Company Raj to Debt Raj—III From sovereignty to conditionality

Pakistan became a member of the International Monetary Fund (IMF) in 1950. Its first Stand-By Arrangement followed on December 8, 1958. The Fund’s own lending history records a commitment of SDR 25 million, none of which was drawn. The significance lies less in that first facility than in what followed. Pakistan’s economic history gradually acquired a recurring pattern. External imbalance produced recourse to the IMF. Stabilisation followed. Political urgency diminished. Structural weaknesses remained. Another external imbalance emerged. A fresh programme followed.

This was not classic colonial rule, but late Neo-colonialism where incompetent rulers submit and nations suffers. The distinction must remain clear. The East India Company acquired territory, revenues, armies and coercive jurisdiction. The IMF possesses none of these. Pakistan is a sovereign member of the Fund. Its governments request assistance and formally agree to programmes supported by it.

The IMF is not the East India Company per se. The deeper problem is that Pakistan repeatedly creates conditions in which others acquire leverage over choices that should have remained its own. In that limited but consequential sense, recurrent dependence risks turning the IMF into a neo-East India Company in Pakistan’s political economy—not by conquering territory, but by acquiring influence over the fiscal choices of a formally sovereign state.

The question is not whether the IMF has replaced the Company. It is whether repeated financial dependence can progressively narrow the range within which a formally sovereign state makes fiscal choices. That takes us from colonial sovereignty to what may be called fiscal sovereignty capture. 

The expression does not mean that an external institution legislates for the state or directly collects its taxes. It describes a condition in which chronic dependence on external financing reduces the effective freedom of government to determine taxation, expenditure, energy pricing, monetary policy and other economic priorities without satisfying conditions attached to continued support.

The IMF itself recognises the tension between conditionality and national ownership. Allan Drazen, writing in an IMF publication, asked why conditionality is needed if reforms are already in a country’s own interest. His answer centred on conflict within borrowing countries between governments and organised interests that bear different costs from reform. Conditionality, in this view, can become a mechanism through which domestic political resistance is overcome.

This complicates the familiar Pakistani claim that the IMF simply “dictates” policy. The Fund does not arrive uninvited. Pakistani governments negotiate programmes. Pakistani officials sign letters of intent and memoranda. Federal and provincial authorities undertake commitments. Parliament subsequently enacts many of the required measures without any meaningful debate.

Responsibility cannot be transferred entirely to Washington. The more disturbing question is why Pakistan repeatedly reaches the point at which an external financing programme becomes necessary for maintaining reserves, meeting external obligations and restoring market confidence.

The present programme illustrates the depth of that dependence. In September 2024, the IMF approved a 37-month Extended Fund Facility (EFF) of about US$7 billion. Its stated priorities extend well beyond a temporary balance-of-payments loan. They include strengthening public finances, broadening the tax base, reforming state-owned enterprises, restoring energy-sector viability and rebuilding international reserves.

The programme’s policy framework also reaches into areas that ordinarily lie at the centre of domestic political choice: taxation, energy tariffs, subsidies, privatisation, public-sector governance, trade policy and the treatment of privileged sectors.

By May 2026, the third review under the EFF was recording structural benchmarks involving tax administration, digital invoicing, production monitoring, energy pricing, special technology zones, sovereign wealth governance, public procurement, foreign-exchange liberalisation and state-owned enterprises.

It would be intellectually dishonest to describe all such measures as inherently harmful. Pakistan does need a broader and fairer tax base. State-owned enterprises require accountability. The energy sector cannot indefinitely accumulate circular debt. Preferential tax treatment distorts competition. Public finances require discipline. 

Some IMF conditions correspond with reforms Pakistan should have undertaken independently. The issue is not whether fiscal discipline is desirable. The issue is who determines its design, timing and social incidence when the state has lost room to manoeuvre.

The Fund’s 2026 review itself illustrates the domestic distortion. Agriculture accounts for a large share of value added but remains lightly taxed, while petroleum products carry exceptionally heavy taxation. Real estate and several other undertaxed areas remain persistent weaknesses.

This is not simply an IMF-created structure. It is the product of Pakistan’s domestic political economy. Successive governments have protected powerful sectors, relied heavily on indirect and withholding taxation, tolerated weak enforcement and financed expenditure through borrowing. When the resulting imbalance becomes unsustainable, adjustment arrives under external supervision. The IMF then becomes both creditor and policy anchor. 

This is where comparison with East India Company rule acquires analytical value. The Company succeeded because domestic fragmentation, local finance and institutional weakness allowed external power to become embedded within Indian structures. 

Modern debt dependence also requires domestic transmission mechanisms. The actors are different. The methods are different. There are no foreign armies and no Diwani. The structural question nevertheless survives: why do domestic institutions repeatedly create conditions in which external leverage becomes decisive?

External conditionality may even become politically convenient [‘Bankruptcy of ideas—II: Debtocracy, subjugation & budget 2026-27’, Minute Mirror, June 13, 2026]. A government can agree internationally to measures it is unwilling to defend domestically. It can then present difficult choices as requirements imposed from outside. The creditor gains leverage. The government gains an alibi. The public bears the adjustment. This does not eliminate domestic agency. It reveals it.

Pakistan’s crisis is not merely one of debt. It is also a crisis of ownership of reform. A sovereign state should decide how to tax wealth, protect vulnerable citizens, price energy, regulate monopolies and allocate public expenditure through institutions accountable to its own people. When those choices repeatedly become conditions for external financing, formal sovereignty remains intact while practical policy autonomy narrows. That is fiscal sovereignty capture for justifying extraction [‘Bankruptcy of ideas—IV: The extractive state’, Minute Mirror, June 15, 2026] for militro-judicial-civil complex.

Part IV will examine the domestic constituencies that reproduce this dependence: privileged tax treatment, unequal burden-sharing, unproductive borrowing, state-created rents and a political system that repeatedly postpones reform until creditors force adjustment.

References

1. International Monetary Fund, “History of Lending Commitments: Pakistan”, recording the Stand-By Arrangement of December 8, 1958. 
2. Allan Drazen, “Conditionality and Ownership in IMF Lending: A Political Economy Approach”, IMF Staff Papers, 2002. 
3. James M. Boughton, “Who’s in Charge? Ownership and Conditionality in IMF-Supported Programs”, IMF Working Paper No. 03/191, 2003. 
4. International Monetary Fund, “Executive Board Concludes 2024 Article IV Consultation for Pakistan and Approves 37-month Extended Arrangement”, September 27, 2024. 
5. International Monetary Fund, “IMF Reaches Staff-Level Agreement on Economic Policies with Pakistan for 37-month Extended Fund Facility”, July 12, 2024. 
6. International Monetary Fund, Pakistan: Third Review Under the Extended Arrangement Under the Extended Fund Facility and Second Review Under the Resilience and Sustainability Facility Arrangement, Country Report No. 2026/101, May 14, 2026. 

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, writer, literary critic, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.