IMF, Pakistan reach staff-level agreement unlocking $1.2bn tranche

The Fund tacitly endorsed Islamabad’s fuel pricing policy in the wake of Middle East crisis.

It said program implementation by Pakistan under the EFF remained broadly aligned with the authorities’ objectives to strengthen public finances, ensure inflation remains durably within the State Bank of Pakistan’s target range; advance reforms to improve the viability of the energy sector; and deepen structural reforms, while strengthening social protection and rebuilding health and education spending.

The authorities’ climate reform agenda, backed by the RSF, is progressing, and the authorities remain committed to implementing comprehensive reforms and policies that enhance resilience and reduce vulnerabilities to climate-related risks.

The talks were held in Karachi and Islamabad from February 25 to March 2 and virtually afterward.

IMF mission chief Iva Petrova said, subject to IMF board approval, Pakistan will have access to about US$1.0 billion (SDR 760 million) under the EFF and about US$210 million (SDR 154 million) under the RSF, bringing total disbursements under the two arrangements to about US$4.5 billion.

“Supported by the EFF, ongoing policies have continued to strengthen the economy and rebuild market confidence. Following the recovery in FY25, economic activity gained further momentum in the first part of the current fiscal year. Inflation and the current account balance remained contained, and external buffers continued to strengthen,” said the statement from the IMF.

“The conflict in the Middle East, however, casts a cloud over the outlook as volatile energy prices and tighter global financial conditions risk putting upward pressure on inflation and weighing on growth and the current account.”

“The authorities remain committed to pursuing sound and prudent macroeconomic policies to preserve the recent gains in macro-financial stabilization, while deepening structural reforms to accelerate growth and strengthening social protection to mitigate the impact of volatile energy prices on the most vulnerable. The authorities’ policy priorities include:

“Maintaining a prudent fiscal stance: The authorities remain committed to ensuring a sustainable fiscal position and reducing the still high public debt burden to more moderate levels over the medium term. To this end, efforts are ongoing to meeting the FY26 budget primary surplus of 1.6 percent of GDP and to target an underlying primary balance of 2 percent of GDP in FY27, supported by measures to broaden the tax base and strengthen expenditure discipline, while expanding health, education, and social protection spending, and strengthening federal‑provincial burden‑sharing.”

“Advancing fiscal structural reforms: Steadfast implementation of fiscal reforms remains critical to achieving the fiscal objectives. Revenue mobilisation efforts have already started to yield results, with the FBR implementing priority actions under its transformation plan and developing key performance indicators to monitor progress,” added the statement.

These priorities include strengthening taxpayer audits, expanding the use of digital invoicing and production monitoring, and enhancing the FBR’s internal governance.

The newly established Tax Policy Office is developing a medium‑term tax reform strategy aimed at ensuring revenue neutrality and tax policy stability, said the statement.

In addition, efforts are underway to enhance fiscal burden‑sharing between federal and provincial governments and to strengthen public financial management, said the Fund.

“Strengthening poverty reduction and social protection: To protect the most vulnerable from the recent elevated volatility in food and fuel prices, the authorities are aiming their efforts to provide more targeted and sustainable support to the more affected households and are strengthening the generosity, coverage, and delivery of the Benazir Income Support Program (BISP), including through inflation‑adjusted cash transfers, expanded beneficiary coverage, and improved payment systems.”

The IMF statement further said that in parallel, they remain committed to “scaling up federal and provincial health and education spending, consistent with program objectives, to support human capital development and inclusive growth”.

“Maintaining an appropriate monetary policy: The State Bank of Pakistan (SBP) remains committed to keeping inflation within its target range and stands ready to raise interest rates should price pressures intensify, or inflation expectations rise, including from the passthrough of recent volatility in global food and fuel prices.”

The Fund, in its statement, said that exchange rate flexibility should continue to serve as the primary shock absorber, including against spillovers from the conflict in the Middle East, while the SBP should ensure that the banking system remains able to accommodate import financing and other external payments amid potentially elevated balance of payments pressures.

“Achieving energy sector viability: The authorities remain committed to achieving energy sector viability and preventing a recurrence of circular debt, which is detrimental to the economy,” said the statement.

It said that sustainability must be maintained through timely tariff adjustments that ensure cost recovery. Moreover, energy price subsidies should be avoided, given their regressivity, high fiscal costs, and distortionary impact.

“At the same time, the authorities remain committed to advancing structural reforms to improve efficiency, including by improving transmission and distribution, privatising inefficient generation companies, completing the transition to a competitive electricity market, and facilitating the shift toward renewable energy and rationalising capacity in line with demand while ensuring grid sustainability.”

“Deepening structural reforms: The authorities are making progress in implementing broad‑based structural reforms aimed at strengthening governance, reducing inefficiencies and market distortions, easing excessive regulatory burdens, boosting productivity, and supporting private sector development, with a view to fostering durable growth while preserving macroeconomic stability and fiscal sustainability.”

The IMF elaborated that advancing SOE reforms and the privatisation agenda remain central to scaling back the state’s footprint and improving service delivery, alongside efforts to reduce government intervention in commodity markets and enable private sector initiatives.

“The authorities are also strengthening institutional capacity and intensifying anti‑corruption efforts to promote inclusive growth and ensure a level playing field for businesses and investment.”

“Building resilience to climate change: Policies supported by the RSF, in line with national commitments —including recently implemented reforms to promote green mobility and transport decarbonisation and to strengthen climate information systems and the management of climate related financial risks—are helping to build resilience.”

It added that the authorities remain committed to advancing further reforms, including enhancing water system resilience, better identifying and prioritising climate-relevant spending, establishing a coordinated disaster risk financing framework, and aligning energy sector reforms with national mitigation objectives.

“The IMF team is grateful to the Pakistani authorities, private sector, and development partners for their hospitality during the visit to Islamabad and Karachi, and fruitful discussions”, the statement concluded.