Amir Khan

Pakistan’s recent $3 billion Stand-By Arrangement (SBA) with the IMF holds the potential to break it free from the boom-and-bust cycle and pave the way for a longer-term Extended Fund Facility (EFF) due to the ongoing fiscal challenges. Talking to WealthPK, Dr. Faiz-ur-Rehman, a fiscal policy expert at the Quaid-I-Azam University, said fiscal imbalances occur when a government struggles to sustain its expenditure based on the projected revenues and existing debt policies. To fund crucial projects, governments often borrow from both domestic and external sources. “However, doubts surrounding a government's ability to generate sufficient revenue for debt repayment can lead the lenders to cease rolling over debt or demand progressively higher interest rates.

This rise in non-development expenditure has become a major contributor to inflation in Pakistan,’’ he explained. The power sector, in particular, has remained a source of serious concern, with circular debt exceeding PKR2.5 trillion. Unfortunately, the previous Extended Fund Facility (EFF) with $2.6 billion remaining undisbursed has been suspended. As part of the new SBA, the utility rates are expected to be raised through various mechanisms, including the annual rebasing exercise, quarterly tariff adjustments, and passing the increased cost of imported fuel on to consumers. According to Dr. Faiz, addressing these fiscal imbalances requires Pakistan to undertake a series of crucial reforms.

To enhance revenue generation, effective tax policies, expanded tax bases, improved tax collection mechanisms, and reduced tax evasion are necessary. Simultaneously, the government aims to exercise control over expenditures by enhancing fiscal discipline, streamlining budgetary processes, and eliminating unnecessary subsidies. “Furthermore, structural reforms also come into focus, particularly in key sectors such as energy, agriculture, and finance. Deregulation, privatization, governance enhancement, and corruption-combating measures are being pursued to improve sectoral efficiency and competitiveness,” he added. He pointed out that encouraging economic growth remains a vital aspect of Pakistan's strategy.

The government plans to create an environment conducive to investment, entrepreneurship, and innovation. Targeted investments in infrastructure, education, and healthcare will further support this objective.He said Pakistan's staff-level agreement with the IMF marks a positive signal for its economic prospects. However, effectively addressing the boom-and-bust cycle and fiscal imbalances necessitates a comprehensive and tailored approach that considers Pakistan's unique circumstances and challenges. By implementing these measures, Pakistan aims to break free from the recurring boom-and-bust pattern, strengthen its fiscal position, and create a stable and sustainable economic environment.

Credit: INP-WealthPk