ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement that could unlock approximately $1.2 billion in fresh financing, while the Fund has urged the government to phase out its fuel subsidy scheme, increase health and education spending and ensure timely energy tariff adjustments.
The agreement covers the fourth review of Pakistan’s 37-month Extended Fund Facility (EFF) and the third review of its 28-month Resilience and Sustainability Facility (RSF), alongside discussions under the 2026 Article IV consultation.
An IMF mission led by Iva Petrova held discussions with Pakistani authorities in Karachi and Islamabad from September 23 to October 7, 2026.
The staff-level agreement remains subject to approval by the IMF Executive Board. Upon approval, Pakistan will receive approximately $1 billion under the EFF and $210 million under the RSF, bringing total disbursements under the two arrangements to around $5.7 billion.
In a statement following the talks, the IMF said Pakistan’s economic programme had remained broadly on track despite a challenging external environment. The Fund credited government policies with helping preserve macroeconomic stability amid the impact of the conflict in the Middle East.
However, it warned that risks remained elevated due to geopolitical tensions, volatile energy prices, tighter global financial conditions and disruptions to international trade.
Economic Growth and Inflation Outlook
According to the IMF, Pakistan’s real gross domestic product (GDP) grew by 4 per cent during the first three quarters of FY26, while full-year growth was estimated at 3.6 per cent as higher energy prices and supply disruptions weakened economic momentum.
Headline inflation, which peaked in May, moderated to approximately 10.3 per cent in September, while core inflation remained contained, the Fund said.
The current account remained broadly balanced during FY26, supported by strong workers’ remittances, while gross foreign exchange reserves increased to approximately $21.5 billion by the end of September.
The IMF also noted that sovereign credit rating upgrades and renewed access to international capital markets reflected improved policy credibility.
Despite these developments, the Fund stressed that maintaining macroeconomic stability would require sustained fiscal discipline, appropriate monetary policy and continued structural reforms.
IMF Calls for Early Withdrawal of Fuel Subsidies
The IMF urged Pakistan to phase out its fuel support scheme promptly, citing its high fiscal cost and broad-based targeting.
It said any future assistance introduced in response to unexpectedly higher oil prices should be limited in duration, targeted at vulnerable households through established social protection programmes and accommodated within the FY27 budget.
The Fund also called for an expansion of targeted cash transfers, improvements in beneficiary coverage and more efficient payment systems to protect low-income households from economic shocks.
According to the IMF, Pakistan has begun reversing the long-term decline in health and education expenditure, increasing combined spending from 2.2 per cent of GDP in FY24 to 2.5 per cent in FY26. The government is committed to raising the share further to 2.8 per cent of GDP in FY27.
The Fund emphasised that effective implementation and the reallocation of resources, where necessary, would be essential to achieving the spending target.
Fiscal Discipline and Tax Reforms
The IMF said implementation of the FY27 budget, anchored by an underlying primary surplus target of 2 per cent of GDP, would be critical to placing public debt on a sustainable downward trajectory.
It called for stronger tax administration through risk-based audits, digital invoicing and the use of third-party data to improve compliance and safeguard revenue targets.
The Fund also recommended a comprehensive medium-term tax reform strategy to create a simpler, fairer and more growth-oriented tax system while reducing economic distortions and protecting government revenues.
Further improvements in public financial management, government procurement, public investment and cash management were identified as priorities. The IMF also urged the authorities to reduce debt rollover risks and servicing costs, while deepening the domestic government securities market and diversifying its investor base.
Energy Tariff Adjustments and Circular Debt
The IMF underscored the need for timely electricity tariff adjustments and cost-reduction measures to prevent the renewed accumulation of circular debt in the energy sector.
It identified improving operational efficiency, encouraging private-sector participation in electricity distribution, promoting competition in electricity markets, maintaining cost recovery in the gas sector and reducing unaccounted-for gas losses as key reform priorities.
The Fund also called for better-targeted electricity subsidies to protect vulnerable consumers without undermining the financial sustainability of the energy sector.
These measures form part of a broader effort to reduce energy-sector inefficiencies, improve cost recovery and create a more reliable and financially sustainable system.
Monetary Policy and Foreign Exchange Reforms
The IMF said the State Bank of Pakistan (SBP) should maintain an appropriately tight monetary policy stance to ensure inflation returns sustainably to its target range.
It also stressed the importance of exchange rate flexibility as a mechanism for absorbing external shocks.
Further accumulation of foreign exchange reserves, gradual liberalisation of the foreign exchange regime and deeper domestic financial markets were identified as necessary to strengthen economic resilience and support private-sector development.
Structural Reforms to Boost Investment and Exports
The Article IV consultation examined reforms aimed at shifting Pakistan’s economy towards higher-value-added activities and narrowing its development gaps with comparable economies.
The IMF called for stronger competition, fewer regulatory and trade barriers, progress on privatisation, improved governance and transparency in state-owned enterprises (SOEs), and stronger governance and anti-corruption institutions.
The Fund said a simpler tax system, increased investment in human and physical capital, a more cost-efficient energy sector and deeper financial markets would be important for raising productivity, expanding labour force participation, creating jobs and encouraging private investment and exports.
Climate Reforms Under the RSF
Under the Resilience and Sustainability Facility, Pakistan is continuing reforms to strengthen its capacity to withstand climate-related risks.
The IMF highlighted progress in integrating climate considerations into public investment planning and improving disaster risk financing and coordination.
Further measures include reforms to irrigation water pricing and collection, better-targeted electricity subsidies, stronger energy-efficiency standards and the decarbonisation of transport.
The Fund said these initiatives would help reduce Pakistan’s vulnerability to climate change while supporting a more sustainable economic development path.
The IMF mission thanked Pakistani authorities, private-sector representatives and development partners for their cooperation during the discussions in Karachi and Islamabad.
The agreement marks another step in Pakistan’s ongoing economic programme, with the next phase dependent on Executive Board approval and continued implementation of fiscal, monetary, energy-sector and structural reforms.
Story by Mehtab Haider
