The government is committed to respecting pre-war objectives and the money will be disbursed early next week
The government has recognized the need for a mini-budget if revenues do not meet expectations by the end of December 2025, according to the IMF. Photo: file
ISLAMABAD:
The International Monetary Fund’s board approved $1.2 billion in loan tranches on Friday after Pakistan agreed to a dozen new conditions and committed to pre-war program goals to keep its economic stabilization efforts on track.
With this new approval, Pakistan has so far received a loan of $4.5 billion from the IMF against two separate debt packages totaling $8.4 billion.
Pakistan has access to an additional $1 billion under the Extended Financing Facility and $200 million under the Resilience and Sustainability Facility.
The money would be disbursed early next week, bringing the central bank’s reserves to more than $17 billion, government officials said.
However, the government had to stick to old fiscal and monetary targets and pledged to remain on the path to stabilization despite strong voices against these policies which caused higher unemployment, greater poverty and greater income inequality.
The IMF Executive Board also approved a change to a performance criterion at end-June, including the SBP’s net international reserves floor.
It also set new performance criteria for the end of December 2026 and the end of June 2027 for the central bank. The $1 billion debt would be used to support the balance of payments while the $200 million would be earmarked for fiscal support, according to government officials.
The IMF approval came after the government showed better performance against fiscal and monetary targets, but views differ on the path forward in the second half of this fiscal year.
The IMF mission had reviewed the performance of Pakistan’s economy for the period July-December 2025, covering the third review of the $7 billion bailout package.
Pakistan met all quantitative performance criteria as of end-December 2025, also outperformed the net international reserves floor and largely met the general government primary balance target.
The government has also achieved six of the eight indicative targets set for the end of December 2025, but the Federal Revenue Council remains the weakest link. It failed to meet the targets on net tax revenue collected by the FBR and tax revenue from retailers, which fell short of the IMF targets.
However, the government assured the IMF that it would remain focused on implementing revenue administration reforms to minimize the deficit by the end of the fiscal year. To offset the impact of the shortfall on the IMF target, the government increased levy rates on oil.
The government also made some progress in structural reforms and achieved four structural benchmarks on time in the areas of governance, social support, gas sector sustainability and special technology zones.
As part of the conditions of the $1.2 billion climate mechanism, the government adopted a green taxonomy and published guidelines on the management of climate-related financial risks and on the disclosure by listed companies of climate-related risks and opportunities.
Finance Minister Muhammad Aurangzeb assured the IMF that the country remains committed to pursuing sound and prudent macroeconomic policies and structural and institutional reforms to place Pakistan on the path to long-term sustainable and inclusive growth.
New assurances were also given to provide the foundation needed to withstand shocks, including the impact of war in the Middle East, government officials said.
Pakistan has now assured the IMF that it will not abandon the fiscal trajectory agreed before the start of the Middle East war and will not achieve the primary fiscal surplus target of Rs 3.4 trillion. Implementation measures would be expedited to cover the FBR revenue shortfall.
Under another commitment, the new budget would be developed in consultation with the IMF to ensure that it is a fiscally strict budget and that the government does not seek higher economic growth, the officials said.
For the next fiscal year, the government has agreed to achieve a primary budget surplus target of Rs 2,840 billion, or 2% of GDP.
Under the same plan, the State Bank of Pakistan has already increased interest rates to 11.5 percent and has pledged to raise rates further if inflation remains above agreed limits, the sources said.
Pakistan also assured the IMF that it would regularly adjust electricity and gas prices to maintain a progressive tariff structure and protect the most vulnerable from sharp tariff increases and cost-cutting reforms in the energy sector.
In total, they agreed to almost a dozen additional conditions, including the approval of the new budget by the National Assembly in accordance with the Fund’s agreement and the modification of laws governing special economic and technological zones.
The government has committed to the IMF that Parliament will approve the budget for the 2026-27 fiscal year, in line with IMF staff agreement on the objectives of the $7 billion program.
This is the second time that the government has accepted such a condition under the current program, with the last budget also approved under the instructions of the IMF.
The total number of conditions that the IMF has imposed so far in the last two years has reached 75. These encompass all spheres of economic decision-making, governance and private sector development.
The sources said Pakistan has agreed to the IMF’s condition that by June 2027, it will enact amendments to the Special Economic Zones (SEZ) Act and the Special Technology Zones Authority (STZA) Act to phase out existing tax incentives and shift from profit-based to cost-based incentives.
The country would also amend these laws to remove the power to grant tax incentives from the Board of Approvals, Board of Investments and SEZ authorities. The legal changes would be made to the satisfaction of the IMF to completely eliminate all existing tax incentives for ZTS by 2035.
Under another commitment, the government would prohibit export processing zones from selling their goods domestically. The restriction on local sales will be implemented by September this year, the sources said.
Industries established in these export zones are often accused of selling a significant part of their production on the local market to avoid taxes.
