Now that a 24th IMF adjustment program is under implementation, a broad consensus is forming that it is in Pakistan’s interests to make this the last such engagement. The reasons are obvious — the loss of autonomous decision-making by the sovereign, inability to set its own priorities, and getting out of growth-restraining frameworks of short-term performance criteria and structural benchmarks.
How should we translate this desire into a credible strategy? The imperative prerequisites are that we achieve durable political stability, tackle security concerns and take tough policy measures without succumbing to pressures from vested interests. We must also move away from vague statements of intentions and move towards measurable and verifiable targets.
The compelling reason for repeatedly approaching the IMF and other creditors is to cover the external financing gap (recently around $25 billion) that results from current account deficits and annual debt repayment obligations. So, the main goal of an exit strategy ought to be the reduction of this gap to a manageable level. This, in turn, implies a focus on expanding exports and restraining import growth.
Exports
Exports of goods recorded a 14pc growth rate in August. If this rate is maintained for the next four years, the level of exports will reach $50bn by FY28. How can this be facilitated? Foremost, problems faced by exporters, such as obtaining refunds, competitive energy prices, and tax incentives, must be quickly resolved. Textile exports should raise the ratio of manmade fiber. The focus should broaden from the current five traditional sectors. The Export-Import Bank should begin providing supplier and buyer’s credit, pre-shipment and post-shipment finance to non-traditional and value-added sectors. IT exports and other service exporters should be provided reliable connectivity, and the flow of skilled manpower must be expanded.
Standards and quality assurance procedures must be digitalized, trade flows facilitated through a national single window, entry into new markets supported by the Export Development Fund (EDF), the exchange rate kept stable and new free trade agreements (FTAs) negotiated with an eye to favoring Pakistani exports. Investment in Reko Diq should be geared up to start flow of export revenues. Tariff rationalization would enable exporters to become part of the global supply chain, particularly to China, while liberalizing domestic markets and ensuring competition would reduce domestic costs and prices.
At least four special economic zones must be made fully operational to attract Chinese companies and other foreign investors. A 1pc increase in participation in the supply chain is accompanied by an equal increase in per capita income. Being connected to global supply chains provides access to new technology, new markets and makes the domestic ecosystem vibrant. Large export firms should invest in their labour to raise productivity. Two-thirds of incremental returns from productivity increase usually accrues to business owners.
Exports of IT services are estimated at $6bn, helping offset the deficit on balance on services. Targeting workers’ remittances at 10pc annually (as the number of workers abroad is expanding fast and growth rate in FY24 was 10.7pc) to reach $45bn seems feasible as well.
Foreign Direct Investment and disbursements from the existing pipeline of multilateral and bilateral loans could provide $6bn. Therefore, total foreign exchange earnings of approximately $95-100bn are possible. However, only those investments which are export-oriented, bring in technology transfer and generate employment should be prioritized.
Imports
Imports are projected to reach $83bn by FY28 assuming an annual growth rate of 12pc. Adding payments on interest, remittances and dividends of $8bn, the current account can potentially generate a surplus of $4-9bn that can be utilized to redeem one-year deposits and short-term liabilities. By FY29 these can be brought down to zero. Together with other flows in the financial account (e.g. NPCs, portfolio investment, purchases from the market), this would result in foreign exchange reserves of $20bn by FY28 as projected by the IMF.
On the import side, POL and RLNG are the largest import items. Oil and gas exploration and development companies should be incentivized through remunerative pricing and a facilitative regulatory environment where they do not have to run to the ministry or the regulator for permission at each stage. These companies want to invest $5bn but are waiting for changes in policy. The CCI decision to offload 35pc of their production to third parties has not yet been implemented. It is hard to comprehend why there continues to be foot-dragging once constitutional bodies such as CCI or NEC or high-powered coordination bodies such as SIFC have made decisions.
Similarly, refinery policy reform has faced one stumbling block after another. Pakistan badly needs a petrochemical complex as downstream industries would benefit. Saudi Crown Prince Mohammed bin Salman had announced his commitment to this project four years ago, but it is now going through another feasibility study while previous studies have been shelved. Meanwhile, the RLNG contract with Qatar should be revised in 2026 as demand for imported fuel is declining. Power distribution and gas companies should be open to competition at the retail level. Russian and Chinese companies were interested in setting up a new steel mill with a capacity of 3 million tons that would replace imports used by the auto and white goods and other industries.
A country with the largest contiguous irrigated system has been importing food items amounting to $10bn. A smart agriculture policy should be able to save $ 6-7bn. The government must discontinue fixing prices for wheat, sugar cane and cotton. Unregulated commodities like maize and rice have increased their output significantly to generate exportable surpluses.
Oil seed cultivation should be another priority area. Meat, poultry, fruits and vegetables, fisheries and milk have high potential for exports, but these are fragmented. These commodities can add $2bn by FY28 if the problems faced by them are quickly resolved.
Domestic reforms
In addition to turning around the external deficit, Pakistan needs a comprehensive three-year action plan for domestic reforms. The broad contours of such reforms are well known. What is needed is a consensus among political parties, federal and provincial governments, and the private sector. Key elements of the plan should be finalized with timelines, responsibilities and milestones, and approved by parliament to ensure continuity and predictability — the missing elements responsible for the poor track record of previous reform efforts.
Broadly speaking, domestic reforms must aim to increase investment, control fiscal deficits, devolve services, address the energy crisis and reform civil services. These points are elaborated below.
Investment in key sectors
Public sector investment must be raised to 5 percent of GDP while maintaining overall fiscal restraint. Public-private partnerships and private investment must rise to 15 percent of GDP, in part through higher credit to the private sector, especially SMEs, farmers, and sectors such as construction, housing and tourism.
The main reason the country keeps getting into a balance-of-payments crisis is that the domestic productive capacity in industry and agriculture falls short of aggregate demand when it crosses the 4 percent growth barrier and results in higher imports. To remove this constraint, agriculture, industry and export sectors must be expanded through investment and productivity gains to make them competitive.
Private equity and venture capital funds, development finance institutions, takafuls, insurance companies, and pension and endowment funds must be reinvigorated to participate in both equity and debt capital market transactions. Private investment is low due to coercive and arbitrary measures, harassment and threats to existing investors, and an unfavorable business climate. Distinguishing legitimate profit-making from rent-seeking is crucial to attract new investment.
In agriculture, the productivity of small and medium farmers can be boosted by providing certified seeds, fertilizers, pesticides, adequate water, agriculture equipment and credit. Contract farming in certain crops has proved successful and should be encouraged for replication in other crops as well.
Rainwater harvesting can augment water supplies. Warehousing, cold storage, farm-to-market roads, refrigerated vans, and agri malls will help reduce waste, substitute imports and ease inflationary pressures.
The private sector’s investment in intermediate goods production must increase, with a focus on industries such as petrochemicals, oil and gas exploration, and engineering goods. Additionally, regulatory reforms should eliminate outdated rules that hamper business growth.
Strengthening public financial management
On the fiscal side, the country must focus on reducing domestic debt. To achieve this, the revenue-to-GDP ratio should be pitched at 15 percent, with taxes contributing 12.5 percent. The expenditure-to-GDP ratio should be aimed at 20 percent.
The FBR should drive digitization to minimize taxpayer interaction, utilize AI-driven analytics, promote digital invoicing and QR codes and simplify tax processes, among other things. Provincial governments can generate additional revenue by collecting agricultural income tax from large landowners and improving urban property tax collection.
Urban immovable property tax should be assessed and collected by the metropolitan or municipal corporations and committees and town councils. Other steps may include cadastral surveys, removal of exemptions, and heavy penalties for non-utilization of plots.
On the expenditure side, the burden of interest payments would be eased by reducing the policy rate if inflation remains under control. Other savings would accrue from targeted subsidies for food, energy and fertilizers.
Restructuring the federal and provincial governments, reducing surplus manpower, and privatizing loss-making state-owned enterprises (SOEs) will also bring considerable savings.
On the development side, increased recourse to public-private partnerships for infrastructure projects should be encouraged. Public expenditure should be raised for research and development in agriculture, industry, climate change, digital infrastructure, technical and vocational training, etc.
Inequitable burden-sharing between the Centre and provinces can be alleviated by adopting an integrated approach to the management of public finances. The budgetary framework and assignments to the federal and provincial governments (without disturbing the NFC award) should reflect national priorities and targets, approved and monitored by the National Economic Council.
Devolution of local government
A common citizen’s daily life revolves around livelihood, education of the children, health care, security, clean drinking water, sewerage, and transport. Most of these functions are discharged best at the local level.
Mobilization of local resources is much easier as the perceived benefits are visible. The Constitution has defined the third tier of the government without a separate schedule defining the functions of the local governments. Such a schedule needs to be inserted in the Constitution. Following that, the NFC award would make allocations for the federal, provincial and local governments separately.
Major cities like Karachi, Lahore and Islamabad can generate their own revenue through financial decentralization, while NFC allocations should consider poverty and human capital investment, rather than population size alone.
Energy sector reforms
The energy sector has become a major hurdle for industrial and export growth. Transition towards a competitive market for buyers and sellers should be completed by privatizing distribution companies or placing them under management contracts, with returns contingent on performance. Private retail companies would work towards increasing the connections for power so that capacity payments are reduced. A politically tough decision to do away with uniform pricing throughout the country should be taken.
If needed, targeted subsidies for energy should be managed through the Benazir Income Support Programme. Expanding transmission capacity, decommissioning inefficient public-sector generation companies, and restructuring gas distribution companies are also critical steps for energy sector reform.
Civil service reform
The capacity and capabilities of more than three million civil servants is Pakistan have eroded over time and weakened the institutions of governance. Reforms to produce merit-based competent professionals of high integrity responsive to public needs have already been designed, though not yet implemented. The entire civil service management process, from recruitment to compensation, must be modernized, with a focus on reducing unnecessary staff and incorporating domain experts into high-level positions. Equality of opportunity, transparency and promotion and compensation-based performance should be the hallmarks of the reformed civil service.
Concluding remarks
A question which arises frequently is: who would manage this highly ambitious agenda given our bleak past track record of implementation? The SIFC has proved to be a useful platform for coordination, problem-solving and monitoring and should assign targets to each implementing agency, review the progress periodically and remove the hurdles if any.
Actions rather than speeches would establish credibility and restore investor confidence. Both external and domestic reforms, if implemented seriously, would allow Pakistan to raise its present growth rate from 4 percent per year to 6 percent. If these reforms are not implemented soon and vigorously, the country may once again be knocking at the doors of the IMF in September 2028.
