India’s Stand Vindicated as Pakistan Once Again Misses IMF Loan Benchmarks

Pakistan has once again stumbled in meeting key conditions of the International Monetary Fund’s (IMF) $7 billion Extended Fund Facility (EFF), failing three out of five critical benchmarks during the programme’s second review. This latest shortfall not only highlights Islamabad’s continuing struggle with fiscal discipline but also reinforces India’s long-held reservations about IMF bailouts to its neighbour.

The second review was meant to assess Pakistan’s progress in stabilising its economy and implementing structural reforms. Instead, the findings exposed glaring weaknesses in tax collection, savings management, and economic governance. India, which had already expressed concerns about the misuse of such funds and the IMF’s oversight, now finds its position further validated.

According to reports, Pakistan missed three out of five key targets, highlighting persistent structural and fiscal weaknesses in its economy | Financial Express

Persistent Fiscal Gaps Despite Some Gains

The Federal Board of Revenue (FBR) fell short of its ambitious target of PKR 12.3 trillion in overall revenue collection. A major contributor to this gap was the underperformance of the “Tajir Dost” scheme—designed to formalise taxation of the retail sector—which brought in just PKR 50 billion, a fraction of its expected yield. This failure has reignited debate about the efficacy of Pakistan’s tax reforms, especially when efforts to expand the tax net are undermined by poor compliance and weak enforcement.

Similarly, provincial governments missed their collective savings target of PKR 1.2 trillion, managing only about PKR 921 billion. The shortfall was largely driven by overspending, suggesting that expenditure control remains a persistent challenge despite tight fiscal conditions.

However, the review was not without some bright spots. The federal government achieved a primary surplus of PKR 2.7 trillion—exceeding the IMF target of PKR 2.4 trillion—and narrowed the fiscal deficit to 5.4 percent of GDP, below the projected 5.9 percent. These figures indicate some progress in fiscal management, although they remain overshadowed by the broader structural shortcomings.

IMF’s Support Comes with Mounting Conditions

The IMF approved Pakistan’s 37-month Extended Fund Facility on 25 September 2024, alongside an additional $1.4 billion under its Resilience and Sustainability Facility (RSF), aimed at improving climate adaptation and disaster resilience. The EFF was designed to restore macroeconomic stability, reform state-owned enterprises, broaden the tax base, and enhance governance.

Since the programme’s launch, Pakistan has received about $2 billion in disbursements, including an immediate $1 billion upon approval and a second tranche of approximately $1.023 billion in Special Drawing Rights earlier this year. The RSF, meanwhile, is intended to address the country’s vulnerability to climate-related shocks, an area where Pakistan has faced increasing risks in recent years.

Yet, despite these substantial financial inflows, Islamabad’s failure to meet agreed targets raises questions over whether the IMF’s repeated interventions are fostering long-term stability or merely postponing deeper reforms.

India’s Abstention and the Question of Accountability

India has consistently taken a cautious stance on IMF aid to Pakistan, warning that funds could be diverted towards military expenditure or even cross-border terrorism rather than economic reform. During the IMF’s decision-making process on the EFF, India abstained from voting, with its representative Parameswaran Iyer stressing the need for moral responsibility in global financial decisions. He argued that the repeated failure to meet targets should prompt greater scrutiny of how such funds are utilised.

India’s scepticism is not without precedent. Over the years, IMF programmes for Pakistan have often been accompanied by political considerations, with critics arguing that the institution’s oversight mechanisms are too lenient in the face of strategic and geopolitical pressures.

Structural Barriers to Reform

A significant impediment to Pakistan’s economic reform is the military’s deep entrenchment in the national economy. Beyond its security role, the army controls or influences numerous commercial enterprises, making it arguably the country’s largest business conglomerate. A 2021 United Nations report highlighted this dominance, and little appears to have changed since.

This entrenched influence extends to the Special Investment Facilitation Council, where military officials retain decision-making authority even under nominally civilian governments. Combined with political instability and frequent changes in leadership, these factors erode the capacity to carry out consistent, long-term economic reforms.

Conclusion: Repeating the Cycle of Bailouts

Pakistan’s failure to meet IMF loan conditions yet again underscores the country’s chronic fiscal and structural vulnerabilities. While isolated improvements—such as a reduced fiscal deficit and a higher-than-expected primary surplus—suggest some capacity for fiscal discipline, they are overshadowed by persistent weaknesses in tax collection, savings, and governance.

India’s decision to abstain from IMF votes on Pakistan, coupled with its warnings about misuse of funds, appears increasingly justified. Unless Pakistan undertakes genuine structural reforms—reducing military influence in economic decision-making, enforcing fiscal discipline at the provincial level, and expanding its tax base—IMF bailouts risk becoming a recurring cycle rather than a bridge to sustainable growth. The burden of proof now lies with Islamabad to show that it can move beyond dependency and towards lasting economic stability.

(Sources: Financial Express, NDTV, Moneycontrol)