Bailouts and bottlenecks
Questions remain as to whether serial bailout recipient Pakistan can break its dependency on the IMF cycle. By Jason Mitchell.
Pakistan has now received more IMF bailouts than any other country in the world, with its 25th arrangement highlighting its prolonged dependency on the fund.
The latest IMF programme was officially approved in September 2024 as a 37-month Extended Fund Facility amounting to around US$7bn. It has raised familiar doubts over whether Pakistan is finally ready to tackle its deep-seated economic imbalances or is merely postponing the next crisis.
Since President Zardari’s government took office in March 2024, headline inflation has plummeted from around 20.7% to 4.1% by July 2025. The IMF has disbursed around US$2.1bn under the EFF, and an additional US$1.4bn has been approved under the Resilience and Sustainability Facility. The programme now includes 50 structural reform benchmarks — spanning tax, energy and state-owned enterprises — with several key conditions still unmet.
Limited progress under the IMF programme has been sufficient for Moody's to upgrade Pakistan's sovereign rating to Caa1 with a stable outlook in August 2025, citing stronger fiscal performance, an expanding tax base and a more favourable external position. Reserves now exceed US$14bn, up from US$9.8bn a year earlier, while fiscal consolidation has narrowed the deficit and improved debt affordability.
However, vulnerabilities remain. Pakistan — with a US$411bn economy and 240.5 million inhabitants — still requires approximately US$20bn–$25bn annually in external financing, with more than 40% of government revenue allocated to interest payments.
Analysts argue that each bailout could delay the implementation of hard structural reforms necessary for long-term stability. Budget deficits, low investment, weak institutional management, rising climate risks and cautious external investors continue to weigh on the country's ability to sustain momentum — making lasting reform more urgent than ever.
Grace Lim, analyst at Moody’s, said: “The current IMF programme and the progress made by the government under the programme have, so far, supported macroeconomic stability and led to some improvements to the country’s external and fiscal positions.
"However, to effectively address deep-rooted structural issues (such as around the circular debt issue, underperforming SOEs, weak fiscal position and narrow tax base, low productivity growth, small export sector and weak export competitiveness), it will require long-term investment and continued reform momentum."
While the IMF’s framework has provided stability, critics argue that meeting formal programme benchmarks is not the same as delivering real reform outcomes.
Sakib Sherani, chief executive officer of Macro Economic Insights, an Islamabad-based economic consultancy, said: "There is a fundamental mismatch between the ambition of IMF programmes and both the tenure of the arrangement as well as the domestic capacity of policymakers and institutions. The broad sweep of fund conditionality pushed through a relatively small time window leads to unintended consequences as well as perverse incentives.”
Ali Salman, executive director of the Policy Research Institute of Market Economy, an Islamabad-based think tank, agreed: "If you look at the benchmarks, if you look at the performance criteria which the IMF defined, or the government of Pakistan actually agreed upon, you will find that most of those criteria have been met.
"On the one hand, the government is able to meet those criteria, but still, the hard structural reforms do not happen. So, the IMF needs to make it very clear: we have committed to help Pakistan in terms of liquidity but are we seeing the results? If not, we should not move on.”
Structural obstacles
Both tax and energy reforms face deep structural obstacles. Broadening the tax base is politically sensitive, while initial improvements in the energy sector have consistently stalled, leaving key problems unresolved.
Pakistan's tax-to-GDP ratio increased from 9.1% in 2023/24 to 10.6% in 2024/25, accompanied by a rise in the number of income tax return filers from 4.5 million to over 7.2 million. The Federal Board of Revenue has set its highest ever collection target — Rs14.13trn (US$49.46bn) for 2025/26 — backed by digital invoicing, point-of-sale integration and real-time automation to enhance compliance and curb tax evasion.
The power sector's circular debt — unpaid obligations across the supply chain when consumers, utilities and the government fail to settle bills in full — has narrowed sharply. By June 2025, it stood at Rs1.614trn, down Rs780bn from the previous year, primarily due to improved billing, better recovery and renegotiated power producer contracts.
To further stabilise the sector, the government secured an Islamic financing facility of some Rs1.275trn from local banks to address power sector liabilities over a six-year period without adding to public debt.
Similar efforts are underway in the gas sector, where authorities aim to eliminate Rs2.6trn in circular debt by trimming liquefied natural gas imports and implementing a gas circular debt management plan, coordinated by cross-ministerial task forces.
However, problems persist. Electricity theft, distribution inefficiencies, tariff misalignment and weak governance continue to weigh on the sector’s financial health. Without cost-reflective tariffs, private sector participation and grid modernisation, recent gains are unlikely to translate into long-term viability.
Furthermore, under prime minister Shehbaz Sharif's economic package, including the five-year "Uraan Pakistan" reform plan, the government has pledged to privatise more than 50 state-owned enterprises, excluding strategic ones, in three phases over four years.
The plan aligns with IMF conditionality aimed at easing fiscal pressures and improving governance; however, progress has been limited so far. Bureaucratic inertia and political sensitivities continue to delay reforms, and without restructuring, stronger oversight, divestment and independent management, these enterprises will likely continue to drain public finances.
Meanwhile, Pakistan faces deep-rooted economic and fiscal challenges. External debt repayments for 2025/26 are expected to exceed US$23bn, creating acute repayment pressure without further external support. Total public debt has reached a record US$267bn, while debt servicing alone consumes nearly half the federal budget.
Although the 2025/26 budget targets a lower fiscal deficit of 4.8% of GDP, this rests on a 6.7% cut to public spending, including sharp reductions in development and social outlays, even as defence expenditure rises 20%.
Moreover, Pakistan remains one of the most climate-vulnerable countries in the world, with over half its population living on less than US$2 per day and a limited capacity to absorb further shocks.
Despite the reforms, economic growth remains weak. According to the IMF, it expanded by 2.49% in 2024 and is forecast to grow by 2.64% in 2025 and 3.5% next year. Analysts note the economy requires growth of at least 5% to reduce widespread poverty. The country is also attracting minimal foreign direct investment. According to Macrotrends, Pakistan's FDI in calendar year 2024 reached approximately US$2.57bn, significantly below that of its peers, such as India (US$27.6bn) and Vietnam (US$23.2bn in 2023).
Pakistan's reliance on China has deepened, with Chinese loans accounting for approximately 27% of its external debt. New projects under the China-Pakistan Economic Corridor (CPEC), a multi-billion-dollar initiative that builds energy, transport and industrial infrastructure, were reaffirmed this year.
Taken together, these economic conditions highlight the fragility of Pakistan's recent macroeconomic gains and the need for more comprehensive structural reforms.
Salman at the Policy Research Institute of Market Economy said: "I think that, in Pakistan's case, it's a good thing that we have a programme, which is progressing, and we have a government that has shown commitment, but the real issue is that the IMF, as a partner, should not let go of its push for the hard structural reforms. Because if the IMF moves ahead on the basis of certain short-term achievements and does not push for the hard structural reforms, we will be in the same cycle again."
Politically tense
Pakistan’s political landscape remains tense. Former prime minister Imran Khan is still in prison, serving a 14-year sentence on corruption charges handed down earlier in the year. His continued detention has fuelled ongoing protests from his supporters and added to the country’s political uncertainty.
President Zardari’s administration faces a challenging environment, balancing reform efforts with rising political pressures and public discontent, amid the military’s continued behind-the-scenes influence over key policy and governance decisions.
“Political disputes and power struggles between the political elite and military have led to frequent changes in government, including military coups," said Carolyn Pang, country risk analyst at BMI, part of Fitch Solutions. "In the past, this instability has resulted in the government delaying or reversing unpopular reforms such as spending cuts and tax hikes in favour of political gains."
Governance also remains one of Pakistan’s central challenges and a key obstacle to structural reform. According to Transparency International’s 2024 Corruption Perceptions Index, the country’s score stands at 27 out of 100, ranking it 135th out of 180 countries.
"By stymying democracy and backing the military in Pakistan, the West has further reinforced the strong capture by a recidivist local elite, which is the biggest roadblock to reform and breaking the cycle of dependence on the IMF," said Macro Economic Insights' Sherani.
Whether this 25th IMF programme breaks Pakistan’s bailout cycle depends on more than meeting fiscal and macroeconomic targets. Without reforms to fix the tax base, energy sector and governance, the country risks another crisis once the programme ends. For now, modest gains and persistent obstacles leave it unclear whether this bailout is a turning point — or just another pause before the next emergency.