ISLAMABAD:
In 2024, Pakistan narrowly avoided a sovereign default and managed to stabilize the economy thanks to another bailout package from the International Monetary Fund (IMF). But the New Year is fraught with challenges in maintaining duty-free access to European markets and handling any policy changes by the United States.
Pakistan’s marginalized salaried class was pushed to the edge after, in a highly unjustifiable decision, the government and the IMF increased their tax burden to an unbearable level of 39%, forcing many people to think about their plans for the future. . As a result, between July and November, tax payments of the salaried class increased by a phenomenal 57% to Rs 198 billion.
Economic decision-making remained fragmented among the inhabitants of Block Q – the headquarters of the Ministry of Finance, the Prime Minister’s Office and the Deputy Prime Minister’s Office.
The government appointed Muhammad Aurangzeb as the country’s new Finance Minister, who obtained Pakistani nationality after taking oath. But the banker-turned-politician lost significant control to Deputy Prime Minister Mohammad Ishaq Dar, who gradually eased his way into economic decision-making. Ishaq Dar is now making decisions ranging from gas imports to approval of development budget and tax issues.
Like previous years, 2024 was no different in terms of economic challenges. Political and security problems worsened, making it difficult to attract foreign investment along with inconsistent economic policies. The Special Investment Facilitation Council also failed to attract any foreign direct investment in 2024, its second year of existence.
After protracted negotiations that lasted months, the IMF board approved a $7 billion Extended Fund Facility, the country’s 25th rescue package. The bailout provided an umbrella to temporarily avoid default by seeking refinancing of around $17 billion or 70% of Pakistan’s external debt-related obligations.
Both the IMF and the federal government took a shorter path by deferring liabilities rather than taking the difficult but sustainable route of debt restructuring. As a result, the threat of default would continue to loom and Pakistan would be forced to remain in the IMF program for a longer period to avoid that eventuality.
The government was unable to negotiate effectively with the IMF and signed conditions, many of which cannot be implemented without setbacks. Shortly after the approval of the program, the IMF had to send an emergency mission to Pakistan to review the status of implementation.
Several government departments have begun to speak out against the IMF’s conditions. The Federal Board of Revenue (FBR) was the first to argue that its fiscal target of nearly Rs 13 trillion had been agreed on the basis of erroneous assumptions. As a result, the first half goal was missed by a wide margin.
The Petroleum Division also came forward and told the Prime Minister that the condition related to ending subsidized gas supply to industries had been met despite their reservations. The Ministry of National Food Security and Agriculture also said that the issue of ending agricultural support price mechanisms had been dropped. So were the provinces, which have been reluctant to increase agricultural income tax rates to 45% under the agreement with the IMF.
One of the reasons for the current situation was the lack of political wisdom and paper to finalize the agreement with the IMF. Traders have once again been protected even though the government agreed with the IMF that it would raise Rs 50 billion from them under a new scheme during the 2024-25 fiscal year. The plan failed shortly after its inception, as did the objective.
But the Ministry of Finance has managed to keep the fiscal aspect under control thanks to higher non-tax payments. Spending continues to grow at a rate of 20% and the Prime Minister’s promise to reduce the size of the government remains unfulfilled. Not even a single ministry or division was closed during the first 10 months of Shehbaz Sharif’s government.
The external sector shows some stability due to a controlled import regime and a lower than real value of the rupee that closed the doors to the informal market for exports and remittance income. The exporter and the foreign shipper received a high price of around Rs 40 per dollar due to a peg of Rs 278 per dollar.
Experts such as Ashfaq Tola – former minister of state – and deputy prime minister Ishaq Dar have said that the rupee-dollar parity will not exceed 240 rupees per dollar in 2024.
But the year-round stable rupee – regardless of price – helped reduce the inflation rate, which eventually fell to its lowest level in more than six years. This brought stability to the markets, but people did not get much relief due to the already high price level.
There were no additional opportunities for job creation and economic growth. Political and economic instability pushed many young people to leave the country.
The government failed to fix the power sector and unbearable electricity bills, coupled with high taxes and low benefits, created serious problems for Pakistan’s low and upper-middle income groups. The poorest remained poorer in the absence of new economic opportunities. The Benazir Income Support Program (BISP) only helped reduce price pressure as the program was never aimed at lifting people out of poverty.
Amid self-inflicted wounds, the federal government spent Rs 39 billion to erect a social media firewall, slowing down internet speeds and damaging the digital economy. Freelancers and service providers who rely on the Internet suffered greatly.
Pakistan’s weak economic and political position, along with its geostrategic alignments, further complicated matters. The European Union (EU) issued its first warning to review Pakistan’s duty-free status after military courts convicted dozens of Pakistan Tehreek-e-Insaf (PTI) political activists accused of attacking military installations .
The EU stated that these sentences violated Pakistan’s commitments under the International Covenant on Civil and Political Rights. The Foreign Office (FO) denies that the government has breached its commitments under the GSP plus regime.
The upcoming Donald Trump administration may be a cause of concern for Pakistani authorities. Pakistan completed its latest Expanded Fund Facility program thanks to nearly a dozen and a half waivers it obtained with the help of US authorities during the period 2013-2016.
There are chances that the country will not be in a position to implement all the conditions agreed with the IMF under the new program. The question is whether there will be a friendly government in Washington to help Islamabad get favorable results from the IMF board. The answer is not simple. Everything indicates that without any influence it will be difficult to win over Washington.
The first test will be in February-March, when the IMF will carry out its first review of the program.
Overall, 2025 will be no different from 2024 due to the low chances of there being room to grow economically and create employment opportunities. If the government attempts to accelerate growth through debt financing, it will put both the IMF program and the relative hard-won economic stability at risk.
