Sacred cows and shrinking pies

Pakistan’s fourth review under the IMF’s Extended Fund Facility has produced the expected staff-level agreement. It was a non-event by any meaningful economic measure.

The programme remains on track, and another $1.2 billion in financing is expected, subject to the Fund board’s approval. What remains missing is a credible route from stabilisation to growth. With the programme due to expire in about a year, another IMF arrangement is beginning to look more likely than a durable exit.

The macroeconomic numbers offer some comfort. Fiscal and external accounts are broadly on target, sovereign spreads have returned to pre-2022 crisis levels, and foreign exchange reserves have recovered to levels last seen before the crisis. These are meaningful achievements of fiscal consolidation and external adjustment. But the finance ministry and central bank appear increasingly content to meet the Fund’s benchmarks and little more.

Growth, employment and poverty reduction remain secondary concerns, as though macroeconomic stability were an end in itself rather than a means to something better.

The contrast with household welfare is stark. Official estimates put poverty at 28.9 per cent in 2024-25, up from 21.9 per cent in 2018-19. Inequality has also widened, with the Gini coefficient rising from 28.4 to 32.7 over the same period.

Pakistan’s economy may have stabilised, but a growing share of its population has become poorer. The latest energy shock, and its direct and indirect effects on inflation, will only add to the pressure.

Some allowance is due for the external environment. Economies everywhere are grappling with surging energy prices and supply disruptions as the Middle East war spreads. Governments are struggling to anticipate what comes next, and Pakistan is no exception.

But the country’s growth struggle is entering its fifth year, and the deterioration in household purchasing power long predates this conflict. The war has aggravated problems that domestic policymakers had years to address.

The Fund, meanwhile, is pressing ahead with further rationalisation of electricity and gas tariffs, the removal of cross-subsidies and better-targeted support for vulnerable households.

The economic logic is defensible. Cost recovery and lower circular debt are essential to the energy sector’s viability. But removing existing subsidies before effective alternatives are operational risks pushing still higher bills onto low- and middle-income households.

The Fund is right to demand financial discipline; Islamabad must ensure that the adjustment does not come disproportionately at the expense of those least able to bear it.

There are also two areas where Pakistan should negotiate greater flexibility. The first is the petroleum levy on furnace oil, introduced as part of the Resilience and Sustainability Facility reforms. With LNG supplies disrupted and furnace oil again needed for power generation, the logic of maintaining this levy without adjustment has weakened.

The Fund should permit a temporary suspension while the war continues and regional energy supply chains remain impaired. Climate commitments matter, but so does the immediate availability and affordability of electricity.

The second is the Fund’s demand for a prompt withdrawal of the fuel subsidy for motorcycles, three-wheelers and small cars. The scheme is expensive and poorly targeted. It largely excludes the poorest households that do not own vehicles, while doing little to contain the wider inflationary effects of higher transport costs.

The Fund’s criticism is therefore justified, but withdrawing relief without a credible alternative would simply transfer another burden to households already struggling with declining real incomes.

A better approach would be to negotiate a temporary reduction in the overall petroleum levy while international prices remain elevated, alongside more targeted income support.

Tax and non-tax revenues have provided some fiscal room, and there is a legitimate argument for reconsidering the exceptionally heavy taxation of petroleum products during an external price shock.

A levy reduction is not the same as subsidising fuel below its cost, although it would still mean foregoing revenue and would benefit higher-income consumers as well. The fiscal trade-off must therefore be explicit, temporary and financed through adjustments elsewhere in the budget.

That brings the discussion to the more fundamental problem: Pakistan’s failure to broaden its tax base. Traders and retailers continue to evade meaningful taxation, real estate remains undertaxed, and provincial agricultural income tax collections are nowhere near their potential.

The Fund’s own analysis acknowledges these distortions. Yet successive governments have demonstrated that they would rather extract more from existing taxpayers than confront politically influential constituencies that have resisted documentation and taxation for decades.

The latest revenue performance illustrates the problem. The FBR marginally exceeded its first-quarter target, but the achievement says little about the quality of taxation or the sustainability of the adjustment. The formal corporate sector, salaried workers and petroleum consumers remain convenient sources of revenue. The agricultural income tax reforms have made little headway in actual collections, while efforts to document retail trade continue to falter.

The sacred cows remain largely untouched, and those already in the tax net are expected to carry an ever-greater burden.

The Fund is not entirely silent on these issues. It has repeatedly called for fairer taxation, better enforcement and structural reforms, and some measures have found their way into programme benchmarks. But the imbalance between the enforcement of fiscal targets and the delivery of politically difficult reforms remains striking.

Revenue collection and expenditure restraint are measured against hard numbers, while progress on widening the tax base and improving economic opportunity is much easier to defer. Islamabad has become adept at complying with the former while promising the latter.

The government’s response to rising poverty is largely to expand social protection. Cash transfers are necessary, but they cannot substitute for productive employment, better education, improved nutrition and an economy capable of raising household incomes.

Nor can greater spending on social services be treated as an achievement without corresponding improvements in outcomes. A country cannot indefinitely compensate for its failure to generate opportunity by distributing an ever-larger share of a constrained fiscal envelope.

It would be unfair to place the principal blame on the IMF. The Fund can insist on stability and encourage reforms, but it cannot manufacture the political will to redistribute the tax burden, confront entrenched interests or create conditions for private investment. Those responsibilities belong to Pakistan’s ruling elite, which remains more concerned with protecting its share of the economic pie than expanding it.