IMF concessions and tax deferral

The government is reluctant to give any concessions to the business community, whether reducing corporate tax or revising the super tax, due to the IMF programme.

Our banking system is liquid, our factories are full of potential and foreign exchange is stable, supported by remittances and external programmes. Current stagnation has nothing to do with the capital but lack of certainty in the fiscal, legal, strategic and administrative framework.

From July to December 2025, the currency in circulation increased by Rs432 billion, a remarkable turnaround from the Rs184 billion contraction documented in the same period last year. Liquidity has returned to the system, but credit has not followed. From July to December 2025, private sector lending dropped from Rs1,470 billion to Rs135 billion year-on-year, a collapse of 90.8%. Deposits expanded more than six times faster than credit uptake, surpassing a 6:1 ratio. Therefore, money is available but needs an enabling environment.

Our inflation is import-related and certainly became excessive due to policy delays. It does not reflect symptoms of domestic overheating. In September and November 2025, year-on-year consumer price inflation rose to 6.1%, up from 4.9% last year. In urban areas, core inflation has risen to 6.6%, whereas in rural areas it is 8.2%. In recent provisional SBP inflation releases, these figures substantiate the persistence of price pressures beyond temporary supply shocks, extending into broader market expectations.

The exchange rate alone remains the most powerful factor influencing inflation. We operate under a controlled float regime, but its currency path has been managed by delay rather than strategy. Complacency here seems to be a strategy. The current mechanism used to ascertain the rupee’s fair value under the IMF currency surveillance model (CA-BEER) estimates the fair value using the current account balance, inflation differentials, terms of trade, reserve adequacy and net foreign investment.

From July to November 2026, our current account deficit reached $812 million, equivalent to 0.42% of GDP. After adjusting for inflation differentials, a 2.1-month reserve cover of imports, a moderate trade-to-manufacturing (TOT) recovery and a steep retrenchment in net foreign investment inflows, the model yields a fair valuation of Rs253.15/USD. The interbank exchange rate was Rs281.7/USD on January 3, 2026, representing a 10.6% undervaluation. This mispricing functions as a hidden tariff and burden on consumers and industry alike, thus inflating costs on imported energy, intermediate materials and consumer goods.

Our inflation is not evenly responsive to depreciation across all sectors; it rather depends on import composition. 32% of Pakistan’s import basket is energy-related, 41% industrial material inputs and 27% consumer imports. Based on historical pass-through elasticity coefficient trend calibrations for the SBP and IMF, inflation rises by 1.8-2.4% per 10-rupee devaluation. Applying weighted elasticity to the current basket puts our entrenched inflationary cost at 5.1%–5.6%, with an average of 5.4%, already absorbed through exchange-rate postponement by households and producers.

Capital flight is another external aspect we are facing, as our net foreign direct investment fell 25.4% year on year. In Jul–Nov FY2026, it is declining from $1,242 million to a provisional $927 million. Total net foreign investment contracted even more sharply – down from 77.5% from $1,391 million to just $314 million, thus reflecting a $1.07 billion evaporation from the system. 

Our current account position over the same period deteriorated by $1.315 billion, fluctuating from a $503 million surplus to an $812 million deficit. The SBP foreign reserves grew by $1.335 billion in a single month (Nov–Dec 2025) and is confirmed by the IMF reserve updates. The policy of reserve accumulation through borrowed or swapped liquidity while investment exits accentuates fragility, not competitiveness. Borrowed reserves are like extending the runway, but they definitely will not attract more passengers.

Our domestic economy’s real sector tells a different story: (LSM), Large-Scale Manufacturing, expanded 8.3% year-on-year in October 2025, compared to 0.23% growth last year. Cement output grew by 12.3%, textiles by 4.7%, electronics by 2.2% and the auto sector announced a considerable recovery as parts imports stabilised and domestic demand normalised. In November 2025, remittances reached $3.19 billion, 9.4% higher than $2.92 billion in the previous year. These remittances, by Pakistanis abroad, remain Pakistan’s most reliable foreign-exchange stabiliser, even as portfolio investment retreats. Hats off to overseas Pakistanis, who deserve our appreciation and recognition.

Debt dynamics demonstrate the cost of delay and complacency. The central government debt reached Rs76,980 billion in October 2025, up 11.4% from Rs69,115 billion last year. While nominal GDP grew 9.08%, the debt-to-GDP ratio worsened from 65.73% to 67.12%. Our domestic debt servicing burden now consumes 13.7% of federal expenditure.

Based on the current SBP-reported debt stock, a 1.0% policy rate correction will lower annual interest costs by Rs540 billion. Perhaps, a coordinated 4.0% reduction unlocks Rs2.2 trillion – equivalent to 42% of Jul–Nov FY26 federal tax collection of Rs4.715 trillion. This is certainly not a fiscal expansion but a fiscal efficiency. This interest burden reduction is certainly permissible under IMF quantitative targets because it decreases the state’s liabilities rather than increasing its borrowing.

Our regional neighbours are adjusting their exchange rates to survive. India’s rupee depreciated from 4.9% to 89.6 per USD. Bangladesh’s currency devalued 2.8% to 122.3, Sri Lanka’s 5.3% to 309.8, while China (Asia’s most stable price environment) appreciated 4.1%, with an inflation rate of around 0.7%. A depreciation of around 1.84% in the Pakistani rupee may appear modest, but it is advantageous. This devaluation has adjusted the least while absorbing the most distortion through delay. Here, the volatility has not eroded competitiveness, but by hesitation and reluctance by those who are at the helm of affairs.

The investment deterrence we face at home is certainly not financial but institutional. The absence of ADR and years of unsettled courtroom disputes over taxes, especially the government super tax appeal in the apex court, manufacturing levies and ad-hoc surcharges, have exacerbated a premium on unpredictability. Investors do not fear taxation but fear arbitrariness. Our challenge is not to reduce or abolish taxes, but to make them legally certain and economically compatible.

The government can establish a 60-day, one-time legal settlement window for all unresolved super-tax disputes, followed by a three-year uniform phase-out under a proposed Super Tax Settlement & Sunset Act. This will end uncertainty without compromising IMF tax floors. Revenue replacement is not aspirational; it can legislatively be pre-sequenced, for example, 50% recovered through Retail POS actual sales capture, 30% through bank-verified Actual Transaction Valuation Tax in Real Estate, and 20% through a Large Landholder Flat Agriculture Income Tax regime. Digitisation is the only way forward; it is the most effective enforcer, not discretion.

Pakistan’s annual revenue losses from unrealised real estate taxable gains are Rs800 billion, followed by retail turnover, with Rs1.6 trillion undocumented and Rs250 billion in recoverable GST leakage. Agriculture contributes 22% of GDP, with 45% of the workforce, yet yields less than 1.0% of tax revenue. This is because of non-digitised land records and cash dominance. Export refund delays lock Rs500 billion in liquidity for 30–90 days, raising working-capital costs by 15%. These are the areas where governmental decisions await reversal.

That said, it is not advisable to revolt against constraints; rather, it is advisable to master them. Tax deferrals and relief can be granted to businesses despite IMF guidelines, which prohibit tax cuts and subsidies. Tax deferrals are distinct from this approach.

For businesses, relief must be activated only after investment and hiring are verified through banking rails; tax credits abstracted only from forthcoming profits instead of current liabilities; an automated refund system within 72–96 hours without discretion; and enforcement through digitisation and removal of discretion, advance tax demands coercion while preserving revenue expectations. Incentives must be stipulated and operate as contracts, not just favours for select business tycoons.

The government and those at the helm must realise that Pakistan does not need saving but sequencing. Businesses do not flourish with subsidies but with relief through verification. And these verifications must have zero tolerance for enforceability. The whole ecosystem is fed up with rhetoric, reassurances and conferences; it needs institutional authority, and that is only possible when we adopt a professional, merit-based culture.

The writer is a political economist, public policy commentator and advocate for principled leadership and regional cooperation across the Muslim world.

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

Originally published in The News