“You have to be willingly ignorant of the past not to know where all this leads”.
– Paul Krugman, Nobel Laureate
The Historical Context
Pakistan has lurched from one economic crisis to another due to deeply entrenched structural economic vulnerabilities and a sham democracy, where democracy is merely an occasional episode in a broader narrative of widespread suffering, extensive deprivation, and poor governance. There has been a discernible absence of long-term economic stability.
When viewed from a proper historical and comparative perspective, Pakistan can be seen as a failed state resulting from political instability and seriously flawed economic policymaking. This is starkly reflected in the fact that at the turn of the 21st century, India’s economy was less than five times that of Pakistan. By the end of this year, India’s $4.39 trillion economy will be twelve times larger than Pakistan’s $411 billion economy. This widening chasm appears set to continue inexorably. Consequently, Pakistan has been compelled to seek 24 bailouts in the last 35 years, with four distinct programs for its cash-strapped and debt-ridden economy since 2019 alone.
The IMF approved a $2.4 billion bailout to Pakistan, split between a $1 billion Extended Fund Facility and a $1.4 billion climate-linked Resilience and Sustainability Trust (RST). This bailout is ostensibly intended to prevent Pakistan’s economy from collapsing, subject to conditions: cut subsidies, tax the untaxed, stop the rupee’s freefall, and most importantly, close the war. But the proof of the pudding is in the eating. Given
Pakistan’s abysmal track record in using previous financial aid responsibly and concerns about misuse of IMF funds, India opposed the “efficacy” of such bailouts or the lack thereof, given Pakistan’s “poor track record” in implementing reform measures. More importantly, it flagged the possibility of these funds being used for “state-sponsored cross-border terrorism”. India averred that the IMF was exposing itself and its donors to “reputational risks” and making a “mockery of global values”. India has 2.6% voting power, whereas countries with significant voting power are America (16.5%), Japan (6.2 %), China (6.1%), Germany (5.3%), France (4%), and Britain (4%).
Poetic Justice
Continued bailouts have pushed Pakistan into a vicious circle of debt, essentially turning it into a “massive defaulter” for the IMF. India highlighted widely shared concerns of misutilization of financial aid and diversion of these funds to support Pakistan’s military and terrorist groups, e.g., indirectly, Lashkar-e-Taiba and Jaish-e-Mohammed There is nothing good about this state of financial affairs, stark examples of playing to the gallery, and the situation is reminiscent of William Shakespeare’s eloquent observation in his play Hamlet: “Something is rotten in the state of Denmark.”
What are the prospects for the success and the appetite for meaningful engagement with Pakistan? How would this loan differ from the earlier loans? In the interregnum, the SOS call for yet another loan could have been placed on hold in this tumultuous time. Pakistan’s economic mess and the diversionary saga of funds require careful attention. monitoring and evaluating the IMF’s funds on an ongoing, real-time basis. This sobering reminder assumes greater significance because of Pakistan’s past track record of flagrantly violating the IMF’s conditionalities with impunity.
The United Nations and multiple think tanks have brought into focus the Army’s control of mega corporations (megacorps) and the assertive role of the Special Investment Facilitation Council (SIFC), fortifying military hegemony at the cost of civilian-led reform. This precarious situation has been caused by the vicissitudes of politics, long Army rule with “potentially deleterious economic implications”, the conspicuous absence of checks on power in Pakistan, and concomitantly, the limitations of democracy. There have also been issues of poor economic policies, which lacked a thrust on internal resource generation, unwise use of extensive subsidies, and heavy reliance on foreign countries, particularly Saudi Arabia and China, for infusion of funds. This macabre situation, at once tragic and comic, was unsustainable and had to collapse under its weight – the cookie crumbled and how!
IMF’s Report – The Theatre of the Absurd
There have been some improvements in Pakistan’s economy, reflected in softening inflation and rising consumer confidence. As the IMF puts it, “The authorities’ policy efforts have continued to bear fruit. Financial and external conditions have continued to improve, with a current account surplus in the first eight months of FY25 and reserves exceeding program projections. Inflation has recently declined to historical lows, although core inflation remains elevated at around 9%. The economic recovery is continuing, although growth in FY25H1 was somewhat lower than anticipated”.
However, with the economy growing by a tepid 2.68% in the fiscal year 2024-25, well below the targeted 3.6% level, the broader economic momentum remained weaker than projected. Pakistan’s GDP reached USD 411 billion, with per capita income rising to USD 1,824. Sector-wise performance varied, with agriculture growing by 1.8 % during the first three quarters, while the industrial sector declined by 1.14%. Pakistan’s manufacturing sector growth slowed to a seven-month low in April, with the HBL Pakistan Manufacturing Purchasing Managers’ Index (PMI) easing to 51.9 from 52.7 in March, weighed by concerns over global trade.
Debt-ridden Pakistan plans to borrow an additional USD 4.9 billion from international banks to meet its external financing needs after falling short of its economic growth target for the fiscal year 2024-25. Pakistan’s strategy is to secure USD 2.64 billion in short-term loans from international commercial banks at expected annual interest rates between 7-8 % without strict conditions or performance benchmarks.
Husain Haqqani, former Pakistani ambassador to the United States, during a candid conversation at the Aspen Ideas Festival, stressed that the threat from Pakistan was not primarily external, but internal, stemming from its fractured national identity, rapid population growth, economic stagnation, and misplaced security priorities.
In the absence of major reforms, fundamental problems, including a low tax base, prevalence of costly subsidies, and chronically loss-making public sector enterprises, persist. There have been no significant moves to restore fiscal prudence and balance, and to initiate structural macroeconomic reforms, particularly in taxation, energy, and governance sectors. Such sorely needed measures have often been delayed or diluted, with austerity measures frequently exacerbating social turmoil and the skew in the distribution of income and wealth. Hence, it has become a case of throwing good money after bad money or throwing money into a bottomless pit.
Pakistan’s debt requires $90 billion in repayments over the next three years, with the next major tranche due in December. Foreign reserves are precariously placed at $9.5 billion, sufficient to meet just over two months of imports. In this overarching setting, the IMF’s loan package can help Pakistan to stabilize its economy by providing much-needed foreign exchange reserves, reducing inflation, and promoting economic growth; implementing fiscal reforms, which can lead to improved governance and reduced corruption; boosting investor confidence, attracting foreign investment, and promoting economic growth; and managing its debt burden, reducing the default risk and promoting economic stability.
While Pakistan faces genuine economic hardship, further bailouts must be linked to tangible reforms and increased transparency. Sound and rational lending decisions, whether at the level of branch banking of the commercial banking system or the IMF, require independence and autonomous decision-making, prudence, due diligence, risk assessment, and risk monitoring. Accordingly, India urged the Financial Action Task Force (FATF), a global watchdog on money laundering and terrorism financing, to consider placing Pakistan back on its ‘grey list’, which necessitates rigorous monitoring
Emerging Contours
The IMF loans are a mixed blessing because the loan conditionalities invariably require austerity measures, tax hikes, and subsidy reductions, imposing a disproportionately heavier burden on the vulnerable sections of the population. Pakistan’s mounting debt burden may lead to a debt trap, where the country struggles to repay the loan, thereby aggravating economic instability. The IMF’s rehabilitation package may not be in sync with Pakistan’s long-term financial goals, potentially hampering sustainable development. Austerity measures and subsidy reductions can seriously hurt the poor and vulnerable sections, potentially increasing poverty and inequality.
The IMF imposed 11 new conditions, raising the total conditions to 50, as a prerequisite to the release of the next tranche, warning that tensions with India could heighten risks to the scheme’s fiscal, external, and reform goals. These conditions include Parliamentary approval of a new Rs 17.6 trillion budget for fiscal year 2026, an increase in the debt servicing surcharge on electricity bills, and lifting restrictions on the import of over three-year-old used cars. Further, the four federating units will implement the new Agriculture Income Tax laws through a comprehensive plan, including establishing an operational platform for processing returns, taxpayer identification and registration, a communication campaign, and a compliance improvement plan by June 2025.
The government will publish a governance action plan based on the recommendations of the Governance Diagnostic Assessment by the IMF. The government will publish a plan outlining the post-2027 financial sector strategy, outlining the institutional and regulatory environment from 2028 onwards.
The government has been urged to notify the annual electricity tariff rebasing by July 1, 2025, to maintain energy tariffs at cost recovery levels. It will notify the semi-annual gas tariff adjustment to maintain the energy tariff at cost recovery levels by February 15, 2026.
The Pakistani Parliament is also called upon to adopt legislation to make the captive power levy ordinance permanent by the end of May. The government has increased the cost for the industries to force them to shift to the national electricity grid. The Parliament will adopt legislation to remove the maximum Rs 3.21 per unit cap on the debt service surcharge, which amounts to punishing honest electricity consumers to pay for the inefficient power sector. Pakistan will prepare a plan by the end of this year based on the assessment conducted to fully phase out all incentives regarding Special Technology Zones and other industrial parks and zones by 2035.
Unintended consequences – Misuse of Funds
Pakistan reiterated its commitment to economic reforms, e.g., tax restructuring, energy sector overhaul, and liberalisation of the automobile industry. But, given Pakistan’s history of fund diversion and its fixation on terrorism, despite (or because of) the poor shape of the economy, such commitments need to be taken not just with a pinch of salt but with a sackful of salt.
Pakistan’s over-assertiveness regarding sponsored terrorism resembles the observation, “the lady doth protest too much, methinks,” in William Shakespeare’s play Hamlet. Therefore, there are valid concerns about the misuse of IMF funds; thus, the IMF should have exercised greater caution in the sanctioning and disbursement of this loan and insisted on stricter, verifiable monitoring and evaluation of the funds’ end-use. Additionally, there is a pressing need for a global mechanism to oversee such misuse.
Monitoring, Evaluation, and End-use of Funds
Global institutions like the IMF must carefully evaluate whether their funds could potentially be diverted toward terrorism and military objectives before approving assistance. It must, however, be realized that the IMF loans are always subject to “conditionalities,” and the disbursement of subsequent loan tranches is dependent on the observance of these conditionalities. This time again, the IMF’s loan is subject to these conditions: cut subsidies, tax the untaxed, stop the Rupee’s freefall, and, most importantly, close the war. Unfortunately, the monitoring of these loans is grossly inadequate, allowing Pakistan to flout the terms and conditions of the loans. There cannot be any shortcut to the constant monitoring of the identified metrics.
Illusory Stability Not Real Self-Reliance and Competitiveness- Cognisable Dilemma of “Moral Hazard”
The economic mess that Pakistan finds itself in is too evident, and the concerns of the multilateral institutions and lender countries are too real and worrisome that Pakistan is beyond redemption and cannot create an illusion of macroeconomic stability and growth. Repeated bailouts, all too nauseatingly frequent, create a “moral hazard”, giving Pakistan’s leadership a soft but unsustainable option of not undertaking any real reforms, confining themselves to using such bailouts as a reprieve to avoid imminent default without undertaking any fundamental, enduring reforms. In this descent into chaos due to foundational missteps, it is important to reset the directive boldly and compellingly.
To be sure, Pakistan’s economy can get short-term relief by stabilizing the economy and reducing inflation. But long-term challenges persist, necessitating the creation of social safety nets to protect vulnerable populations from the negative impacts of austerity measures, the implementation of structural reforms to promote economic growth, reduce corruption, and improve governance, promotion of economic growth, and management of its debt burdento avoid a debt trap and promote economic stability, and monitoring and evaluation to make necessary adjustments and ensure its benefits are equitably distributed.
Given the magnitude of the challenge, there must be a focus on self-reliance and the injection of an element of competitiveness. Without effective strategic planning, Pakistan will remain trapped in a vicious cycle of poverty caused by high and mounting levels of debt, a falling rupee, severe pressure on its foreign exchange reserves, and a low-level equilibrium trap, necessitating structural reforms that create fiscal space and assuage concerns about debt sustainability. If there is no wake-up call, no course correction, even Allah will find it difficult to prevent Pakistan from slipping into a deeper morass.
Accountability must constitute a core element of the fundamental objectives of multilateral institutions amid rapidly shifting geopolitical realities for promoting stability and transparency, or else the world risks financing fragile economies, and dangerous regimes that threaten regional and global security.
India should have a say in global decisions of institutions like the IMF, particularly at a time of endangered regional peace and security. But this is impossible till the IMF’s governance and voting structure is changed and the international financial architecture is transformed. Today’s international financial framework is a symbol of the colonial-era mindset, which needs to be changed so that developing and responsible countries like India can get their rightful place.
Why does Pakistan continue to lag economically, unlike Bangladesh and Vietnam?
This is not a difficult question. Fundamentally, the answer lies in the absence of political intent and will, along with the aggressive use of “Jihad” as an instrument of state policy rather than as a means to promote broad-based development, which has devastating consequences for the macroeconomy. Meanwhile, Bangladesh and Vietnam focused on human resource development, exports, education, and women’s empowerment, and today the results are evident.
Pakistan is the IMF’s fifth-largest debtor, owing over $6 billion as of May 25, 2025, after Argentina, Egypt, Ukraine, and Ecuador. Permissive terms and relaxed conditions of IMF assistance encourage Pakistan to avoid economic discipline and to abandon reforms prematurely. In this environment of ongoing volatility amid debt concerns, Pakistan has been treated with kid gloves, little realizing that such short-sighted, myopic policies do not consider broader geopolitical consequences in its funding decisions, ultimately harming Pakistan and sending a wrong message to the global community—a message of unevenness and discrimination.
The message of history is unmistakable: business as usual without addressing fundamental dysfunctions cannot resolve structural and deeply entrenched issues. Let us wait and watch. We live and learn, or don’t we? Karl Marx’s contextually significant observation, “History repeats itself, first as tragedy, second as farce,” has important policy prescriptive implications today.
