Fund supports fuel pricing policy and warns Middle East conflict could put pressure on inflation and growth prospects
IMF opposes Rs1tr power subsidy. Design: Mohsin Alam
The International Monetary Fund (IMF) on Saturday announced that it has entered into a Service Level Agreement (SLA) with Pakistan for the disbursement of approximately $1.2 billion, following the successful completion of the country’s third review of the Extended Fund Facility (EFF) and the second review of the Resilience and Sustainability Facility (RSF).
The Fund also tacitly endorsed Islamabad’s fuel pricing policy amid the ongoing crisis in the Middle East.
According to the IMF, the implementation of Pakistan’s program under the EFF remained largely aligned with the authorities’ objectives to strengthen public finances, sustainably keep inflation within the State Bank of Pakistan’s target range, improve the viability of the energy sector, deepen structural reforms, and expand social protection while rebuilding health and education spending.
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IMF reaches staff-level agreement on the third review of the 37-month extended arrangement under the Extended Credit Facility (EFF) and the second review of the 28-month arrangement under the Resilience and Sustainability Facility (RSF) – Pakistan
– Ministry of Finance, Government of Pakistan (@Financegovpk) March 28, 2026
Under the $7 billion program, the Washington-based bank is urging policymakers in Islamabad to maintain a tight, data-dependent monetary policy to anchor inflation expectations and shore up external reserves.
Pakistan’s central bank kept its policy rate unchanged at 10.5% this month, suspending rate cuts as rising global energy prices and regional tensions pose new inflation risks for the import-dependent economy.
The IMF added that Pakistan’s climate reform program, supported by the RSF, is making progress, with the authorities committed to policies aimed at strengthening resilience and reducing vulnerabilities to climate-related risks.
Talks between IMF officials and Pakistani authorities were held in Karachi and Islamabad from February 25 to March 2 and continued virtually thereafter.
IMF Mission Chief Iva Petrova said that, subject to approval by the IMF Executive Board, Pakistan will have access to approximately $1.0 billion (SDR 760 million) under the EFF and approximately $210 million (SDR 154 million) under the RSF, bringing the total disbursements under the two arrangements to approximately $4.5 billion.
“Supported by the EFF, ongoing policies continued to strengthen the economy and restore 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 remained contained and external buffers continued to strengthen,” the IMF said in a statement.
“The conflict in the Middle East, however, darkens the outlook, as volatile energy prices and tightening global financial conditions risk putting upward pressure on inflation and weighing on growth and the current account,” the report added.
The Fund said Pakistani authorities remained committed to sound macroeconomic policies to preserve recent stabilization gains while accelerating reforms and strengthening social protection to protect vulnerable groups from volatile energy prices.
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The IMF has defined several policy priorities, starting with maintaining a prudent fiscal stance. The authorities are targeting a primary fiscal surplus of 1.6% of GDP in FY26 and an underlying primary balance of 2% of GDP in FY27 through expansion of the tax base, expenditure discipline and better burden-sharing between the federal government and provinces, while increasing spending on health, education and social protection.
The statement said fiscal structural reforms remain essential, noting that revenue mobilization efforts are already producing results under the Federal Board of Revenue’s transformation plan. Measures include strengthening taxpayer controls, expanding digital invoicing and production tracking, and improving internal governance.
The newly established Tax Policy Office is developing a medium-term tax reform strategy aimed at ensuring revenue neutrality and political stability, while broader efforts are underway to strengthen public financial management and fiscal coordination between the federal and provincial governments.
On social protection, the IMF said authorities are strengthening targeted support to vulnerable households through the Benazir Income Support Program (BISP), including inflation-adjusted cash transfers, expanded coverage and improved payment systems.
The Fund added that the federal and provincial governments remain committed to increasing spending on health and education to support human capital development and inclusive growth.
On monetary policy, the IMF said the State Bank of Pakistan remains ready to increase interest rates if inflationary pressures intensify or expectations rise due to global volatility in food and oil prices.
Exchange rate flexibility is expected to continue to act as the main buffer to external pressures, including fallout from the Middle East conflict, while ensuring that banks can continue to finance imports and external payments amid potential balance of payments tensions.
The IMF stressed the importance of restoring the viability of the energy sector and avoiding a resurgence of circular debt. He said sustainability depends on timely tariff adjustments to ensure cost recovery and warned against energy price subsidies due to their budgetary costs and distorting effects.
The authorities also plan structural improvements, including the modernization of transmission and distribution systems, the privatization of inefficient generation companies, the transition to a competitive electricity market, the development of renewable energy and the alignment of capacity with demand while maintaining grid stability.
The Fund said Pakistan was progressing broader structural reforms aimed at strengthening governance, reducing market distortions, easing regulatory constraints, boosting productivity and supporting private sector-led growth.
State-owned enterprise reforms and the privatization program remain key to reducing the state’s footprint and improving service delivery, alongside efforts to limit state intervention in commodity markets and encourage private sector initiatives. The authorities are also strengthening institutional capacities and intensifying anti-corruption measures to promote inclusive growth and a level playing field for investment.
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On climate policy, the IMF said reforms supported under the FSR – including green mobility initiatives, transport decarbonization, improved climate information systems and better management of climate-related financial risks – help build resilience.
Other reforms will focus on the resilience of water systems, prioritizing climate-related spending, establishing a coordinated disaster risk financing framework, and aligning energy reforms with national mitigation goals.
“The IMF team thanks the Pakistani authorities, the private sector and development partners for their hospitality during the visit to Islamabad and Karachi and for their fruitful discussions,” the statement concluded.
