Islamabad has assured the International Monetary Fund (IMF) that it will increase taxes on fertilisers, pesticides, and sugary products, while moving selected items to the standard 18% GST slab. These measures are part of Pakistan’s plan to successfully complete the second review of the $7 billion Extended Fund Facility (EFF) and unlock the third $1 billion tranche, along with the first $200 million tranche under the $1.4 billion Resilience and Sustainability Facility (RSF). The IMF’s recently released staff report highlights that Pakistan has achieved most targets under the programme, though it projects that the country’s balance of payment gap could widen to $3.253 billion by 2029–30, signaling potential need for another IMF programme in the future. The report outlines contingency measures the government plans to adopt if revenues fall short by December 2025. These include raising excises on fertilisers and pesticides by five percentage points, introducing levies on high-value sugary items, and broadening the GST base. In addition, Islamabad is ready to reduce or postpone spending in response to lower revenues. Other commitments include full deregulation of the sugar sector, continued tariff adjustments in the power sector, and measures to reduce system losses and costs. The government will also roll out point-of-sale systems for 40,000 large retailers nationwide over the next two years, while all provinces will move toward harmonised sales tax procedures. The IMF report notes that, in the current fiscal year, Pakistan will restrict spending on new development schemes to 10% of the PSDP, prioritising completion of ongoing projects worth around Rs2.5 trillion. From the next fiscal year, greater focus will be placed on climate-related initiatives. Public procurement is set to transition to digital e-pads, with the Auditor General required to submit a compliance report to the president by March 2026. Under social protection measures, the Kafalat cash transfer under the BISP programme will rise to Rs14,500 per quarter from January 2026, expanding coverage to 10.2 million families. Biometric verification for payments will remain mandatory, and the government plans to launch the long-awaited e-wallet system by June 2026. On energy reforms, the IMF has noted that the government has already decided to shift annual tariff rebasing from July to January 2026. Last fiscal year, the circular debt stock was reduced to Rs1.614 trillion. By January 2026, the government aims to settle Rs1.2 trillion owed to commercial banks, out of which Rs660 billion will go to Pakistan Private Holdings Limited and the rest to the Central Power Purchasing Agency. The plan also includes eliminating Rs128 billion in interest payments owed to IPPs and keeping the circular debt at zero inflow until fiscal year 2031. The Fund highlights that 5.2 million income tax returns were filed in FY2024, while the number is expected to reach 7 million in FY2025. It acknowledges Pakistan’s progress on stabilisation, noting improvements in foreign exchange reserves, which have risen to $14.5 billion, and a 1.3% primary surplus delivered in FY2025. Fiscal performance remains strong, with the primary surplus recorded at 1.3%, and the IMF report says this surplus was achieved in line with the programme target. According to the report, within one year, foreign exchange reserves increased from $9.4 billion to $14.5 billion, and reserves are projected to rise further in the coming years. The IMF says Pakistan has achieved its first current account surplus in 14 years and terms the primary surplus target for fiscal year 2025–26 achievable. Reforms to increase revenues and reduce debt are described as ongoing. On inflation, the IMF notes that inflation increased due to food prices following the floods but says this inflationary pressure is temporary. Inflation is projected to ease to 7% in the current fiscal year. The IMF has stressed maintaining a tight monetary policy to keep inflation under control. It also says exchange rate flexibility is necessary to absorb shocks. At the same time, the IMF warns that the 2022 floods highlighted Pakistan’s deep climate vulnerability, having affected seven million people and claiming nearly 1,000 lives, while causing extensive losses to infrastructure, homes and livestock. The report says that following the floods, the importance of reforms and policy continuity has increased further, and it urges stronger climate adaptation measures, improved water management and disaster preparedness. The global lender has also stressed sustained reforms in taxation, governance, state-owned enterprises and energy to secure long-term growth. It says Pakistan must widen the tax net, simplify tax procedures, ensure data transparency, and maintain a strict monetary policy to keep inflation stable. Strengthening forex market transparency and reducing policy uncertainty are also essential. The IMF report adds that progress has been made in improving the power sector through energy tariff adjustments, but further reforms are required to stabilise the sector. It also notes that improving governance in state-owned enterprises and the investment environment is important, and that trade and investment reforms are essential for sustainable growth. It says RSF reforms will help improve flood risk management and water governance. The report concludes that Pakistan’s economic recovery remains fragile but is moving in the right direction under the current programme. Stronger reforms and consistent policy implementation, it notes, will be critical for lowering debt, raising revenue and sustaining growth in the years ahead.
Pakistan Confirms Agricultural Tax Increase, Development Cuts to IMF
