ISLAMABAD: International Monetary Fund (IMF) has said that 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. Without a concerted adjustment and reform effort, Pakistan risks falling further behind its peers.
Fund has also expressed the fear that large uncertainty and downside risks exist due to resurgent political or social tensions which could weigh on policy and reform implementation.
This apprehension is part of the document released by the Fund $ 7 billion 37- months Extended Finance Facility (EFF) arrangement.
According to the Fund, notwithstanding the new government’s intent to deepen reforms under a new Fund-supported program, political uncertainty remains significant, and pressures for easing policies and providing tax concessions and subsidies are strong.
” A resurgence in political or social tensions could weigh on policy and reform implementation. Policy slippages, including particularly on needed revenue measures, together with lower external financing, could undermine the narrow path to debt sustainability, given the high level of gross financing needs, and place pressure on the exchange rate and on banks to finance the government (further exacerbating crowding out of the private sector, which could entrench a low-growth—low-financial-development equilibrium), ” IMF said adding that geopolitically-driven higher commodity prices or tighter global financial conditions could also adversely affect external stability.
On energy, IMF has said that timely energy tariff adjustments under the previous program have helped stabilize energy sector circular debt. Going forward, deep cost-side reforms are critical to securing the sector’s lasting viability and reducing its costs.
The energy sector has become a major point of macro-fiscal risk as circular debt (CD) spiked over 2013–21 for power and 2020–23 for gas. The authorities began to significantly adjust tariffs in line with costs beginning in 2021 (electricity) and early 2023 (gas). This, along with sizeable power subsidies (around 1 percent of GDP in FY24), broadly stabilized nominal CD flow in 2023-24 (text charts). However, large persistent power subsidies are not a viable ongoing tool to plug the sector’s gaps. Broad structural reforms must take place aimed at reducing costs and tackling theft, captive power, and inefficiencies in the sector (especially DISCOs).
For the power sector, this requires an annual rebasing notification in full by the Power Ministry at a rate consistent with cost recovery, which occurred on July 14, 2024, along with timely implementation of quarter tariff adjustments and monthly fuel cost adjustments. This, along with the budgeted FY25 power subsidy of Rs 1,229 billion (1.0 percent of GDP), would minimize net CD flow.
The Fund is of the view that for the gas sector, this requires notification by the Petroleum Ministry of the semiannual tariff adjustments, in line with revenue requirements and continuing to include the cost of imported RLNG, which occurred on July 1, 2024 and is anticipated by February 15, 2025 (February 15, 2025 ). It is critical that both power and gas tariff adjustments preserve their current progressive tariff structures, thus continuing to protect vulnerable household consumers.
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