The executive board of the International Monetary Fund (IMF) has stressed the “sustained implementation” of the new $7 billion bailout package, as well as broadening the tax base.

The IMF’s Executive Board said this in a statement issued on Saturday, following its approval of the 37-month Extended Fund Facility (EFF) for Pakistan, under which it has disbursed a $1bn tranche.

The government had in July agreed to the deal — its 24th IMF payout since 1958 — in exchange for unpopular reforms, including widening its chronically low tax base.

“This programme should be considered the last program,” Prime Minister Shehbaz Sharif said in July when the loan deal was secured.

The finance ministry wrangled for months with IMF officials to unlock the new loan. It came on the condition of far-reaching reforms including hiking household bills to remedy a permanently crisis-stricken energy sector and uplifting pitiful tax takings.

The recent statement, issued on the conclusion of consultation with Pakistan and approval of the bailout, said the IMF executive directors “emphasised in particular the criticality of sustained program implementation, supported by capacity development and close collaboration with developments partners, to mobilise additional financing and restore market access”.

“Directors also welcomed steps taken toward a fairer tax system and stressed the importance of additional revenue mobilisation efforts by broadening the tax base and enhancing tax administration.

“Alongside prudent spending management, this will create space for essential investments in human capital, infrastructure, and social protection,” the press release added.

“Noting the still high risks and narrow path to sustained stability, directors urged continued strong commitment and ownership of sound policies and structural reforms under the Extended Arrangement to create the conditions for durable and inclusive growth and to put debt firmly on a downward trajectory.”

A week ago, PM Shehbaz approved drastic measures for tax enforcement and compliance, including a ban on all banking and financial transactions for non-filers of tax returns.

According to a report, a comprehensive reform plan is set to be implemented over the next three to four years, comprising the introduction of digital invoicing, desk audits of tax returns, performance-based bonuses, and a documentation prize scheme to encourage tax compliance.

The IMF statement noted: “It is expected that the next Article IV consultation with Pakistan will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.”

Need to ‘move away from state-led growth model, strengthen business environment’

The IMF executive directors “noted that Pakistan needs to move away from its state-led growth model, strengthen the business environment, and ensure a more even playing field with freer competition to reverse the decline in living standards”, the statement said.

“Priorities include reforming SOEs, removing trade barriers and market distortions, and strengthening governance frameworks.”

The IMF directors “commended the authorities for strengthening policymaking over the past year under the Stand-by Arrangement, which has delivered renewed economic stability”.

They also stressed the importance of “vigilant monitoring of programme implementation, close consultation with the Executive Board, and robust contingency planning to safeguard the program’s success”.

Urging “steadfast execution of the planned continued consolidation in the FY25 budget,” the IMF top officials underscored the need for “sustained gradual consolidation, underpinned by strengthening of fiscal institutions, to durably improve debt sustainability”.

The statement added: “Some directors noted that given the ambitious growth projections, there is no room for policy slippages without undermining debt sustainability.”

Directors also called for reforms to strengthen the fiscal framework, including federal-provincial institutional arrangements; measures to ensure the energy sector’s lasting sustainability, including through cost-based tariffs; and enhanced liquidity and debt management.

The statement said they “supported continued tight and data-driven monetary policy to ensure that inflation continues moving toward the target range on a sustained basis”.

The Fund directors “emphasised the importance of allowing the exchange rate to serve as a shock absorber, buffering competitiveness and helping rebuild reserves”.

“Safeguarding financial stability requires enhancing the bank regulatory and supervisory frameworks, monitoring risks associated with the sovereign-bank nexus, and addressing long-undercapitalised financial institutions.”

The IMF executive directors also called for continued enhancements in the framework for Anti-Money Laundering and Combating the Financing of Terrorism, as well as further steps towards building climate resilience through the effective implementation of the C-PIMA action plan.

“They emphasised the need for effective communication to build broad consensus and support for reforms,” the statement said.

‘Formidable challenges’

The IMF board highlighted the new program would “require sound policies and reforms to support the authorities’ ongoing efforts to strengthen macroeconomic stability, address deep structural challenges, and create conditions for a stronger, more inclusive, and resilient growth”.

“Continued strong financial support from Pakistan’s development and bilateral partners will also be critical for the program to achieve its objectives,” it added.

Pakistan has won additional financing assurances from China, Saudi Arabia and the United Arab Emirates that go beyond a deal to roll over $12bn in bilateral loans owed to them, an IMF official said this week.

The IMF executive board acknowledged that the country had “taken key steps to restoring economic stability with consistent policy implementation” under the 2023-24 SBA.

It highlighted that key priorities under the new EFF-supported programme included: (i) rebuilding policy-making credibility and entrenching macroeconomic sustainability through consistent implementation of sound macro policies and a broadening of the tax base; (ii) advancing reforms to strengthen competition, and raise productivity and competitiveness; (iii) reforming SOEs and improving public service provision and energy sector viability; and (iv) building climate resilience.

“Growth has rebounded (2.4 per cent in FY24), supported by activity in agriculture, while inflation has receded significantly, falling to single digits, amid appropriately tight fiscal and monetary policies. A contained current account and calm foreign exchange market conditions have allowed the rebuilding of reserve buffers,” it noted, adding that “reflecting disinflation and steadier domestic and external conditions”, the State Bank of Pakistan had also cut the policy rate by a total of 450 bps since June.

However, the IMF board noted that “despite this progress, Pakistan’s vulnerabilities and structural challenges remain formidable”.

“A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers, while the tax base remains too narrow to ensure tax fairness, fiscal sustainability and meet Pakistan’s large social and development spending needs.

“In particular, spending on health and education has been insufficient to tackle persistent poverty, and inadequate infrastructure investment has limited economic potential and left Pakistan vulnerable to the impact of climate change.”

The IMF warned that Pakistan risked falling further behind its peers without a concerted adjustment and reform effort.

IMF programme ‘critical anchor’ for structural reforms

Following the executive board’s discussion, Kenji Okamura, the deputy managing director and acting chair, highlighted that the “implementation of sound policies over the past year has been critical to restore economic stability, reduce near-term risks and rebuild confidence”.

“Growth has returned, external pressures have eased with reserves doubling over the last year, and inflation has declined markedly. However, despite this progress, significant structural challenges remain, and ambitious and sustained efforts are needed to strengthen Pakistan’s resilience and economic prospects,” Okamura noted.

He asserted that the $7bn programme provided a “critical anchor to policies and structural reforms and a framework for partner financing”.

“Overcoming Pakistan’s longstanding structural challenges — most notably low productivity and economic openness, resource misallocation, and climate vulnerability — requires faster implementation of structural reforms,” the IMF official stated.

The IMF acting chair listed that reforms priorities included “advancing the SOE reform agenda; scaling back distortive incentives, promoting a level playing field for all business; strengthening governance and anti-corruption institutions; and continuing to build climate resilience”.

“Continuing fiscal consolidation in FY25 and beyond, through enhanced revenue mobilisation and prudent expenditure management, is critical to securing fiscal sustainability and reducing the crowding out of private investment.

“Increasing revenue mobilisation by broadening the tax base, removing special sectoral regimes, and placing a fairer burden on previously undertaxed sectors (including industrialists, developers, and large-scale agriculture), will enhance fairness and efficiency and create needed space for essential investments in human capital, infrastructure, and social spending,” the IMF acting chair said.

Okamura also touched upon the IMF-suggested reforms for the power sector.

Noting that “timely energy tariff adjustments under the previous program have helped stabilise energy sector circular debt”, he said “deep cost-side reforms are critical to securing the sector’s lasting viability and reducing its costs”.

Welcoming the recent “marked decline in inflation”, the IMF official predicted that the buildup in forex reserves “should continue, supported by inflows under the Extended Arrangement, as well as price discovery in the interbank market to help buffer external shocks, attract financing, and protect competitiveness and growth”.

“Strong action to address undercapitalised financial institutions and, more broadly, vigilance over the financial sector is needed to ensure financial stability,” Okamura highlighted.