IMF pushes Pakistan to ditch state-led growth for bold reforms

October 11, 2024 (MLN): Pakistan needs to move away from its state-led growth model, strengthen the business environment, and ensure a more even playing field with freer competition to reverse the decline in living standards, Executive Directors of the International Monetary Fund (IMF) said in the latest report. 

The report noted the Ex-post Peer Review assessment and the negative impact caused by deviations from programmed policies and stressed the importance of strong ownership for program implementation and financing.

Directors emphasized the need for effective communication to build broad consensus and support for reforms.

 Priorities include reforming SOEs, removing trade barriers and market distortions, and strengthening governance frameworks, it added.

It emphasized the need for further steps towards building climate resilience through the effective implementation of the C-PIMA action plan and enhanced climate adaptation investments.

The report urged steadfast execution of the planned continued consolidation in the FY25 Budget and underscored the need for sustained gradual consolidation, underpinned by the strengthening of fiscal institutions, to durably improve debt sustainability.

In this regard, Directors noted that given the ambitious growth projections, there is no room for policy slippages without undermining debt sustainability.

IMF also welcomed steps taken toward a fairer tax system and stressed the importance of additional revenue mobilization efforts by broadening the tax base and enhancing tax administration.

Alongside prudent spending management, this will create space for essential investments in human capital, infrastructure, and social protection. Directors also called for reforms to strengthen the fiscal framework, including federal-provincial institutional arrangements; measures to ensure the energy sector’s lasting sustainability, including through cost-based tariffs; and enhanced liquidity and debt management.

The continued tight and data-driven monetary policy to ensure that inflation continues moving toward the target range on a sustained basis was also appreciated. 

Safeguarding financial stability requires enhancing the bank regulatory and supervisory frameworks, monitoring risks associated with the sovereign-bank nexus, and addressing long-undercapitalized financial institutions. Directors also called for continued enhancements in the AML/CFT framework,the report reads.

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for strengthening policymaking over the past year under the Stand-by Arrangement, which has delivered renewed economic stability.

Noting the still high risks and narrow path to sustained stability, the Directors urged continued strong commitment and ownership of sound policies and structural reforms under the Extended Arrangement to create the conditions for durable and inclusive growth and to put debt firmly on a downward trajectory.

They emphasized in particular the criticality of sustained program implementation, supported by capacity development and close collaboration with development partners, to mobilize additional financing and restore market access.

Directors also stressed the importance of vigilant monitoring of program implementation, close consultation with the Executive Board, and robust contingency planning to safeguard the program’s success.

In late September, the Executive Board of the Fund concluded the 2024 Article IV consultation1 and approved a 37-month Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan in the amount of SDR 5,320 million (262% of quota, or around US$7 billion).

The Board’s decision allowed for an immediate disbursement of SDR 760 million (or about $1 billion).

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