ISLAMABAD: The International Monetary Fund (IMF) has introduced 11 new conditions for Pakistan as part of its $7 billion loan programme, bringing the total number of conditions to 50. These include approval of a Rs17.6 trillion federal budget, electricity bill surcharges, reforms in agricultural taxation, and the easing of import restrictions on used vehicles.
The IMF released its Staff Level Report on Saturday, warning that escalating tensions between Pakistan and India could pose risks to Pakistan’s fiscal stability, external accounts, and reform agenda. However, it noted that, so far, the financial markets have shown only a modest reaction, with the stock market largely holding its recent gains.
Key New Conditions
Among the new conditions:
- Budget Approval: Pakistan must pass a FY2026 budget totaling Rs17.6 trillion, in line with IMF targets, by the end of June 2025. This includes Rs8.7 trillion in interest payments, Rs6.6 trillion in fiscal deficit, and Rs1.07 trillion for development.
- Defense Spending: The defense budget is projected at Rs2.414 trillion—a 12% increase—but government figures suggest it could rise above Rs2.5 trillion (18% increase) following recent tensions with India.
- Agriculture Tax Reform: Provinces are required to implement a comprehensive agricultural income tax plan, including tax return processing systems and compliance strategies, by June 2025.
- Governance Action Plan: The federal government must publish a governance reform roadmap based on IMF recommendations to address key institutional weaknesses.
- Cash Transfer Indexing: The IMF mandates annual inflation adjustments to the country’s unconditional cash transfer program to preserve recipients’ purchasing power.
- Post-2027 Financial Sector Strategy: A detailed strategy for Pakistan’s financial sector beyond 2027 must be published.
- Energy Tariffs: Four new energy-related conditions include:
- Annual rebasing of electricity tariffs by July 1, 2025.
- Semi-annual gas price adjustments by February 15, 2026.
- Making the captive power levy permanent through legislation.
- Removing the Rs3.21 per unit cap on the electricity debt servicing surcharge.
The IMF argues these measures are crucial for ensuring cost recovery in the energy sector and reducing circular debt, which continues to grow due to inefficient policies and poor governance.
Industrial Incentives & Import Reforms
The IMF is also pushing for a long-term plan to phase out tax and regulatory incentives in Special Technology Zones and industrial parks by 2035, with an initial report due by the end of 2025.
In a more consumer-oriented condition, the IMF has asked Pakistan to lift all quantitative restrictions on used car imports for vehicles under five years old by July 2025. Currently, imports are restricted to cars no older than three years, with additional non-tariff barriers in place. The IMF believes liberalizing imports will enhance trade and vehicle affordability.
Condition Adjustments & Compliance Status
The IMF report also details progress and delays in earlier programme conditions:
- Deadline Extensions: Four previously set targets have received extensions.
- Performance Criteria Met: Pakistan met all seven quantitative performance benchmarks for December 2024, including those on reserves, cash transfers, budget deficits, and government guarantees.
- Structural Benchmarks: Out of 12 benchmarks, nine were met, including approval of a National Fiscal Pact, changes to monetary policy safeguards, and reforms to banking and deposit laws.
- Missed Targets: Targets related to FBR tax revenue, education and health spending, and the retailer tax scheme (Tajir Dost) were missed. Additionally, benchmarks concerning undercapitalized banks and captive power producers were not met, though corrective measures are underway.
- Delayed Legislation: Provincial agricultural tax legislation was delayed but later passed in February 2025. Amendments to the Civil Servants and Sovereign Wealth Fund Acts remain pending.
Despite the stringency of these conditions, the IMF notes that the overall implementation of the programme has improved, with Pakistan showing commitment to fiscal consolidation and structural reform.
