IMF approves $1.2b tranche for Pakistan amid reform commitments

The executive board of the International Monetary Fund (IMF) on Friday approved $1.2 billion worth of loan tranches after Pakistan accepted a dozen new conditions and assured it would stick to the pre-war programme targets to stay on the course of stabilization.

With the fresh approval, Pakistan has so far received a $4.5 billion loan from the IMF against two separate debt packages totaling $8.4 billion. Pakistan has access to another $1 billion under the Extended Fund Facility and $200 million under the Resilience and Sustainability Facility.

The money would be disbursed early next week, which will take the central bank’s reserves to over $17 billion, said government officials.

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However, the government had to stick to the old fiscal and monetary targets and gave a commitment to stay on the path of stabilization despite strong voices against these policies that have caused higher unemployment, higher poverty, and higher income inequality.

The IMF executive board also approved a modification of one end-June performance criterion, specifically the floor on net international reserves of the SBP. It also set new performance criteria for end-December 2026 and end-June 2027 for the central bank. The $1 billion debt would be used for balance of payment support, while the $200 million is given in budget support, according to government officials.

The IMF approval came after the government showed better performance against the fiscal and monetary targets, but there were divergent views about the path during the second half of this fiscal year.

The IMF mission had reviewed the performance of Pakistan’s economy for the July-December 2025 period, covering the third review of the $7 billion bailout package.

Pakistan met all end-December 2025 quantitative performance criteria and also outperformed against the floor on net international reserves and comfortably met the general government’s primary balance target.

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The government also met six of eight end-of-December 2025 indicative targets, but the Federal Board of Revenue remained the weakest link. It missed the targets on net tax revenues collected by the FBR and income tax revenues from retailers, which fell short of IMF targets.

However, the government assured the IMF that it would remain focused on implementing revenue administration reforms to minimize the shortfall by the end of the fiscal year. To offset the impact of the revenue shortfall on the IMF target, the government has increased petroleum levy rates.

The government also made some progress on structural reforms and met four structural benchmarks in the areas of governance, social support, gas sector sustainability, and special technology zones on time.

As part of the conditions under the $1.2 billion climate facility, the government adopted a green taxonomy and issued guidelines on the management of climate-related financial risks and on listed companies’ disclosure of climate-related risks and opportunities.

Finance Minister Muhammad Aurangzeb assured the IMF that the country remains committed to continuing with sound and prudent macroeconomic policies and structural and institutional reforms to place Pakistan on a path toward long-term sustainable and inclusive growth.

The fresh assurances have also been given to provide the foundation to withstand shocks, including the impact of the Middle East war, said government officials.

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Pakistan has now assured the IMF that it would not abandon the fiscal path agreed before the start of the Middle East war and would deliver the Rs3.4 trillion primary budget surplus target. Enforcement measures would be fast-tracked to cover the revenue shortfall by the FBR.

According to another commitment, the new budget would be made in consultation with the IMF to ensure that it is a fiscally tight budget and that the government does not chase higher economic growth, said officials.

For the next fiscal year, the government has agreed to deliver a Rs2.84 trillion primary budget surplus target, which is equal to 2% of GDP.

Under the same plan, the State Bank of Pakistan has already increased interest rates to 11.5% and gave a commitment to further raise rates if inflation remains higher than the agreed limits, said sources.

Pakistan has also assured the IMF that it would regularly adjust electricity and gas prices to maintain a progressive tariff structure, shield the most vulnerable from large tariff increases, and continue cost-reducing reforms in the energy sector.

Overall, the government accepted nearly a dozen more conditions, including approval of the new budget by the National Assembly in line with the Fund’s agreement and the amendment of laws governing special economic and technology zones.

The government has committed to the IMF that the Parliament would approve the fiscal year 2026-27 budget in line with the IMF staff agreement on the $7 billion programme targets. This is the second time the government has accepted such a condition under the current programme, as the last budget was also approved under IMF instructions.

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The total number of conditions that the IMF has so far imposed during the past less than two years has touched 75. These encompass all spheres of economic decision-making, governance, and private sector development.

The sources said that Pakistan has accepted the IMF condition that by June 2027, it will enact amendments to the Special Economic Zones (SEZ) Act and Special Technology Zones Authority Act (STZA) to phase out existing fiscal incentives and shift from profit-based to cost-based incentives.

The country would also amend these laws to withdraw the authority of the Board of Approvals, Board of Investment, and SEZ authorities in granting tax incentives. The legal changes would be made to the satisfaction of the IMF to completely phase out all existing fiscal incentives to STZs by 2035.

According to another commitment, the government would prohibit Export Processing Zones from selling their goods in the domestic market. The restriction on local sales will be implemented by September this year, said sources.

The industries located in these export zones are often accused of selling a significant chunk of their production in the local market to evade taxes.