In a significant development, the International Monetary Fund (IMF) and Pakistani authorities have reached a preliminary agreement on a comprehensive financial framework. This accord paves the way for continued negotiations on the federal budget for fiscal year 2025-26, with discussions expected to intensify in the coming days.
Officials within the finance ministry indicate that these advanced discussions aim to finalize crucial fiscal policies. Key areas of focus include setting the ambitious revenue collection target for FY26, determining the scope of the development outlay, finalizing defence expenditure, and hammering out the highly debated tariff rationalization plan for various industries.
While progress has been made on the overall financial framework, several areas still require further agreement. These include potential tax concessions for the salaried class, the contentious issue of an increase in the defence budget, and policies related to the real estate sector. The ongoing discussions will also delve into strategies for reducing overall government expenditures and advancing long-standing structural reforms, notably the privatization of state-owned enterprises.
IMF Mission Concludes Staff Visit, Next Review in H2 2025
According to an official IMF announcement, the Fund mission, led by Nathan Porter, has concluded its staff visit to Islamabad. The visit primarily focused on recent economic developments, the implementation progress of existing programs, and the strategic direction for the FY26 budget.
The IMF delegation had arrived in Islamabad on May 19 to review Pakistan’s recent economic developments, assess progress under the 2024 Extended Fund Facility (EFF) and the 2025 Resilience and Sustainability Facility (RSF), and initiate critical discussions on the next federal budget.
“We held constructive discussions with the authorities on their FY26 budget proposals and broader economic policy and reform agenda, supported by the 2024 EFF and the 2025 RSF,” Mr. Nathan stated, emphasizing the collaborative nature of the talks. The next mission, associated with the upcoming EFF and RSF reviews, is anticipated in the second half of 2025.
Commitment to Fiscal Consolidation and Revenue Enhancement
Finance ministry officials reaffirmed Pakistan’s commitment to fiscal consolidation, while simultaneously safeguarding social and priority expenditures. Their aim is to achieve a primary surplus of 1.6 percent of gross domestic product (GDP) in FY26, signaling a strong intent for fiscal discipline.
During the mission visit, discussions specifically focused on actions to enhance revenue, which includes bolstering tax compliance and strategically expanding the tax base. Simultaneously, talks centered on prioritizing expenditures to ensure efficient allocation of resources.
The Federal Board of Revenue (FBR) is currently facing significant shortfalls in the current fiscal year. Tax officials confirmed that they “will discuss a realistic revenue target for the FBR while keeping in view real GDP growth and inflation,” adding that next year’s target will be based on actual revenue potential rather than setting an unrealistic goal.
Mr. Nathan confirmed, “We will continue discussions towards agreeing on the authorities’ FY26 budget over the coming days.”
He further added that the discussions also encompassed ongoing energy sector reforms, aimed at improving financial viability and reducing the high-cost structure of Pakistan’s power sector. Other structural reforms discussed are intended to foster sustainable growth and promote a more level playing field for business and investment across the country.
Concluding his remarks, Mr. Nathan highlighted that Pakistani authorities emphasized their commitment to ensuring sound macroeconomic policymaking and building robust financial buffers. In this context, maintaining an appropriately tight and data-dependent monetary policy remains a priority to anchor inflation within the central bank’s medium-term target range of 5-7pc. Simultaneously, rebuilding foreign exchange reserves, preserving a fully functioning forex market, and allowing for greater exchange rate flexibility are considered critical to strengthening resilience against external shocks.
