In terms of domestic economic policy, Khan inherited a twin balance of payments and debt crisis upon assuming office in 2018, characterized by a significant current account deficit and fiscal deficit. His government sought assistance from the IMF to address these challenges. In exchange for the bailout, Khan's administration implemented austerity measures, cutting subsidy spending in the energy sector and unveiling an austerity budget to reduce the fiscal deficit and limit government borrowing. The IMF also insisted on the depreciation of the rupee and improvements in tax collection. Khan's government opted to raise import tariffs to boost tax revenues and devalued the currency, which, alongside heavy import duties, helped mitigate the current account deficit through import substitution.
Pakistan's overall balance of payments improved notably following record-high remittances in 2020, stabilizing the central bank's foreign exchange reserves. The fiscal deficit narrowed to less than 1% of GDP by 2020 due to austerity measures, and the rate of debt accumulation slowed considerably. However, Pakistan's debt remained high due to significant borrowing by previous administrations, necessitating substantial allocations to repay loans taken during their tenures.
In addition to IMF-mandated reforms, Khan's government implemented policies to enhance the business environment. As a result, Pakistan climbed 28 places on the World Bank's ease of doing business index in 2019, ranking among the top 10 most improved countries. Tax collection also reached record highs, primarily from domestic taxes, with import tax revenues remaining stable due to reduced imports.
The fiscal deficit was further controlled to less than 1% of GDP in the latter half of 2020, with Pakistan recording a primary surplus. However, when accounting for interest payments on debt, a deficit persisted, albeit smaller. This reduction in the fiscal deficit was attributed primarily to increased non-tax revenues, including higher oil prices paid by consumers to state-owned oil companies. Nonetheless, tax revenues also saw an upward trajectory, with the Federal Board of Revenue exceeding its collection targets and setting records in the fiscal year 2021.
In terms of international trade policy, Khan's government implemented the second phase of the China–Pakistan Free Trade Agreement in January 2020, negotiating concessionary rates from China on Pakistani exports to mainland China, such as reduced or zero tariffs. These negotiations were hailed as a significant milestone in Pakistan's foreign policy, expanding trade relations beyond traditional defense and security matters.
Furthermore, Khan's government addressed concerns regarding terror financing laws after Pakistan was placed on the FATF grey list in June 2018. Initially, temporary legislation was enacted through presidential decrees to comply with FATF requirements. Subsequently, permanent legislation was introduced in parliament, with partial support from opposition parties. Despite hurdles from the opposition-dominated Senate, the government successfully passed necessary bills in a joint session of parliament. By October 2020, Pakistan had made significant progress in addressing FATF requirements, and by February 2021, approximately 90% of the agenda was completed. Continued efforts led to further progress, with Pakistan addressing 26 out of 27 action items by June 2021. Ultimately, Pakistan's successful implementation of its action plan led to its removal from the FATF grey list in October 2022.
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