Pakistan and the International Monetary Fund (IMF) have agreed to prolong their discussions regarding the third review of the country’s $7 billion Extended Fund Facility (EFF) program. The latest round of negotiations concluded without reaching a staff-level agreement, as both parties continue to deliberate over critical fiscal targets and evaluate the potential economic repercussions stemming from the ongoing conflict in Iran. This extension highlights the complexities involved in balancing Pakistan’s economic reform commitments with emerging geopolitical risks.
The IMF released a statement following the recent meeting, acknowledging that “considerable progress” had been achieved during the talks. However, it emphasized the necessity for further dialogue to thoroughly assess recent global developments and their possible effects on Pakistan’s fragile economic landscape. The review process is a crucial step before the IMF’s executive board can authorize the disbursement of the next tranche, which amounts to approximately $1 billion under the bailout package aimed at stabilizing Pakistan’s economy.
The negotiations, which commenced on February 26, have primarily focused on Pakistan’s fiscal policy framework, ongoing economic reforms, and the broader macroeconomic outlook. Initially, the IMF mission, led by Iva Petrova, conducted on-ground discussions in Karachi. However, due to escalating security concerns linked to rising tensions in the Middle East, the team had to cut short their visit and continue the remaining deliberations virtually from Türkiye. This shift underscores the challenges posed by regional instability on international financial cooperation.
One of the major sticking points in the talks has been the disagreement over Pakistan’s fiscal projections, particularly concerning tax revenue collection and the government’s capacity to achieve its primary budget surplus target. Islamabad had committed to generating a primary surplus of around Rs 3.15 trillion for the current fiscal year. Yet, government officials now anticipate that this target may be missed by a significant margin, raising concerns about fiscal discipline and revenue mobilization efforts.
The IMF has also expressed doubts about the Federal Board of Revenue’s (FBR) ability to meet its revised tax collection goals. Initially, the government set a tax collection target of Rs 14.13 trillion for the fiscal year, which the IMF later adjusted downward to Rs 13.98 trillion. Following several missed interim targets, the FBR has proposed a further reduction to just below Rs 13.5 trillion. This downward revision reflects the ongoing challenges Pakistan faces in broadening its tax base and improving compliance amid economic headwinds.
Another critical area of contention has been the energy sector, which remains a significant drain on Pakistan’s fiscal resources. The IMF rejected Pakistan’s proposal to allocate Rs 990 billion for electricity subsidies in the upcoming fiscal year, insisting that the subsidy amount should be capped at under Rs 800 billion. Additionally, the IMF urged the government to restrict the growth of circular debt in the power sector to around Rs 300 billion, as opposed to the Rs 500 billion figure requested by Islamabad. These demands highlight the IMF’s focus on curbing fiscal deficits and promoting sustainable energy sector reforms.
While Pakistan successfully met most of the quantitative performance criteria for the July–December 2025 period, it fell short of achieving certain indicative targets, including specific benchmarks related to tax collection. This mixed performance has contributed to the cautious tone of the ongoing negotiations and the need for further adjustments to Pakistan’s economic program.
The talks also incorporated an assessment of the potential economic fallout from the Middle East conflict, particularly the war in Iran. Given Pakistan’s heavy reliance on oil imports from Gulf countries, officials examined how the conflict might affect the country’s balance of payments, external financing requirements, and energy import costs. This analysis is crucial as any disruption in energy supplies or price spikes could exacerbate Pakistan’s already delicate economic situation.
Both Pakistan and the IMF have committed to continuing their negotiations in the coming days, aiming to finalize a staff-level agreement before the IMF’s next mission to Pakistan, which is expected around May. This timeline coincides with discussions on the upcoming federal budget, making it a critical period for aligning fiscal policies with the IMF’s conditions and Pakistan’s economic priorities. The extension of talks reflects the ongoing efforts to strike a balance between meeting international financial obligations and addressing domestic economic challenges amid a volatile regional environment.
