LAHORE: As global economic tremors intensify following the fallout of the Iran conflict, developing economies are once again being pushed to the edge.
But for IMF beneficiaries there is a growing realisation that the standard policy prescription offered by it may be part of the problem rather than the solution.
Pakistan’s economic managers often present IMF programmes as unavoidable lifelines. In reality, they come with a rigid framework that prioritises fiscal tightening, higher taxation, and reduced public spending — policies that disproportionately hurt the lowest strata of society while failing to address the structural weaknesses of the economy.
The current global environment underscores how unfair this model has become. External shocks — rising fuel prices, food insecurity, global interest-rate hikes and geopolitical conflicts — are the primary drivers of distress in countries like Pakistan. Yet, the IMF continues to treat these crises as if they stem from domestic mismanagement alone. The result is a “one-size-fits-all” austerity template that ignores country-specific realities.
Pakistan offers a textbook example. Its tax system is narrow, its informal economy vast, and its export base limited. Under such conditions, raising tax rates does not necessarily increase revenues — it often does the opposite by discouraging compliance and slowing economic activity. Yet IMF programmes repeatedly emphasise higher taxation targets without sufficient focus on broadening the base or formalising the economy.
Equally problematic is the insistence on cutting public expenditure. While fiscal discipline is necessary, indiscriminate cuts, especially in development spending, undermine long-term growth. Infrastructure projects stall, industrial expansion slows, and job creation suffers. For a country where millions of young people enter the labour force each year, this is not just an economic issue; it is a social time bomb.
The contradiction becomes stark when compared with the policies of advanced economies. During crises like Covid-19, rich countries injected massive fiscal stimulus, averaging around 6.0 per cent of GDP, to protect their economies. Pakistan, under IMF guidance, was asked to do the exact opposite: contract its economy in the futile hope that private capital will eventually return.
Research over the past decade shows that IMF-backed programs often fail to improve investment flows or diversify exports, two areas critical for Pakistan’s long-term stability. Even the IMF’s own projections have frequently overestimated growth outcomes under its programs, largely because they underestimate the contractionary impact of austerity.
More troubling, however, are the social consequences. Rising utility prices, increased indirect taxation, and cuts in subsidies have pushed millions closer to poverty. Health and education outcomes deteriorate as households struggle to cope with inflation. Inequality widens, and economic frustration spills over into political instability, something Pakistan has witnessed repeatedly.
The core issue is not that Pakistan does not need reform, it does. Chronic fiscal deficits, inefficient state-owned enterprises, and weak governance structures must be addressed. But reform cannot be synonymous with austerity alone. A shrinking economy cannot generate the revenues needed to service debt, nor can it create the jobs required to maintain social cohesion.
Pakistan needs instead is a growth-oriented adjustment framework. This means prioritising export diversification, supporting small and medium enterprises, investing in human capital, and formalising the undocumented sectors of the economy. It also requires smarter taxation, lower rates combined with wider coverage, and targeted subsidies that protect the most vulnerable while minimising fiscal leakages.
The IMF must rethink its approach. Its ongoing review of program design presents a rare opportunity to move away from rigid conditionalities toward more flexible, country-specific solutions. For Pakistan, this would mean allowing countercyclical policies during external shocks rather than enforcing pro-cyclical austerity that deepens downturns.
Pakistan is not merely facing a balance-of-payments crisis; it is confronting a broader challenge of economic transformation. Without sustained growth, no amount of fiscal tightening will restore stability. And without social stability, no reform programme, IMF-backed or otherwise, can succeed.
Austerity may balance books on paper, but it cannot build economies. For Pakistan, the time has come to move beyond compliance and demand a framework that prioritizes growth, resilience, and equity. Only then can the country break free from its recurring cycle of crisis and dependency.
