ISLAMABAD: The International Monetary Fund (IMF) on Wednesday approved a $7 billion bailout package for Pakistan after the government committed to reforming its agricultural income tax, transferring certain fiscal responsibilities to provincial authorities, and limiting subsidies.
A statement from the Prime Minister’s Office confirmed that the IMF Executive Board sanctioned the 37-month Extended Fund Facility (EFF), releasing an initial loan tranche of under $1.1 billion. This is the 25th IMF programme Pakistan has entered into since 1958 and the 6th under the EFF framework.
According to the Ministry of Finance, Pakistan will be paying an interest rate of around 5% on the IMF loan.
Prime Minister Shehbaz Sharif reiterated on Wednesday that this would be the country’s last IMF programme—a pledge he also made after securing the previous IMF bailout in 2023. Shehbaz credited Deputy Prime Minister Ishaq Dar, Chief of the Army Staff General Asim Munir, and the government’s finance team for the successful negotiation. He stressed that federal cooperation with all four provincial governments is critical to completing the country’s 25th IMF programme.
Interestingly, both Sindh and Balochistan ratified a memorandum of understanding to sign the National Fiscal Pact following the IMF’s staff-level agreement with Pakistan on 12 July. Sindh gave its approval on 30 July, while Balochistan ratified it on 26 July.
However, the IMF board approved the bailout without addressing one of the major challenges facing Pakistan: the restructuring of its external and domestic debt, which consumed 81% of tax revenues during the previous fiscal year.
The bailout aims to restore macroeconomic stability by consolidating public finances, rebuilding foreign exchange reserves, reducing fiscal risks associated with state-owned enterprises, and improving the business climate to encourage private sector growth.
To meet the IMF’s conditions, Pakistan imposed additional taxes ranging between Rs1.4 trillion and Rs1.8 trillion, increased electricity tariffs by up to 51%, and committed to improving transparency within its Sovereign Wealth Fund.
In an effort to meet a key IMF condition, Pakistan also took out its most expensive commercial loan to date—a $600 million loan to secure a board meeting date. The IMF programme also includes conditions to enhance the fiscal viability of the power sector, privatise loss-making state entities, and increase tax revenues.
Unlike previous IMF arrangements, this programme includes significant requirements for provincial budgets. The federal and provincial governments are expected to sign a new National Fiscal Pact by next Tuesday, transferring responsibility for health, education, social safety, and infrastructure projects to provincial authorities.
By 30 October, all four provincial governments are required to align their agricultural income tax rates with the federal personal and corporate tax rates, raising them from the current 12-15% to 45% by January of next year. Provincial governments are also prohibited from offering further subsidies on electricity and gas and from creating new Special Economic Zones or Export Processing Zones. Meanwhile, the federal government must phase out tax incentives for existing zones by 2035.
One of the most significant conditions is that Pakistan must show a primary budget surplus of 4.2% of GDP over the next three years. The primary surplus—calculated before interest payments—will significantly restrict non-interest expenditures and place an additional tax burden of around 3% of GDP on current taxpayers. For this fiscal year, Pakistan is required to show a primary surplus of 1% of GDP, with a further 3.2% surplus over the following two years to bring the debt-to-GDP ratio onto a sustainable downward trajectory.
Should there be a tax shortfall, the government has committed to introducing a mini-budget, potentially increasing taxes on imports, contractors, professional services, and fertilisers. The Federal Board of Revenue (FBR) is already facing a potential tax shortfall of over Rs200 billion for the first quarter.
Pakistan is also bound by the programme to maintain defence spending and subsidies at the same levels as the previous fiscal year, relative to the size of the economy. Nevertheless, the IMF programme has not fully addressed the issue of debt sustainability, relying on the rollover of maturing external debt during the programme period.
Pakistan has also agreed not to repay $12.7 billion in loans owed to Saudi Arabia, China, the UAE, and Kuwait throughout the programme period.
In order to secure IMF board approval, Pakistan was required to bridge a $2 billion financing gap, for which it secured its most expensive commercial loan ever, at an 11% interest rate from Standard Chartered Bank.
Meanwhile, the Asian Development Bank (ADB) has warned that mounting political and institutional tensions may impede Pakistan’s ability to deliver on the reforms promised to the IMF. The ADB stressed that these reforms are essential to ensuring continued financial support from international lenders.
