The government promises to meet pre-war targets and the money will be disbursed early next week.
The government has accepted the need for a mini-budget if revenues fall short of expectations by the end of December 2025, according to the IMF. Photo: archive
ISLAMABAD:
The International Monetary Fund’s executive board approved $1.2 billion in loan tranches on Friday after Pakistan agreed to a dozen new conditions and pledged to stick to the goals of the pre-war program to keep its economic stabilization efforts on track.
With the 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 another $1 billion under the Expanded Fund Facility and $200 million under the Resilience and Sustainability Fund.
The money will 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 the old fiscal and monetary objectives and pledged to stay on the path of stabilization despite the strong voices against these policies that have caused higher unemployment, greater poverty and greater income inequality.
The IMF executive board also approved a modification to one of the performance criteria in late June, specifically the SBP’s net international reserves floor.
It also set new performance criteria for the end of December 2026 and 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 provided as budget support, according to government officials.
The IMF approval came after the government showed better performance against fiscal and monetary targets, but there were divergent views on the path during 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 and also performed above the floor in net international reserves and comfortably met the general government’s primary balance target.
The government also met six of the eight indicative targets set for the end of December 2025, but the Federal Board of Revenue remained the weakest link. It missed targets on net tax revenue collected by the FBR and income tax revenue from retailers, which fell short of IMF targets.
However, the government assured the IMF that it would remain focused on implementing revenue management reforms to minimize the deficit before the end of the fiscal year. To offset the impact of the revenue shortfall on the IMF target, the government has increased oil tax rates.
The government also made some progress in structural reforms and met four structural benchmarks on time in the areas of governance, social support, gas sector sustainability and special technological zones.
As part of the conditions of the $1.2 billion climate fund, the government adopted a green taxonomy and issued guidelines on the management of climate-related financial risks and on the disclosure of climate-related risks and opportunities by listed companies.
Finance Minister Muhammad Aurangzeb assured the IMF that the country remains committed to continuing sound and prudent macroeconomic policies and structural and institutional reforms to put Pakistan on the path to long-term sustainable and inclusive growth.
The new guarantees have also been given to lay the groundwork to withstand shocks, including the impact of the Middle East war, government officials said.
Pakistan has now assured the IMF that it will not abandon the fiscal path agreed before the start of the war in the Middle East and will not meet the primary budget surplus target of Rs 3.4 trillion. Enforcement measures would be expedited to meet the FBR’s revenue shortfall.
Under another commitment, the new budget would be drawn up in consultation with the IMF to ensure it is a fiscally tight budget and that the government does not pursue higher economic growth, the officials said.
For the next fiscal year, the government has agreed to achieve a primary budget surplus target of Rs 2.84 trillion, which is equivalent to 2% of GDP.
Under the same plan, the State Bank of Pakistan has already raised interest rates to 11.5% and has promised to raise them further if inflation remains higher than agreed limits, sources said.
Pakistan has also assured the IMF that it would periodically adjust electricity and gas prices to maintain a progressive tariff structure and protect the most vulnerable from large tariff increases and cost-cutting reforms in the energy sector.
In total, they agreed to almost a dozen other conditions, including the approval of the new budget by the National Assembly in accordance with the Fund’s agreement and the modification of the laws governing the special economic and technological zones.
The government has committed to the IMF that Parliament would approve the fiscal year 2026-27 budget in line with IMF staff agreement on the targets of the $7 billion program.
This is the second time that the government has accepted such a condition under the current programme, as the last budget was also approved following instructions from the IMF.
The total number of conditions that the IMF has imposed so far over the past two years has reached 75. These cover all spheres of economic decision-making, governance and private sector development.
Sources said Pakistan has accepted the IMF’s condition that by June 2027, it will enact amendments to the Special Economic Zones (SEZ) Act and the Special Technological Zones Authority (STZA) Act to phase out existing tax incentives and move from profit-based incentives to cost-based incentives.
The country would also amend these laws to remove the authority of the Approval Board, Board of Investment and SEZ authorities to grant tax incentives. 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 products in the domestic market. The restriction on selling locally will be implemented in September this year, sources said.
Industries located in these export zones are often accused of selling a significant part of their production on the local market to evade taxes.
