rate by 45%, reducing borrowing costs of the government as well as the private sector. However, low tax collection and a narrow tax base remain unresolved issues. Key sectors — including trade, retail, agriculture and real estate — remain largely untaxed, while a significant portion of the economy remains informal.

On the external front, the current account surplus in the first half of the fiscal year has not resulted from export expansion or productivity gains but rather from a sharp deceleration in imports due to low GDP growth (<3%). With industrial output stagnating and private sector investment sluggish, the sustainability of this surplus remains in question. Pakistan's continued dependence on imports and consumption rather than industrial expansion leaves it vulnerable to another external sector crisis post-IMF.

Despite repeated commitments, no major privatisations — including PIA, distribution companies (Discos) and Pakistan Steel Mills — have been executed. Lack of political will, an ineffective privatisation framework and bureaucratic inefficiencies have stulted privatisation for more than two decades. While the SOE Act 2023 was enacted and an oversight mechanism through the Cabinet Committee on SOEs has been established, implementation of governance reforms in the SOEs remains extremely slow and challenging. Without accelerated privatisation and governance reforms, loss-making entities will continue draining public resources.

The current policy of excessive taxation and soaring energy tariffs to contain fiscal deficit is discouraging investment and pushing businesses into the informal sector. While the IMF emphasises revenue collection, it overlooks the structural barriers to business growth and technological transformation. High energy costs reduce industrial competitiveness, exorbitant tax rates and excessive regulations deter investment and stifle private sector growth.

A fundamental issue with Pakistan's economy is its oversized government and inefficient public sector, with too many departments and agencies consuming a significant portion of revenues while delivering poor services. Rather than facilitating private sector growth, policymakers continue expanding public sector and state control, crowding out investment. While both the IMF programme and policymakers stress the importance of the private sector, this does not go beyond rhetoric.

Without governance reforms that promote efficiency, competitiveness, and innovation, Pakistan will continue to fall behind in industrial development and productivity growth. A thriving private sector is essential for long-term economic health, yet current policies — including high taxation, expensive energy and excessive regulation — hinder business expansion and competition.

Pakistan’s economic policies, including past IMF programmes, have been heavily focused on short-term stabilisation through tax hikes and tariff increases, rather than boosting productivity and fostering investment. Raising tax rates without broadening the tax base encourages tax evasion, informalisation and a cash-based economy, undermining sustainable growth in the economy. High import tariffs, energy price hikes, and indirect taxation discourage local industries from expanding, innovating, and increasing exports.

The real focus should be on enhancing productivity for export-led growth rather than consumption-driven growth. Boosting productivity across industries will drive sustainable economic expansion while reducing reliance on remittances and external financing.

Achieving this requires policy reforms that promote competitive manufacturing, technology adoption, and industrial efficiency. A pro-business regulatory environment and effective enforcement are crucial for attracting investment – including Foreign Direct Investment (FDI) and fostering entrepreneurship.

A major missing element in Pakistan’s economic strategy is the development of a robust startup ecosystem. Unlike many emerging economies, Pakistan lacks risk capital in the form of venture capital and private equity funds. Without access to risk capital, startups struggle to scale, and innovation-driven economic growth remains stunted. Encouraging venture capital investment through policy incentives, regulatory reforms, and government-backed innovation funds is critical for driving technological advancements, increasing productivity, and creating jobs.

To break the cycle of economic crises, structural reforms beyond the IMF's short-term prescriptions are essential. Weak coordination between federal and provincial governments creates inefficiencies in policy implementation, fiscal management and public spending. Reducing bureaucratic red tape, ensuring policy stability, and attracting long-term investment are crucial for industrial expansion.

Pakistan's economy remains low-productivity and import-dependent. Without AI, automation and digitisation, Pakistan will continue falling behind globally. Education system failures have left youth unequipped to make significant contributions to economic development. Urgent reforms should focus on improving basic education, integrating STEM and digital curricula, reducing out-of-school children, strengthening higher education, and enhancing vocational training to create a globally competitive workforce.

Digitisation can enhance tax collection, improve transparency and streamline governance, yet it remains absent from IMF-mandated reforms. Key areas for digitisation include taxation and revenue collection, public financial management, land registries, education, healthcare, policing, and other citizen services. Economic policy decisions in Pakistan remain reactionary rather than data-driven. A shift towards data-driven decision-making and independent policy advisory institutions is crucial for effective governance.

Public financial management remains weak, with poor budget planning, inefficient expenditure allocation and lack of fiscal discipline. Zero-based and outcome-based budgeting should replace the current ineffective system. Debt sustainability planning must become a priority, and transparent utilisation of development funds must be ensured to minimise misuse. Strengthening audit and accountability mechanisms is critical for reducing corruption and ensuring taxpayers' money is used effectively.

Pakistan’s governance challenges extend beyond economic mismanagement to political instability, weak institutions and inconsistent policies. These factors erode investor confidence and disrupt economic planning. Governance reforms at federal and provincial levels must focus on ensuring policy continuity, enforcing the rule of law in business regulations, and improving institutional efficiency. The IMF’s governance review initiative could be a step in the right direction if followed by meaningful action.

Historically, Pakistan's economic performance deteriorates immediately after IMF programmes end. This was evident in 2017-18, when the current account deficit surged to $17-20 billion immediately after the successful completion of the IMF programme, requiring another bailout in 2019, and again in 2022, when the government attempted economic expansion in violation of IMF programme conditions leading to severe external financing challenges triggering another IMF intervention in 2023 and the current EFF programme in 2024. Short-term IMF stabilisation does not resolve deep-rooted economic inefficiencies. Without structural reforms, Pakistan is bound to face another crisis post-IMF.

As the IMF team conducts its first review, key questions remain: fiscal deficit targets were met, but is this sustainable? Why is the tax base still narrow despite repeated IMF programmes? Why has privatisation stalled? How do high energy tariffs and excessive taxation support investment? Why aren't digitisation and promoting innovation core priorities? What is the post-IMF strategy to prevent another crisis in 2028?

Pakistan has been in an economic ICU for decades, relying on repeated IMF bailouts instead of addressing structural weaknesses. While the IMF provides temporary relief, only real governance, productivity-driven reforms and a dynamic private sector can ensure long-term economic stability.

Policymakers must seize this opportunity to put Pakistan on a sustainable growth path — not just delay the next crisis.

The writer is a former managing partner of a leading professional services firm and has done extensive work on governance in the public and private sectors. He posts @Asad_Ashah

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

Originally published in The News