The International Monetary Fund (IMF) has approved a $7 billion bailout package for Pakistan, contingent on a series of significant economic reforms. This 37-month Extended Fund Facility, Pakistan’s 25th IMF program since 1958, includes an immediate disbursement of nearly $1.1 billion. To secure the deal, Pakistan agreed to overhaul its agricultural income tax, shift fiscal responsibilities to the provinces, and take on the most expensive loan in its history—a $600 million agreement aimed at securing a meeting date with the IMF board.
Unlike previous arrangements, this program extends IMF oversight to provincial budgets, which must now align their agricultural income tax rates with federal personal and corporate tax rates by October 30. This reform is expected to increase agricultural tax rates from the current 12-15% to as much as 45% by January next year.
To meet the IMF’s conditions, Pakistan imposed additional taxes of Rs1.4 trillion to Rs1.8 trillion, raised electricity prices by up to 51%, and pledged greater transparency in managing its Sovereign Wealth Fund. The government also committed to showing a primary budget surplus of 4.2% of GDP over the three-year program, with a surplus of 1% this fiscal year and 3.2% over the next two years. If tax revenues fall short, the government has promised a mini-budget, which could result in higher taxes on imports, contractors, professional services, and fertilizers.
Moreover, provincial governments will be prohibited from offering subsidies on electricity and gas and will be restricted from establishing new Special Economic Zones or Export Processing Zones. Existing tax incentives for such zones are set to end by 2035. The federal government has committed to freezing defense and subsidy spending at last year’s levels as a percentage of GDP.
Despite these measures, the IMF program does not fully address Pakistan’s debt sustainability issues, relying instead on rolling over maturing external debt. During the program, Pakistan will not repay $12.7 billion owed to Saudi Arabia, China, the UAE, and Kuwait.
The Asian Development Bank (ADB) has forecast moderate growth of 2.8% for Pakistan in FY25, bolstered by the IMF-backed reforms. Growth in FY24 rebounded to 2.4%, while inflation decreased to an average of 23.4%, down from 29.2% the previous year. However, the ADB expressed concerns over high personal income tax rates and spending restrictions, which could curb consumption in FY25. Inflation is projected to decline further to 15% by FY25, driven by tighter monetary policies and stable global commodity prices.
The ADB warns that Pakistan’s economic outlook remains vulnerable to external financing shortfalls and potential lapses in policy implementation, which could strain the exchange rate and exacerbate debt vulnerabilities. Additionally, geopolitical tensions, higher food and oil prices, and tighter global financial conditions pose risks to the country’s macroeconomic stability.
Meanwhile, the Federal Board of Revenue (FBR) dismissed rumors of a potential mini-budget this fiscal year, with Member Inland Revenue Policy Hamid Ateeq Sarwar stating there is no current need for such measures.
