Rethinking Pakistan’s Economic Future: Breaking the Cycle of Dependency

For decades, Pakistan has lurched from one economic crisis to the next. It remains stuck in a seemingly never-ending cycle of borrowing, its foreign exchange reserves perpetually on the verge of depletion. In September 2024, the International Monetary Fund (IMF) approved yet another $7 billion loan – Pakistan’s 25^th since independence – to support the cash-strapped economy, exemplifying Pakistan’s chronic reliance on external assistance that has left the country’s economy weak and unstable. 

The International Monetary Fund (IMF) is a global financial institution that promotes financial stability and economic growth. It often steps in to assist countries facing acute balance of payments crises when they are unable to meet their external debt obligations or finance essential imports. The IMF provides loans while imposing conditions on the recipient country to implement structural reforms aimed at stabilizing the economy and ensuring repayment. These typically involve fiscal austerity, currency devaluation or tax reform. While such measures are meant to restore financial stability, they often lead to short-term social and economic hardships for local populations.

Pakistan, which has sought IMF assistance 25 times since joining the institution in 1950, is a chronic user of such bailouts. While many developing countries, such as Sri Lanka and Ghana, have used IMF programs as a bridge to economic growth, Pakistan has struggled to transition away from dependence on these loans, partially due to structural weaknesses in its economy. The country has long relied on foreign assistance rather than building a resilient production-driven economy capable of generating sufficient exports or domestic revenue. Economic aid from the US and USSR during the Cold War, and more recently from China, multilateral institutions and Gulf countries, have provided temporary relief but not long-term solutions. Inflows have disproportionately benefited a narrow elite, leaving public institutions underdeveloped. Thus, the country continues to remain in a “cycle of debilitating debt repayments” with little to show in terms of sustainable economic development, according to the Express Tribune. 

The IMF’s previous programs, including the one initiated in 2019, have had mixed results. While they aimed to address fiscal imbalances, they led to higher inflation, slowed economic growth and worsening social equality. For example, by 2023, economic growth had slumped to 2.4% and inflation was in double digits, while the budget deficit continued to expand. A weak tax base meant the government was unable to generate sufficient funds to service its debt or invest in infrastructure and human capital. The country’s export sector remained stagnant, foreign direct investment was limited, and imports continued to outpace earnings. These dynamics culminated in a near-default situation in 2023, where Pakistan was on the brink of being unable to meet its debt obligations. This forced the country negotiate a stopgap agreement with the IMF, only to find itself returning for a larger bailout in 2024.

To comply with the agreed-upon terms to secure this bailout, Pakistan had to boost revenues and reduce its fiscal deficit. To this end, the government introduced comprehensive tax reforms, setting a challenging tax revenue target of 13 trillion PKR (around $46.66 billion USD) for the 2024-25 fiscal year – a near 40% jump from the previous cycle. This target comprises a 48% increase in direct taxes and 35% hike in indirect taxes over revised estimates of the current year. The reforms also introduce significant changes to income tax rates for salaried individuals, impacting a wide range of earners. With the average monthly salary in Pakistan at 82,100 PKR (approximately 296 USD as of August 2024 exchange rates), those earning between 50,000 and 100,000 PKR per month will see their tax rate double from 2.5% to 5% on income above 50,000 PKR. Higher income brackets face similar increases, with the aim of generating an additional PKR 75 billion in revenue.

The government has also begun targeting previously undertaxed sectors, including retail, agriculture, and exports, to broaden the tax base, and a number of tax exemptions have been eliminated. Items like poultry feed and pharmaceuticals, previously zero-rated, are now subject to sales tax between 8% and 18%. Other significant measures include an increase in the General Sales Tax on luxury goods from 18% to 25%, which is expected to generate an additional PKR 80 billion in revenue annually. A higher Capital Gains Tax has been imposed on real estate transactions, with the aim to discourage speculative investments and raise revenue from Pakistan’s historically under-taxed real estate sector. 

As a result of such reforms, revenues are projected to rise by 2.5% of GDP. Higher import taxes have also reduced the trade deficit, though this likely reflects a decline in import volumes rather than structural improvements. In addition, cuts to energy subsidies have marginally eased the fiscal deficit. However, while these reforms may generate revenue in the short term, they also threaten to dampen economic activity and pose significant challenges to the local population. The increase in sales taxes, particularly on essential goods like pharmaceuticals and energy, is expected to considerably escalate the cost of living, straining low and middle-income households. 

Systemic challenges especially threaten the success of these reforms. The current coalition government is fragile and faces significant resistance to reforms from political rivals and entrenched business interests. Rising utility costs and the removal of subsidies on essential goods have caused a rise in inflationary pressures, eroding public trust in the government and fueling social unrest. Consumer purchasing power has significantly declined, creating further challenges for businesses already struggling with high production costs. Corruption in the tax system continues to undermine revenue collection efforts, despite attempts to digitize the process. Government spending also remains heavily skewed toward non-productive areas like defense and debt servicing, leaving little room for investment in sectors that drive economic growth. 

The IMF-backed reforms do little to address broader issues such as inefficient government spending, low-value exports, and underinvestment in education, healthcare and infrastructure. Instead of weaning the economy off external assistance, successive governments have relied on foreign inflows to paper over underlying vulnerabilities. With the leadership prioritizing short-term gains over long-term economic stability, each bailout merely postpones a deeper reckoning with Pakistan’s structural weakness.

To break the cycle of dependency, Pakistan should consider engaging with the international creditors it typically borrows from, such as China and Saudi Arabia, to restructure its external debt, providing it some room to redirect resources towards growth-oriented sectors. This would require implementing transparent strategies in order to demonstrate fiscal discipline. Reducing wasteful government spending and reallocating resources to the infrastructure and education sectors would also enhance long-term economic resilience. Furthermore, Pakistan must move away from its reliance on low-value textiles and agricultural exports by investing in IT services and renewable energy industries. 

Ensuring fair taxation by reducing loopholes and targeting high-income individuals and corporations could also foster greater compliance and public support. This must be coupled with efforts to reduce corruption and improve transparency in public finance management. Meaningful economic progress will require not only adhering to the IMF program’s conditions but also addressing broader structural issues. Without a sustained commitment to reform, the latest bailout risks becoming yet another chapter in Pakistan’s long history of economic mismanagement. 

Bylines:

Sereen Yusuf (CC ’27) is a writer for the Columbia Emerging Markets Review and a member of CEMS’ Middle East and North Africa subcommittee. She is studying economics and political science, and has a keen interest in the intersection of geopolitics and the economies of developing nations.  

Sydney Smith (Trinity / GS ‘26) is a managing editor for the Columbia Emerging Markets Review studying Classical Civilization. She is interested in clean energy in emerging economies, as well as geopolitical analysis.