PIDE finds flaws in IMF report

Says debt sustainability is a distant dream due to stagnant economy

Shahbaz Rana September 21, 2022
IMF has not addressed structural issues of taxation. Instead, the proposed measures will make taxation more complex, according to PIDE. photo: file


The Pakistan Institute of Development Economics (PIDE) has questioned the credibility of an International Monetary Fund (IMF) report that showed a reduction in public debt, saying the debt sustainability remains a distant dream due to the stagnant economy and high external financing needs.

In its commentary on the recently released report on the seventh and eighth review of the IMF, PIDE – a public sector think tank – argued that Pakistan could not control inflation by simply increasing the interest rate.

It also criticised the IMF’s approach to addressing the debt sustainability issue by solely relying on revenues and completely ignoring the expenditure rationalisation plan. PIDE’s commentary came amid criticism of the IMF over becoming part of the problem instead of providing a solution due to its inflexible approach towards Pakistan, which was first hit by the Ukraine war-induced global commodity price pressures and then by the devastating floods.

In recent days, the IMF has not indicated that it will provide any meaningful relief to Pakistan, though 15% of the land is still inundated and 33 million people have been affected by the floods.

“The expectation that the debt-GDP (gross domestic product) ratio would decline in the face of a stagnant economy and a current account deficit of 3% of GDP is untenable,” said PIDE.

The IMF report has shown the debt-to-GDP ratio at 72.5% by the end of current fiscal year, which it expects to decline to 60.7% by June 2027. PIDE stated that the debt-to-GDP trajectory was showing an upward trend. Given the fact that fiscal retrenchment is not possible and without comprehensive fiscal reforms, the sustainability of debt is only a distant dream, it added.

The IMF has not suggested any step to reduce the debt servicing cost by urging the government to review the possibility of renegotiating domestic debt deals with commercial banks.

PIDE said that external liabilities were gradually shifting from multilateral to bilateral and commercial sides, which increased the debt servicing cost over time. Debt servicing will require more external resources and a substantial improvement in external inflows.

The review report has also projected an increase in external flows. PIDE notes that attracting external flows, without adopting structural reforms, seems daunting.

The IMF projects a 47% reduction in the current account deficit in current fiscal year, with the deficit shrinking from $17.3 billion in the last fiscal year to $9.3 billion in the current year. These projections by the IMF have assumed adherence to the “market-based” exchange rate. There is an increasing view in Pakistan that the market-based exchange rate has caused more problems, as the country’s currency has been left at the mercy of a few speculators who can easily manipulate the market due to its small size.

Interest rates

PIDE criticised the IMF approach to dealing with inflation by relying on a tight monetary policy. The IMF suggests that the State Bank of Pakistan (SBP) will continue the tight monetary policy, as per the standard prescription, to restrain higher inflation expectations.

“It would be challenging for the SBP to curtail inflation through monetary tightening,” said PIDE. The SBP began to tighten monetary policy in November 2021 but failed to achieve a positive real rate and control inflation, it added.

Also, the IMF report projected that the broad money growth would be around 12% during FY23. Therefore, PIDE argued that the demand-side pressure would not be a major driver of inflation in the near future. The current wave of inflation may be more supply-side shock driven. PIDE estimated that supply-side pressures would contribute to inflation by more than 80% during the current fiscal year. “Further tightening of the monetary policy may not be desirable.”

But it said that further tightening of the policy may reduce exchange rate pressures. The SBP has increased the interest rate by more than double to 15% since November last year and still the real rate remains negative and will likely to remain negative through the programme period.


The IMF has not addressed the structural issues of taxation in Pakistan. Instead, the proposed measures in the report would make taxation more complex, according to PIDE.

It added these measures are either focused on new taxes or increased rates for existing taxes without highlighting the coverage issues.

It said that tax on agricultural income was still missing from the IMF agenda. PIDE recommended that income tax should be universal. Pakistan still maintains distortive taxes, such as having a filer and non-filer distinction. The IMF report retained the significance of revenue generation through taxation, but it does not stress expenditure reforms, which is a low-hanging fruit in the case of fiscal adjustment, according to PIDE.

After the 18th Amendment, the primary functions were devolved to provinces, but overlapping roles by the federal government are still in place. The government’s footprint is expanding instead of decreasing, with new government entities being created without reviewing the existing organs of the state.

Under the IMF programme, Pakistan has significantly increased electricity tariffs but yet its circular debt increased to Rs2.3 trillion by June this year, as the IMF is ignoring other critical aspects of the power sector reforms.

Published in The Express Tribune, September 21st, 2022.

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