No cause for celebration: Growth falters despite IMF staff-level agreement

As the government celebrates reaching a staff-level agreement with the International Monetary Fund, Kamran Khan warned that the country’s grim economic indicators leave little reason to celebrate.

In a critical economic assessment, Khan said the enthusiasm surrounding the IMF deal is misplaced given the disappointing 1.54 percent GDP growth this fiscal year—well below the 3.5 percent target Pakistan had assured the IMF.

“There is no reasonable justification to celebrate,” Khan said, pointing to persistent economic stagnation in a country of over 240 million people, where 64 percent of the population is under the age of 30.

Pakistan recorded just 1.34 percent growth in the first quarter and 1.73 percent in the second. Khan said this level of stagnation is alarming, especially given the increasing pressures on all economic sectors.

He cited data from the Pakistan Bureau of Statistics and the National Accounts Committee, noting that the agriculture sector, which makes up nearly 23 percent of GDP, shrank by 7.7 percent due to falling yields of cotton, maize, rice and sugarcane. Cotton production alone plummeted by 31 percent compared to the 2014-15 season, when output had exceeded 14 million bales. This season’s figure dropped below 5 million.

Sugar production fell by 12.6 percent, raising fears of a possible sugar shortage later in the year.

Large-scale manufacturing (LSM) also saw a 0.4 percent decline in the first half of the fiscal year, driven by major drops in textiles, automobiles, cement and an 18 percent decrease in iron and steel production. Khan warned that this downturn was triggering job losses across industries.

“Industries are taking a massive hit. Layoffs are already happening,” he said.

Khan also raised concerns about Pakistan’s low tax-to-GDP ratio, which remains stuck at 9.2 percent. Under a trader-friendly tax scheme, the government aimed to collect PKR 23.4 billion in the first six months of this fiscal year but only managed PKR 2 million.

Agriculture tax implementation across provinces, scheduled for Jan. 1, 2025, has yet to materialize. And while tax revenue hit PKR 4,500 billion in six months, over 65 percent went toward debt servicing, leaving little for development projects.

Pakistan’s total internal debt now stands at PKR 50 trillion, with external debt at $131 billion—exceeding 75 percent of GDP.

Despite a 10 percent cut in interest rates over the past eight months, private sector borrowing has not picked up, and banks remain hesitant to offer long-term credit. Meanwhile, around 1.5 million young people enter the job market annually, but a weak 2 percent growth rate and a 13.7 percent drop in private investment have left the economy unable to absorb them.

“This is fueling frustration and accelerating the brain drain,” Khan warned.

He added that while the IMF may be satisfied by balance sheets, Pakistan has failed to meet several critical program targets, including privatizing state-owned enterprises like PIA and power distribution companies. Reforms in the Federal Board of Revenue and progress on CPEC Phase II projects also remain stalled.

“Until Pakistan changes its economic strategy, there is no real reason to celebrate the IMF program,” Khan concluded.

Muhammad Sohail, CEO of Topline Securities, shared his perspective on the IMF deal, viewing the early staff-level agreement as a positive step.

He highlighted that Pakistan's quick agreement was an improvement over other regional countries like Sri Lanka and Bangladesh, where delays were observed in their respective IMF negotiations. "The agreement came just 10 days after the staff-level meeting, which is better than expected," Sohail noted.

However, Sohail also warned that Pakistan’s real challenge lies in securing the disbursement of funds after the IMF board approval. He pointed out that the country’s foreign reserves had decreased from $12 billion to $11 billion in recent months, adding further uncertainty to the economy.

Sohail also reflected on the changing global economic environment. He expressed concern over the difficulty Pakistan faces in securing commercial loans, especially with the rising interest rates globally. “The geopolitical situation has made borrowing expensive and challenging. Our country’s credit rating doesn’t help either,” he said, referring to the increased risks for lenders.

The Middle East appeal

Sohail attributed the rising trend of Pakistanis seeking employment in the Middle East to tax-free incentives. He noted that the Gulf region offers a competitive advantage with zero taxes, which has made it an attractive destination for Pakistani workers, despite high living costs.

Sohail suggested that Pakistan could benefit from revisiting its tax policies to remain competitive in the global job market.

Long-term economic reforms

Sohail also stressed the importance of long-term economic reforms, including digitization of payments and improving Pakistan’s GDP base. He suggested that the government must revisit its GDP calculations every decade to ensure they reflect the country’s changing economic realities. By doing so, Pakistan could better align its fiscal policies with its actual economic output.

In conclusion, while Sohail acknowledged the importance of the IMF agreement, he shared concerns about the structural challenges facing Pakistan’s economy. “The IMF deal is just a short-term fix. Pakistan needs to implement deeper reforms to address its long-term economic issues,” he said.