ISLAMABAD: Pakistan and the International Monetary Fund have reached a staff-level agreement on the fourth review of the country’s 37-month Extended Fund Facility and the third review under the Resilience and Sustainability Facility, paving the way for about $1.21 billion in fresh financing once approved by the IMF Executive Board.
Following board approval, Pakistan will gain access to approximately $1 billion under the Extended Fund Facility (EFF) and another $210 million under the Resilience and Sustainability Facility (RSF). The latest disbursements would take total financing received under the two programmes to about $5.7 billion.
The agreement followed IMF discussions with Pakistani authorities in Karachi and Islamabad from September 23 to October 7, covering the 2026 Article IV consultation as well as the latest reviews of the EFF and RSF programmes.
The IMF mission was led by Iva Petrova, who also held a concluding meeting with Finance Minister Senator Muhammad Aurangzeb in Islamabad. Finance Secretary Imdad Ullah Bosal and IMF Resident Representative Mahir Binici were also present, according to the Finance Ministry.
IMF Sees Economic Stability but Warns of External Risks
The IMF said Pakistan had maintained macroeconomic stability despite the impact of conflict in the Middle East, higher energy prices and supply disruptions.
Real gross domestic product grew by around 4 percent during the first three quarters of fiscal year 2026, although weaker momentum later brought the Fund’s full-year growth estimate to 3.6 percent.
Headline inflation eased after reaching a peak in May and stood at around 10.3 percent in September, while core inflation also remained contained.
Pakistan’s current account was broadly balanced during FY2026, helped by strong workers’ remittances, while the State Bank of Pakistan’s gross foreign exchange reserves had risen to approximately $21.5 billion by the end of September.
The Fund also pointed to improvements in Pakistan’s sovereign credit ratings and renewed access to international capital markets as signs of greater confidence in the country’s economic policies.
However, it cautioned that risks remained elevated because of geopolitical tensions, volatile energy prices, tighter global financial conditions and possible disruptions to international trade.
IMF Calls for Strict Implementation of FY2027 Budget
The IMF stressed that full implementation of Pakistan’s fiscal year 2027 budget would be critical to maintaining economic stability.
The budget is based on a primary surplus of 2 percent of GDP, supported by measures covering tax policy and revenue administration.
The Fund said reforms such as stronger risk-based tax audits, digital invoicing and increased use of third-party data would help safeguard revenue collection.
It also called for a broader medium-term tax reform strategy aimed at making Pakistan’s tax system simpler, fairer and more supportive of economic growth while protecting government revenues.
Pakistan is also working to strengthen public financial management by improving transparency and efficiency in budgeting, public investment, procurement and government cash management, the IMF said.
Health and Education Spending to Rise
The Fund noted that Pakistan had reversed a long-running decline in public spending on health and education.
Combined expenditure in these areas increased from 2.2 percent of GDP in FY2024 to 2.5 percent in FY2026, while the government plans to raise it further to 2.8 percent of GDP in FY2027.
The IMF said higher targeted cash transfers, improved identification of eligible beneficiaries and more efficient payment systems could strengthen protection for low-income and economically vulnerable households.
State Bank Urged to Keep Monetary Policy Tight
The IMF said the State Bank of Pakistan should maintain an appropriately tight monetary policy stance to bring inflation sustainably back within its target range.
It also recommended retaining exchange rate flexibility as a key mechanism for absorbing external economic shocks.
Further accumulation of foreign exchange reserves, gradual liberalisation of the foreign exchange regime and deeper domestic financial markets would help improve economic resilience and support private-sector growth, according to the Fund.
Energy Reforms and Circular Debt Remain Key Priorities
The IMF called for timely electricity tariff adjustments and cost-reducing reforms to prevent the renewed accumulation of circular debt while protecting vulnerable consumers.
Key priorities include improving power-sector efficiency, increasing private-sector participation in electricity distribution and promoting greater competition in the power market.
The Fund also called for continued cost recovery in the gas sector and measures to reduce unaccounted-for gas losses.
Privatization, Governance and Business Reforms Discussed
During the Article IV consultation, discussions also focused on shifting Pakistan’s economy toward higher-value activities through structural reforms.
These include strengthening competition, reducing regulatory and trade barriers, accelerating privatization, improving governance and transparency at state-owned enterprises, and strengthening anti-corruption institutions.
The IMF said a simpler and fairer tax system, greater investment in human capital, more efficient energy services and deeper financial markets would be important for raising productivity, increasing employment, encouraging private investment and expanding exports.
Climate Reforms Continue Under RSF
Under the Resilience and Sustainability Facility, Pakistan is continuing reforms aimed at strengthening the country’s ability to cope with climate-related shocks.
Recent measures include integrating climate considerations into public investment planning and improving financial and institutional coordination for disaster preparedness.
Further reforms include changes in irrigation water pricing and collection, better targeting of electricity subsidies, enforcement of energy-efficiency standards and measures to reduce carbon emissions from the transport sector.
The IMF mission thanked Pakistani authorities, private-sector representatives and development partners for what it described as constructive discussions during its meetings in Islamabad and Karachi.