ISLAMABAD:
The International Monetary Fund (IMF) on Saturday announced a staff agreement with Pakistan to release a $1.2 billion loan, but linked the board meeting to approve the tranche to Islamabad’s ability to collect 322 billion rupees in revenue from court cases.
After deeming the performance of the Federal Board of Revenue below average, the Washington-based global lender imposed “prior action” whose successful implementation will pave the way for the board meeting, Pakistani authorities said.
The IMF reached this agreement only after seeking assurances that the government would strictly adhere to pre-war fiscal targets, while the central bank would raise interest rates if inflation exceeded the target range and allow exchange rate flexibility to absorb external shocks resulting from the conflict.
According to the preliminary action, the FBR would collect additional tax revenue from recent court judgments in cases previously contested and for which the courts had issued rulings by the end of February, according to government officials.
They said the IMF and Pakistan agreed that an amount of Rs 322 billion would be collected through court rulings, mainly in super-tax cases. The FBR not only collects the principal amount but also demands late payment surcharges of up to 25%.
The government has already collected the majority of the disputed taxes and was confident that the required amount would be generated before Pakistan’s case was submitted to the board for approval. Pakistan hopes that after meeting the preliminary measures, the board of directors can meet in early May to approve the next loan tranche.
Once approved, Pakistan will have access to around $1 billion under the EFF and $210 million under the RSF, bringing the total disbursements under the two agreements to around $4.5 billion.
The FBR missed its first eight months of the initial fiscal target this financial year by a margin of Rs640 billion. He attributed the deficit to falling collections in the power, oil and gas sectors.
The FBR said in these meetings that during the first half of the financial year, about half of the deficit was offset by higher collection of oil tax and provincial cash surpluses, lower than expected cost for flood interventions and loan repayments of state-owned enterprises arising from the circular debt settlement of the power sector.
Amid the growing tax disputes and the FBR’s difficulties in resolving these issues, Prime Minister Shehbaz Sharif has constituted a task force to improve the legal affairs of the FBR, according to a notification.
The task force will revamp and strengthen the tax litigation framework of the FBR at all levels, including initial adjudication by the tax department, commissioner, appeals from collectors, tax and customs appellate tribunals, high courts, the Supreme Court and the Federal Constitutional Court.
The task force will be chaired by Mr. Shad Mohammad and includes prominent constitutional and tax lawyer Hafiz Ahsaan Ahmad Khokhar, an advocate at the Supreme Court, emphasizing the seriousness of the government initiative.
Members are required to conduct a comprehensive assessment of existing legal wings, covering workload management, human and logistical resources and overall operational capacity. The review will focus on identifying structural weaknesses, procedural bottlenecks and systemic inefficiencies that contribute to protracted litigation and delayed resolution of tax and customs disputes.
A key part of the review will be the Litigation Management System (LMS), which has encountered difficulties integrating with the appellate tribunals and superior courts.
The Task Force should recommend reforms that ensure a more effective, data-driven, and institutionally coordinated approach to litigation.
The IMF is now also focusing on weaknesses in the FBR’s internal governance, signaling concerns that the government’s efforts to strengthen the fiscal apparatus have yet to produce fully effective results.
Middle East war will impact Pakistan
“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 IMF said.
In contrast, Pakistan’s Finance Ministry projected that inflation would rise only marginally to 0.3 percent, remain within target, economic growth would remain around 4 percent, and the current account deficit would remain below $2 billion despite global oil price shocks.
Iva Petrova, IMF mission chief, said Pakistani authorities “remain committed to pursuing sound and prudent macroeconomic policies to preserve recent gains in macro-financial stabilization, while deepening structural reforms to accelerate growth and strengthening social protection to mitigate the impact of energy price volatility.”
The Fund’s assessment contrasts with projections by Pakistan, which has said the war would not have major economic implications.
No relaxation of objectives
The IMF has not relaxed the pre-war primary fiscal surplus target of 1.6% of GDP, although the State Bank of Pakistan has previously indicated that this target may be difficult to achieve due to the FBR’s poor tax collection performance. The Fund also maintained strict budgetary targets for the next financial year.
Petrova said authorities remained committed to ensuring a sustainable fiscal situation and reducing the still high public debt burden in the medium term.
“Efforts are underway to achieve the FY26 fiscal 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,” she said.
She also highlighted efforts to improve spending sharing between the federal and provincial governments, with Islamabad asking provinces to share the burden of fuel subsidies, which already stood at Rs125 billion as of April 3.
“Efforts are underway to improve tax burden sharing between the federal and provincial governments and to strengthen public financial management,” Petrova said.
The IMF stressed that resolute implementation of fiscal reforms remains essential to achieving the program’s objectives.
Petrova said the State Bank of Pakistan remains committed to keeping inflation within its target range and is ready to increase interest rates if price pressures intensify, particularly due to the pass-through effects of global volatility in food and oil prices. Pakistan has set an inflation target of 7.5%, which the finance ministry says remains achievable despite fuel price shocks.
The IMF said exchange rate flexibility should continue to serve as the main buffer against fallout from the Middle East conflict, while ensuring that banks can finance imports and external payments amid potential balance of payments pressures. The Fund reiterated that Pakistan must achieve sustainability in the energy sector and prevent the re-emergence of circular debt.
“It is essential that sustainability is maintained through timely tariff adjustments that ensure cost recovery,” Petrova said, adding that energy price subsidies should be avoided due to their high budgetary cost and distorting effects.
The IMF also highlighted structural reforms, saying progress in state enterprise reform and the privatization program remains key to reducing the state’s economic footprint and improving service delivery.
The authorities are also strengthening institutional capacities and intensifying anti-corruption efforts to promote inclusive growth and ensure a level playing field for businesses and investors.
