The International Monetary Fund (IMF) has agreed to provide Pakistan with a $7 billion loan to support its struggling economy. In return, Islamabad has pledged that this will be the last time it relies on assistance from the Washington-based institution.

This marks Pakistan’s 24th IMF bailout since 1958, coming with the condition of implementing unpopular reforms, such as expanding its low tax base.

In the previous year, Pakistan narrowly avoided default due to political instability, catastrophic 2022 monsoon floods, decades of economic mismanagement, and a global economic downturn. Last-minute loans from friendly countries and an IMF rescue package provided temporary relief, but the country continues to face severe financial challenges, including high inflation and massive public debt.

Prime Minister Shehbaz Sharif emphasized the importance of this being the final IMF program. "This programme should be considered the last programme," he said. "We should tax those who are not being taxed."

Addressing Economic Challenges

Negotiations with the IMF to unlock the new loan, announced on Friday, lasted for months. The loan will be disbursed over three years, contingent on approval by the IMF's Executive Board.

The agreement includes stringent reforms, such as increasing household bills to address the perpetually troubled energy sector and enhancing tax revenues.

In a nation with over 240 million people, where the majority work in the informal sector, only 5.2 million filed income tax returns in 2022. The government aims to raise nearly $46 billion in taxes during the 2024-25 fiscal year, representing a 40% increase from the previous year.

Unconventional methods, like blocking 210,000 SIM cards of mobile users who have not filed tax returns, have been employed to widen the tax base.

IMF Pakistan Mission Chief Nathan Porter stated that revenue collection would be bolstered by "simpler and fairer direct and indirect taxation, including bringing net income from the retail, export, and agriculture sectors properly into the tax system."

Islamabad also plans to reduce its fiscal deficit by 1.5% to 5.9% in the coming year, in line with another key IMF requirement.

The IMF believes the loan and its conditions will help Pakistan achieve "macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth."

However, Pakistan's public debt remains substantial at $242 billion, with debt servicing expected to consume half of the government's income in 2024, according to the IMF.

Analysts have criticized Islamabad's measures as superficial reforms aimed at satisfying the IMF without addressing fundamental issues. Ali Hasanain, an economics professor at Lahore University of Management Sciences, expressed skepticism, noting, "The IMF has issued a loan similar in size and conditions as the one agreed to five years ago, and five years before that."

Public Reaction

Prime Minister Sharif, who came to power in February under contested elections, faces potential backlash from the strict economic measures introduced by his fragile coalition government. Protests have already erupted over tax and bill increases outlined in last month’s IMF-influenced budget, with more demonstrations expected.

The World Bank warned in April that around 40% of Pakistan's population lives below the poverty line, with an additional 10 million people at risk of falling into poverty.

Pakistan's previous $3 billion IMF loan in 2023 provided critical support but also required unpopular austerity measures, including ending consumer cost subsidies.