THE initial discussions between the IMF and Pakistan on the upcoming budget suggest that the multilateral agency is not going to relent on the core condition of its current $7bn financing facility: a tight fiscal policy. That was not unexpected. With the country living off repeated bailouts from the lender, it is but natural that its economic policies are tightly tied to the programme goal aimed at ensuring debt reduction and sustainability — in times of war and peace both.

Starting Wednesday, the virtual technical-level discussions, which precede formal policy-level talks on the budget from May 19, have revealed tentative fiscal, inflation, growth and other targets that our policymakers will be required to meet next year to stay in the programme.

Media reports say that the Fund expects Pakistan’s moribund economy to expand by 3.6pc next year, with headline consumer inflation averaging at 7.7pc, and total federal and provincial tax and non-tax revenues growing to nearly Rs20tr or 15.2pc of the economy’s size.

The IMF proposals also emphasise austerity by tightening controls on current and development expenditure to reduce the budget deficit from 5.6pc of the economy’s size estimated for the present fiscal year to 5.1pc next year.

Related to this is the hefty increase suggested in primary surplus from 1pc to 1.6pc of GDP in order to ensure sustainable debt servicing and bring down the debt-to-GDP ratio from 77.6pc to 75.6pc in FY26. The next budget will also map climate relevance in adaptation, mitigation and transition to receive the IMF’s climate-related funding of $1.4bn in the next 28 months.

Data for the current fiscal year shows that Pakistan is on track to meeting budget targets and other time-bound structural benchmarks agreed with the Fund. Cooperation from the provinces has proved critical in pulling off many of these goals. However, a significant increase in the revenue target proposed for next year amid a shortfall in tax revenues this year underlines the need for broadening the tax base by effectively bringing retail, real estate, agriculture and other undertaxed or untaxed areas of the economy into the net. This demands political commitment and substantial efforts by both the federal and provincial governments.

The decision to pull the government out of the wheat market this year despite opposition from the rural elite, and to cut energy subsidies for powerful textile and other manufacturers, shows that the state has what it takes to make tough decisions. The past policy of squeezing the salaried classes and fully documented corporations to collect taxes will not work any longer. Failure to reform the corrupt and inefficient tax system has already taken a huge toll on ordinary people and led to large cuts in spending on the development of infrastructure crucial for future economic growth and stability.

Published in Dawn, May 16th, 2025