IMF urges Pakistan to move away from state-led growth model

September 28, 2024 (MLN): The Executive Directors of the International Monetary Fund (IMF) said 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.

The global lender made these remarks in a detailed report released after approving Pakistan’s request for a $7 billion, 37-month Extended Fund Facility (EFF).

In its report, the IMF Directors said the new programme priorities include reforming SOEs, removing trade barriers and market distortions, and strengthening governance frameworks.

Directors 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.

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 developments partners, to mobilize additional financing and restore market access.

IMF 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.

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

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

Directors 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.

Directors supported continued tight and data-driven monetary policy to ensure that inflation continues moving toward the target range on a sustained basis. They emphasized the importance of allowing the exchange rate to serve as a shock absorber, buffering competitiveness and helping rebuild reserves.

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.

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

"It is expected that the next Article IV consultation with Pakistan will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements," the IMF said.

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