Pakistan: Encouraging IMF Staff Level Report

The recently released IMF staff level report praises Pakistan’s strong program implementation and stresses the need to prioritize reforms going forward.

These include reforms to strengthen competition and productivity, improve SOEs and public services, increase energy sector viability, broaden the tax base, and build climate resilience.

Several new structural benchmarks have been introduced, which will impact multiple sectors such as Energy and Autos, and these may be part of the upcoming FY26 Budget.

Pakistan’s macroeconomic recovery has been cemented by growing foreign exchange reserves and sharply lower inflation, enabling the State Bank of Pakistan (SBP) to halve the policy rate to 11.0%.

GDP growth in FY26 is expected to reach the long-term average, and modestly accelerate thereafter. The current account is expected to remain in control, aided by lower oil prices and strong remittances.

This may limit pressure on the PKR, even as the IMF has encouraged a more flexible exchange rate.

Containing the fiscal deficit, as ever, will likely prove to be the most challenging. The projected improvement on the fiscal deficit is contingent on tax collection, including the effective implementation of the newly introduced Agriculture Income Tax laws.

That said, climate-related funding by the IMF (US$1.4 billion over the course of the program) can be used for budgetary support, which is a positive. 

As of December 2024, Pakistan had met all seven quantitative performance criteria and five of eight indicative targets. Compliance with structural benchmarks was also generally strong.

Important structural benchmarks that have already been met include approval of the National Fiscal Pact, and introduction of Agriculture Income Tax laws at the provincial level. However, others are still pending including eliminating captive power use in the gas sector. The IMF has now introduced additional structural benchmarks.