Meeting benchmarks but missing growth

Pakistan has made considerable progress in meeting the structural benchmarks under the IMF's Extended Fund Facility (EFF), such as the approval of the National Fiscal Pact to enhance fiscal coordination, harmonisation of provincial agricultural income tax laws with federal tax laws, publication of PSDP project criteria and progress reports, and the non-provision of tax amnesties. However, some benchmarks, particularly those in the energy sector, may not prove as sustainable as projected.

One such case is the elimination of captive power from the gas sector. While aimed at reducing the Rs2,083 billion circular debt in the gas sector, this benchmark could potentially harm the industry by causing a $3 billion loss in exports, as reported by Socioeconomic Insights and Analysis (SIA).

With an already struggling industrial base, this policy could further damage the sector, which serves as the backbone of Pakistan's economy. Secondly, the reliability of such a policy is also questionable; without ensuring uninterrupted energy supply for the industry, the losses could be multifold. The textile industry alone could face a 24% revenue loss (Yasmeen et al, 2022). These kinds of experiments could prove troublesome for the industrial sector.

Even though some benchmarks, including the one discussed above, might not be industry friendly, if meeting the benchmarks were a sign of a healthy economy, there should have been visible signs of growth. However, despite compliance with most of the IMF's structural benchmarks and a positive signal from the IMF staff regarding Pakistan's economic stability and recovery, the economy doesn't reflect any meaningful signs of growth.

This disconnect between the reform programme and actual economic recovery is stark, and is evident when we analyse the performance of the large-scale manufacturing (LSM) sector, which showed a 1.7% decline on a year-on-year basis. This can challenge the perception that meeting structural benchmarks alone can restore growth momentum.

In its recent World Economic Outlook report, the IMF revised Pakistan's growth projection downward from 3% to 2.6%. While global growth slowdown has been significantly attributed to external shocks, including the protectionist trade measures introduced by the Trump administration, Pakistan's deeply rooted domestic structural issues cannot be ignored.

The country's export base remains narrowly concentrated in low value sectors, which are further expected to plummet due to tariffs and considering that the US is Pakistan's major export destination, initial tariffs of 29%, which are currently at 90 days pause, may cause an export loss of $564 million in fiscal year 2025-26. This makes the country vulnerable to external shocks and limits its growth potential. These external shocks coupled with domestic constraints such as weak private sector confidence and underinvestment continue to weigh heavily on economic recovery.

A UK-based economist Ahmed Jamal Pirzada rightly pointed out that despite the increase in credit to the private sector, the investment in the private sector has been stagnant. This reveals a fundamental issue that Pakistan is unable to offer a business environment conducive to long-term investment. Businesses are hesitant to commit their capital domestically (despite the availability of credit and low interest rates) and are instead looking for opportunities to move their assets to countries which promise steady returns on their investments.

While Pakistan has met several structural benchmarks and is making progress on the remaining, it is important to note that the completion of the programme does not depend entirely on compliance with these reforms.

The fragility of the external account remains the Achilles' heel for the completion of the programme. If Pakistan is not successful in securing timely rollovers of maturing debt or negotiating favourable terms for debt re-profiling, this can put the IMF programme at risk. Last month, a $2 billion rollover from China provided the country with temporary breathing space, but this doesn't address the structural weaknesses of Pakistan's external sector.

In line with the economic stability, Fitch Ratings for Pakistan upgraded to B- with a stable outlook signals for the economy. This offers some confidence to consumers and businesses in short-term macroeconomic management. However, the rating agency also warned that Pakistan's external financing needs are still substantial. Pakistan faces over $8 billion in external debt maturities in FY25 (excluding $13 billion in routinely rolled-over bilateral loans) and any delays in rollovers of debt can seriously risk the IMF programme.

While Pakistan has achieved certain stability goals including the stable inflation leading to low interest rates, the broader economic challenges, particularly low investment, concentrated exports, and external account vulnerabilities continue to hinder the path towards the growth-based economy. Even if the IMF programme is successfully completed, the government's priority should not be to secure another bailout programme but to focus on the structural issues that are holding back sustainable growth.

The writer is affiliated with the PRIME Institute as a research economist