IMF sets Rs1.73tr petroleum levy target for FY27

Global lender releases staff level report

ISLAMABAD:

The International Monetary Fund (IMF) has set the petroleum levy target for the next fiscal year at Rs1.73 trillion – higher by Rs259 billion – and hardened other conditions to ensure the Federal Board of Revenue (FBR) achieves its revenue target, according to the Fund's staff?level report released on Friday.

The report disclosed that federal and provincial governments will make additional revenue efforts equivalent to Rs860 billion. The federal government will take half of these measures, divided into new tax measures and enforcement. Provincial governments will expand sales tax on services and collect agricultural income tax to contribute their share of Rs430 billion.

The federal budget size is projected at over Rs17.1 trillion, nearly 9% higher than this fiscal year's revised budget. The defence budget is projected at Rs2.665 trillion, up by Rs101 billion.

The petroleum levy collection target for FY2026?27 is set at Rs1.727 trillion, an increase of Rs259 billion (17.6%) over this year's target. Achieving this may require extraordinary measures, as higher prices are feared to compress demand. The government currently charges Rs117.4 per litre levy on petrol and nearly Rs43 on diesel. The IMF noted that "petroleum products carry an effective tax rate of 166%, leaving revenues heavily reliant on fuel taxation and vulnerable to shocks".

Pakistan has accepted IMF conditions to impose Rs215 billion in additional taxes, with another Rs215 billion to be generated through audit, production monitoring and other enforcement measures.

The IMF has hardened the condition to ensure the FBR achieves its next fiscal year target of Rs15.27 trillion after missing targets for two consecutive years. Unlike the current indicative target, the IMF has now imposed a quantitative performance criterion. If the FBR misses the agreed targets, it will require a waiver from the IMF executive board. Pakistan has accepted this condition.

"With these measures, we expect to achieve revenues of Rs7.022 trillion by end?December 2026, which will be set as a new quantitative performance criterion," according to the government's assurance to the IMF. The end?June 2027 target is Rs15.27 trillion, requiring nearly 14% growth over this fiscal year's expected collection.

New measures

The government has assured the IMF that it will reduce income and sales tax expenditures to collect an additional 0.15% of GDP (Rs215 billion). Another 0.15% of GDP (Rs215 billion) will be achieved by implementing the FBR's transformation plan. If the government gives any tax relief, it will impose more taxes. "The impact of any potential revenue?reducing tax simplification policies introduced in the FY27 budget will be offset by new permanent tax policy measures with equivalent revenue yield," according to the written assurance.

The budget will also include provincial tax revenue targets aiming to contribute an additional 0.3% of GDP (Rs430 billion) to the tax?to?GDP ratio. This brings the total impact of tax efforts to Rs860 billion, equally divided between the centre and provinces.

Provinces will mobilise revenue by expanding enforcement of GST on services to gradually cover all sectors of the economy. New agricultural income tax rates will apply to FY2026 agricultural income, with revenue impact materialising in the next fiscal year.

Achieving the next fiscal year's primary budget surplus target requires additional revenue collection of 0.6% of GDP to address Pakistan's low tax buoyancy. Expenditure restraint will also be essential, with primary spending remaining flat as a share of GDP in FY27, while increasing targeted cash transfers and health and education spending ratios.

The IMF noted that persistent shortfalls in FBR tax revenues underscore risks of a narrow tax base. Despite contributing 24.6% of value added, the effective tax rate of the agricultural sector is just 0.3%. Agricultural income tax rates were increased significantly in 2025, but revenues remained below expectations due to implementation delays and enforcement challenges.

Pakistan's 18% standard GST rate is not low by regional standards, but barely one?quarter of the theoretical base is taxed. A broad set of basic goods remains exempt or concessionally taxed. To bring sales tax efficiency close to regional levels, Pakistan needs to add roughly Rs2.1 trillion in additional GST.

Economic outlook

The IMF said a prolonged Middle East conflict will hurt Pakistan's economic growth prospects, impact remittance flows and short?term commercial loans from the Gulf, and intensify capital outflows. However, Pakistan should stay on the course of building foreign exchange reserves and fiscal consolidation.

The outlook would deteriorate further under an adverse scenario. The IMF downward revised the economic growth forecast for the next fiscal year due to higher commodity prices and weak external demand.

"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," the lender said.

Under an adverse scenario, the cumulative hit to economic growth would rise to 1.5% in the next fiscal year, bringing growth down to just 2.6%. The impact on inflation would be 2.5%, accelerating it to nearly 10% in the next fiscal year. The current account deficit would also increase by around 1.5% of GDP to about 2.1%.

CPI inflation is expected to exceed 10% in the fourth quarter of this fiscal year and reach 8.4% in FY27 before returning to the SBP target range in FY28. The IMF has closed the door for any subsidies on petrol and diesel, linking approval of $1.3 billion in loan tranches to full recovery of prices and taxes.

The current account is expected to further deteriorate in FY27 on account of elevated oil and gas prices, although lower domestic demand is expected to mitigate the impact on the trade deficit.

As a net oil and gas importer, Pakistan relies heavily on Gulf supplies (81% of fuel imports). In the event of sustained disruptions to physical availability of fuel imports, impacts on economic activity would likely be even larger.

Immediate exposures to fertiliser trade disruptions appear manageable, as Pakistan is largely self?sufficient in urea production. However, prolonged disruption to DAP supply chains could impact the Kharif planting season in June?July.

Pakistan's 55% of foreign remittances come from Gulf countries. A significant disruption to Gulf economies or return of migrant workers could weigh on these flows. Deterioration in global financial conditions has already resulted in capital outflows, which are likely to intensify if the crisis extends. Access to short?term commercial financing, largely from Gulf banks, could also be impacted.

The IMF said that under the baseline, public debt remains sustainable over the medium term, but risks remain high, reflecting Pakistan's large gross financing needs and challenges in obtaining external financing, including high?quality foreign investment.