The IMF deal Pakistan couldn’t refuse
In March 2025, Pakistan struck another deal with the International Monetary Fund. This time unlocking a total of $2.3 billion through a combination of a new 28-month climate-focused loan under the Resilience and Sustainability Facility, and a disbursement under the ongoing Extended Fund Facility. On paper, this looks like a much-needed relief for a country struggling to steady its economic footing. But as is often the case with IMF programs, the story doesn’t end with the inflow of dollars. In fact, for most Pakistanis, this is where the real story begins.
Unlike earlier bailouts, this time around the IMF has gone beyond the usual prescriptions of austerity and belt-tightening. It’s asking Pakistan to not only fix its books but also brace itself for the climate crises that are becoming alarmingly frequent. That sounds noble and perhaps even necessary given the scale of destruction caused by recent floods but it also means the cost of reform is going to hit the public squarely in their pockets, and soon.
Let’s be clear the IMF is not throwing cash Pakistan’s way out of goodwill. The loan comes with a long list of conditions, many of which are already being quietly implemented. Among the most significant is the introduction of new taxes. A carbon levy on fossil fuels, including petrol, diesel, and coal, is one of the key requirements under the climate resilience agenda. It’s meant to nudge the country toward cleaner energy sources, but in the process, it will make transport, power, and manufacturing more expensive. That means higher prices not just for fuel, but for everything that depends on it from vegetables being trucked into cities to electricity bills for middle-class homes.
The tax net is also being widened elsewhere. The government is under pressure to raise more revenue domestically, which could mean revisiting sales tax exemptions, hiking utility rates, or introducing new forms of indirect taxation. And here’s the rub in Pakistan’s highly unequal tax system, it’s almost always the salaried class and lower income groups who end up paying more, while the wealthier segments manage to evade or negotiate their way out.
Then there’s the matter of energy reforms. For decades, Pakistan has subsidised electricity, partly to protect the poor and partly to paper over inefficiencies in the power sector. Those subsidies are now on the chopping block. The logic is straightforward, you can’t fix the fiscal deficit if you’re bleeding money through poorly targeted support programs. But pulling back subsidies without a solid safety net in place is going to hit people hard, especially in urban areas where power bills already consume a big chunk of monthly income.Inflation is the other side of this coin. While the State Bank has managed to pull it down from last year’s double-digit highs, prices remain sticky, and any new taxes or hikes in utility rates will likely push them up again. That means food, transport, and daily essentials could all become costlier just as many families were beginning to catch their breath. For a population that’s been living through one economic shock after another COVID, political instability, and floods, this will feel like déjà vu.
It’s important to acknowledge, though, that Pakistan didn’t get here overnight, nor is the IMF entirely to blame. The country has been running persistent fiscal and current account deficits for years, borrowing heavily to finance both development and consumption.Successive governments have avoided politically difficult decisions like tax reform or restructuring of state-owned enterprises. Instead, they’ve opted for short-term fixes: loans from friendly countries, ad hoc subsidies, or populist budget gimmicks. The IMF program, in many ways, is a correction of those past sins.
Still, the IMF’s approach remains rigid and top-down. It often assumes that governments can pass reforms cleanly and efficiently and that citizens will accept short-term pain for long-term gain. However, the political economy of a country like Pakistan is far more complex. Reforms hurt, especially when they’re front-loaded and when trust in government institutions is already low. People are unlikely to buy into sacrifices unless they see something tangible in return, better schools, cleaner water, and functioning hospitals. So far, that promise has remained mostly on paper.
There’s also the risk that the reforms stall midstream, as they have so many times before. With elections on the horizon, any government, regardless of party, will think twice before implementing deeply unpopular decisions. And if political instability returns, or if external conditions worsen (say, due to a spike in oil prices or regional conflict), the whole reform agenda could unravel. That would leave the country once again in limbo: beholden to lenders, stuck with half-baked policies, and still no closer to real economic sovereignty.
But here’s the thing, there is also a window of opportunity. For perhaps the first time, there’s a conversation happening in policymaking circles about long-term sustainability, not just survival. The inclusion of climate resilience in the IMF’s agenda is a turning point. Pakistan has been among the countries hardest hit by climate change, and this program offers both a framework and financing to start building defences, whether that’s better flood protection, smarter urban planning, or cleaner public transport. If done right, this could lay the foundation for a more resilient and future-proof economy.
The IMF deal is what Pakistan makes of it. It could be just another loan that tides the country over for a few months. Or it could be the beginning of a slow, difficult, but ultimately necessary transformation. What’s clear is that the burden of adjustment is falling disproportionately on ordinary citizens, many of whom had no role in causing the crisis. That’s not just an economic issue, it’s a moral one. If reform is to succeed, it must also be fair. And that’s a decision that lies not with the IMF, but with Pakistan’s leaders.
Courtesy: The Friday Times, Pakistan
https://thefridaytimes.com/30-Mar-2025/the-imf-deal-pakistan-couldn-t-refuse
