Pakistan’s economic challenges are mounting as the International Monetary Fund (IMF) highlights an increasing debt burden fueled by persistent revenue shortfalls and an uneven tax structure. According to the IMF, the country’s fiscal stability remains fragile, with the formal sector shouldering the majority of tax obligations while vast portions of the economy remain untaxed.

IMF’s Concerns Over Pakistan’s Fiscal Challenges

During a recent economic conference, IMF’s Resident Chief for Pakistan, Mahir Binici, emphasized the need for a more balanced tax framework. He pointed out that the current tax system unfairly burdens salaried individuals and businesses while leaving high-revenue sectors like retail, agriculture, and real estate largely untaxed.

“The formal sector contributes significantly to tax revenues, but many other sectors escape taxation entirely, worsening the fiscal strain,” Binici stated.

The IMF’s concerns come ahead of a critical review meeting in March, where Pakistan’s progress under the $7 billion Extended Fund Facility (EFF) will be assessed. This review is crucial for securing further financial assistance and avoiding economic instability.

Tax Reforms: The Need for a Broader Tax Base

Pakistan’s Finance Minister, Muhammad Aurangzeb, reinforced the urgency of tax reforms, highlighting the disproportionate contributions of different sectors. “The retail sector constitutes 19% of our GDP but contributes only 1% to tax revenues,” he revealed.

This imbalance has placed undue pressure on industries and salaried individuals, making tax collection inefficient and unsustainable. Experts argue that broadening the tax net to include currently untaxed sectors is critical for economic stability.

Rising Debt and Fiscal Deficit

The latest economic indicators show troubling signs for Pakistan’s financial health. January 2025 saw a shift from a current account surplus to a $420 million deficit, signaling increasing vulnerabilities. The government is now focusing on enforcing stricter tax compliance to address this shortfall.

To further bolster its financial position, Pakistan is also in discussions with global financial institutions for additional support. An IMF mission is set to visit Islamabad in late February to discuss a potential $1 billion climate finance package under the Resilience and Sustainability Trust, which could provide crucial relief.

The Road Ahead: Economic Stability Through Structural Reforms

Pakistan’s path to economic recovery requires a combination of immediate tax reforms, strengthened enforcement mechanisms, and strategic international financial partnerships. By expanding the tax base and ensuring equitable fiscal policies, the government can pave the way for long-term financial stability.