Breaking the Boom & Bust Cycle:
Pakistan’s Reform Agenda

 

By Mahir Binici | Resident Representative for Pakistan, International Monetary Fund

 

With the economy gaining momentum, reserves rebuilt, inflation at a record low and current account in surplus, Pakistan stands at a pivotal moment. Credibility now hinges on sustained follow-through and a faster pace of reform implementation to improve the welfare of all Pakistanis.

In the summer of 2022, floods submerged a third of Pakistan, devastating crops, roads and homes, while reconstruction costs far exceeded already-stretched public finances. A difficult external environment and policy missteps have also led to large fiscal and external deficits, rising inflation and eroded reserve buffers. By early 2023, foreign exchange reserves had fallen below three weeks of imports; credit ratings were deteriorating, and sovereign spreads were widening amid heightened economic uncertainty.

The International Monetary Fund (IMF) responded to Pakistan’s request to support its economic stabilization program with a Stand-By Arrangement in 2023 which helped improve the country’s economic and financial position. It soon became evident that a durable recovery required integrating fiscal management and structural reforms into a unified strategy to address Pakistan’s deep-seated economic and climate vulnerabilities. This alignment took shape in two stages: first, the 2024 Extended Fund Facility (EFF)1 anchored medium-term macroeconomic policies and structural reforms, and second, the recently approved Resilience and Sustainability Facility (RSF)2 expanded the reform agenda to support Pakistan’s efforts to build resilience against natural disasters.

IMF logo over a green, starry background with a crescent moon and star.

Breaking the Boom-and-Bust Cycle

The 2024 EFF aims to break the cycles of boom-busts, often led by a loosening of economic policy in an effort to stimulate faster growth and to place Pakistan on a path of more competitive, private sector-led, and sustainable growth. Debt sustainability hinges on sustained fiscal consolidation, underpinned by a broader and fairer tax base. Previously untaxed or lightly taxed sectors, real estate, agriculture, and retail, are now included in the tax system, easing the burden on compliant taxpayers and creating space for greater social spending. A government-wide rightsizing exercise aims at reallocating resources towards essential services. At the same time, high tariff barriers are being reduced to enable firms to compete, innovate, and direct capital to the most productive uses. 

Progress to date has been significant, with macroeconomic stability restored and confidence gradually rebuilt despite a challenging global environment. While growth remains moderate, inflation has declined to low single digits–its lowest level in a decade; financial conditions have eased, sovereign spreads have narrowed considerably, and external balances have strengthened. 

Putting Resilience at the Core of Public Investment

With limited fiscal space, achieving inclusive growth and resilience requires better—not just more—public investment. To this end, the authorities have overhauled project selection criteria to integrate resilience considerations. All large-scale proposals must now pass a new screening framework that evaluates both economic returns and resilience. Only projects meeting this dual threshold advance to budgeting; others are deferred or cancelled. This rule-based system, soon to be complemented by green public financial management extending the same scrutiny to provincial spending, establishes a clear audit trail. Its discipline stands in contrast to the parliamentary SDG funds, whose single-line allocations bypass rigorous appraisal and public disclosure, weakening accountability.

Managing Water, Disaster Risk and Price Signaling 

Public investment alone cannot close the resilience gap—complementary reforms are needed to address risks at their source. Provinces are modernizing irrigation charges and improving collection systems, promoting water conservation while ensuring sustainable financing for basic maintenance in a water-stressed country. A new disaster-risk-finance framework will enable a more coordinated response, ensuring that emergency support is deployed based on objective triggers rather than ad hoc appeals. Mitigation efforts are also being integrated into macroeconomic policy: a broad-based carbon levy, implemented through existing fuel pricing mechanisms, will be paired with incentives for cleaner transport and industry. Designed to be revenue-neutral, the policy preserves the fiscal anchor while shifting private decisions toward decarbonization.

Quantifying the Payoff

IMF staff quantified the stakes through two complementary simulations. The first illustrates that a structural reform package—including broader taxation, stronger competition, an overhaul of state-owned enterprises, and more efficient public investment—could raise real Gross Domestic Product (GDP) by about 7 percent above a no-reform trend within five years, reduce the debt-to-GDP ratio by roughly 6 percentage points and narrow consumption inequality by around 2 points. The second simulation overlays a repeat of the 2022 floods: in an economy that has already invested 1 percent of GDP annually in resilient infrastructure, the output loss is halved, and activity returns to its pre-shock path a full year earlier. The modest increase in debt is comfortably absorbed by faster growth. In short, the reforms deliver twice—driving stronger expansion in normal times and enabling softer landings when shocks hit.

Staying the Course and Accelerating the Pace

With the economy gaining momentum, reserves rebuilt, inflation at a record low, and the current account in surplus, Pakistan stands at a pivotal moment. Credibility now hinges on sustained follow-through and a faster pace of reform implementation to improve the welfare of all Pakistanis. Maintaining sound macroeconomic policies and rebuilding buffers remain essential to entrench stability. Steadfast implementation of Pakistan’s structural reform agenda is key to achieving sustainably stronger growth—by reducing the state’s footprint, strengthening governance, removing trade and investment barriers, and advancing environmental policies to mitigate vulnerabilities—thereby fostering greater private investment and enhanced competitiveness.

1.    IMF, ‘IMF Executive Board Concludes 2024 Article IV Consultation for Pakistan and Approves 37-month Extended Arrangement’, Press Release No. 24/343, 2024. Available at: https://www.imf.org/en/News/Articles/2024/09/27/pr-24343-pakistan-imf-concludes-2024-aiv-consultation-pakistan-approves-37-mo-extended-arr 
2.    IMF, ‘IMF Executive Board Completes First Review of the Extended Fund Facility Arrangement with Pakistan and Approves the Request for an Arrangement under the Resilience and Sustainability Facility’, Press Release No. 25/137, 2025. Available at: IMF Executive Board Completes First Review of the Extended Fund Facility Arrangement with Pakistan and Approves the Request for an Arrangement under the Resilience and Sustainability Facility