The seal of the International Monetary Fund is seen at the headquarters building in Washington, DC. — AFP/File
ISLAMABAD: The government has committed to introducing additional revenue measures worth Rs430 billion and increasing the petroleum levy target by 17.6 per cent in the upcoming budget 2026-27 as part of its agreement with the International Monetary Fund (IMF) to achieve a primary surplus of Rs2.881 trillion, equivalent to 2pc of GDP.
Under the IMF-backed fiscal framework, the government will continue its consolidation drive aimed at restricting the overall budget deficit to below 4pc of GDP in the next fiscal year.
According to budget projections, the Federal Board of Revenue (FBR) has been assigned a tax collection target of Rs15.264 trillion, while the petroleum levy target has been projected at Rs1.727 trillion.
On the expenditure side, total current expenditures are estimated at Rs15.92 trillion. Interest payments are expected to consume the largest share at Rs7.82 trillion, followed by defence spending of Rs2.665 trillion.
The federal development budget is projected at Rs986 billion, while subsidy allocations are expected to stand at around Rs947 billion in the upcoming fiscal year.
The IMF staff report for Pakistan, released on Friday, stated that the impact of the war in the Middle East clouds Pakistan’s near-term outlook, and there is great uncertainty about how developments will unfold. Under the baseline scenario, the war is expected to put upward pressure on inflation and weigh on growth and the balance of payments, but the overall impact is expected to be contained. However, downside risks are high.
For completion of third review and release of fourth tranche under EFF programme, the IMF imposed 11 new conditions including parliamentary approval of a FY27 budget in line with IMF staff agreement to meet programme targets, including an underlying primary balance of 2pc of GDP, prepare an audit manual and audit policy centralising the audit case selection process via administrative prioritisation and a report to monitor high-risk cases through the Compliance Risk Management system, amend PPRA rules to eliminate SOE preferences in awarding public procurement contracts without competition by September 2026, enhance NAB’s autonomy and transparency by: (i) submitting to parliament amendments to the NAB ordinance to establish an open, merit-based, rigorous and competitive selection process of senior management, including adopting pre-determined qualification criteria and designating a multisectoral stakeholder committee to conduct selection in line with the recommendations of the Governance and Corruption Diagnostic report; and (ii) publishing NAB’s investigation and prosecution rules and annual statistics regarding the investigation, prosecution, and conviction of corruption offence by January 2027, annual inflation and generosity adjustment of the unconditional cash transfer (Kafalat) programme quarterly benefit for BISP from January 2027, SBP to develop a roadmap for gradual foreign exchange regime liberalisation, including appropriate sequencing (macroeconomic, financial stability, and other preconditions), notification of the semi-annual gas tariff adjustment from July 1, 26, semi gas tariff adjustment from Feb 15, 2027, annual power tariff adjustment from Jan 2027, enact amendments to: (i) the SEZ Act and phase-out existing fiscal incentives to SEZs (consistent with the FY26 Finance Bill) and shift from profit-based to cost-based incentives as per the agreed phase out plan, and discontinue the rights and responsibilities of the BOA, BOI, and existing SEZ Authorities in granting tax incentives; and (ii) the STZA Act to phase-out all existing fiscal incentives to STZs by 2035 and establish the Pakistan Regulatory Registry as a comprehensive and legally authoritative (“with positive security”) source on business regulations for federal government and the ICT.
The IMF elaborated the Fund sponsored programme objectives and described that the authorities remain committed to programme policies and objectives, including: (i) the gradual fiscal consolidation plan and accelerating efforts to broaden the tax base to generate resources needed for higher social and development spending, alongside reforms to improve spending efficiency and public financial management; (ii) an appropriately tight monetary policy to ensure inflation expectations remain anchored in the face of volatile commodity prices; (iii) maintaining a flexible exchange rate as the key shock absorber to support the rebuilding of reserves; (iv) keeping fuel and energy tariffs in line with cost recovery to avoid unaffordable subsidies and fiscal costs, while protecting vulnerable consumers with targeted support and continuing to implement reforms to address the high costs of energy; and (v) advancing and deepening structural reforms to sustainably boost long-term growth, including delivering on the Economic Governance Reform actions and strengthening anti-corruption institutions, advancing SOE reforms and the privatisation agenda, and eliminating distortions and unnecessary regulations. Policies adopted under the RSF arrangement will reduce economic vulnerabilities from climate shocks, improve the climate information architecture, and help facilitate climate-focused investment.
Strong programme implementation, according to the IMF, has bolstered Pakistan’s resilience to external shocks, but reform momentum needs to be sustained against a challenging backdrop. Growth had gained momentum prior to the Middle East war, as programme implementation had begun to bear results.
However, the war weighs on the near-term outlook as Pakistan is highly exposed to energy imports and remittances from the Gulf countries as well as to global financial conditions. An extended period of volatile commodity prices, elevated global policy uncertainty, and higher long-term interest rates could substantially impact its economy and the balance of payments. Amidst this challenging international environment, and with growing domestic concerns about poverty and growth, strong policy and reform efforts need to be sustained and deepened to lock in recent gains, strengthen public finances, continue rebuilding external buffers, and support inclusive and resilient private sector-led growth.
The authorities’ commitment to the programme’s fiscal targets amidst a difficult global environment is commendable. The gradual fiscal consolidation envisaged in the programme remains appropriate to strengthen resilience in a shock-prone world and reduce vulnerabilities from the still high debt and gross financing needs.
However, the consolidation progress so far has relied primarily on increasing revenue from the formal sector. The authorities should scale up efforts to broaden the tax base in the undertaxed sectors by strengthening revenue administration, which would also create space to address distortions in the existing tax policy design and support long-term growth. Spending efficiency and public financial management reforms are also key to supporting policy credibility and sustainability. Enhancing social protection and human capital development are critical to build resilience against shocks and improve poverty and employment indicators.
In this regard, the planned FY27 increase in UCT benefit generosity and in health and education spending are welcome, and further efforts should be made to ensure their expansion and timely and quality implementation.
The SBP should remain vigilant to ensure inflation expectations stay anchored in the face of ongoing commodity price volatility, while allowing the exchange rate to act as a shock absorber. With inflationary pressures likely to increase, the SBP should stand ready to tighten monetary policy if needed, while carefully monitoring second-round effects on prices, wages, and inflation expectations. Efforts to continue improving central bank communication will help anchor expectations and support effective policy implementation. Exchange rate flexibility should be the main shock absorber to preserve and continue building reserve buffers, which are still well below comfortable levels. At the same time, the SBP should continue deepening the interbank FX market, including through a carefully sequenced medium-term FX liberalisation.