Frequently Asked Questions on Pakistan
Last updated: February 19, 2025
On September 25, the Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation with Pakistan and approved a 37-month Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan in the amount of SDR 5,320 million (or around US$7 billion).
The 2024 Extended Fund Facility (EFF) aims to improve the livelihoods and prospects of the Pakistani people and restore Pakistan’s external viability. To achieve this, the program is built around 4 key pillars:
The main reforms under the program are focused on improving Pakistan’s competitiveness and creating a better environment for private sector-led growth, which will result in higher productivity, employment, and incomes. The new program will also support the Pakistani people and protect the most vulnerable by strengthening social safety nets and increasing investment in human capital such as training, education, and other social development opportunities. Despite necessary fiscal consolidation, the adjustment is designed to allow for the Benazir Income Support Program (BISP) to increase by 27% to 0.5% of GDP in FY25. This will allow for higher unconditional cash transfers to the poorest households.
Additionally, the program aims to expand coverage by enrolling the remaining eligible households into BISP and enhancing education, health, and nutrition conditional cash transfer programs in collaboration with the World Bank. The government is also committed to rebuilding health and education spending at the federal and provincial levels and increasing allocations to partially restore previous levels of human capital investment. These measures are designed to alleviate poverty, improve living standards, and strengthen the resilience of vulnerable populations.
The new program, unless many of its predecessors, has the advantage of beginning with economic stability already restored. This allows policy efforts to immediately focus on sustainable growth and structural reform. The program formalizes, for the first time, provincial involvement through a new National Fiscal Pact (NFP), enhancing federal-provincial fiscal relations and facilitating devolution (in line with the 18th amendment to the Constitution of Pakistan), alongside efforts to right-size the federal government. This program includes a novel revenue mobilization strategy under the NFP which aims at taxing previously undertaxed sectors such as agriculture and property, as well as retailers at the federal level, while also integrating exporters into the regular tax regime. Finally, by reducing state interventions in product markets (including the setting of prices for goods and services, correcting trade policy distortions, increasing competition, and eliminating concessions that have hindered growth, the program addresses key economic distortions from an outsized role of the state.
Pakistan's debt is assessed as sustainable despite its high level, provided that the authorities remain committed to implementing sound policies and reforms that strengthen the economy and foster sustained growth. Increasing revenue fairly and efficiently is essential given the low tax-to-GDP ratio and will require enhancing tax compliance and shifting taxation towards direct, progressive taxes on undertaxed sectors such as retailers, property, and agriculture. Improving the quality of public spending and better managing the substantial gross financing needs through improved debt management and extended maturities are also crucial. However, the path to debt sustainability is narrow and could be undermined by policy slippages, particularly in implementing necessary revenue measures, or by reduced external financing. If these challenges materialize, they may exert pressure on the exchange rate and crowd out the private sector, potentially weakening growth.
The program aims to raise Pakistan's notably low tax-to-GDP ratio by 3 percent of GDP while improving the fairness and efficiency of the tax system. This will be achieved by broadening the tax base and improving tax compliance. There are three key elements to broadening the tax base: (i) increasing direct taxes by bringing previously untaxed sectors—such as retailers, property owners, and agricultural income—into the tax net and rationalizing personal and corporate income taxes; (ii) reducing exemptions and harmonize rates in the general sales tax (GST) system to streamline indirect taxation; (iii) expanding the coverage and rates of the Federal Excise Duty (FED); and (iv) rationalizing tariffs by eliminating exemptions and concessions to increase customs revenue. Provincial support for a number of these reforms is critical and welcome. Compliance efforts include enhancing revenue administration through better information sharing and digitalization.
The program enhances Pakistan's competitiveness by implementing structural reforms that address key economic distortions and improve the business environment. Reforming state-owned enterprises through restructuring and privatization will enhance efficiency and reduce fiscal burdens. The program will foster a level playing field for the private sector, and lower the cost structure of the economy, by removing state-induced distortions including the setting of prices for goods and services, reforming the energy sector, and increasing competition. Measures such as streamlining subsidies, improving the foreign direct investment regime, and deepening financial intermediation aim to attract investment and stimulate economic activity. By scaling up human capital investment and enhancing governance and transparency, the program will strengthen the foundations for productivity gains and competitiveness.
