Pakistan and the International Monetary Fund (IMF) have largely agreed on key fiscal and economic objectives for the federal budget of the upcoming fiscal year 2026-27. The IMF mission extended its stay in Islamabad by two days to advance negotiations on the budget framework under the ongoing Extended Fund Facility (EFF).
The IMF has recommended raising the petroleum levy by 18 percent as part of broader revenue enhancement measures designed to support fiscal consolidation. This recommendation comes when the current petroleum levy on petrol is Rs108.17 per litre. The proposed increase aims to help Pakistan achieve ambitious revenue and primary surplus goals agreed upon with the IMF.
Discussions led by IMF mission head Iva Petrova took place from May 13 to May 20, focusing on recent economic developments, reform implementation, and preparations for the FY2027 budget. The talks also addressed the impact of disruptions caused by the Middle East conflict, Pakistan’s budget process, and progress under both the EFF and the Resilience and Sustainability Facility (RSF).
Pakistani authorities reaffirmed their commitment to attaining a primary budget surplus of 2 percent of GDP in FY2027, a target deemed crucial for fiscal sustainability and economic resilience. The IMF emphasized that gradual fiscal consolidation will be supported by efforts to broaden the tax base, improve tax administration, and enhance spending efficiency and public financial management at federal and provincial levels. Budget negotiations are expected to continue in the coming days.
The IMF has proposed additional tax measures totaling Rs430 billion for the next fiscal year and urged provinces to generate an equivalent amount in revenue. Moreover, the IMF seeks a combined provincial surplus close to Rs2 trillion to bolster the federal fiscal framework. The Federal Board of Revenue (FBR) has been assigned a tax collection target of Rs15.264 trillion for FY2027, with a half-year target of Rs7.022 trillion through December 2026.
Pakistan’s external financing requirements for the next fiscal year are estimated at $21.2 billion, reflecting ongoing pressures on the balance of payments despite recent macroeconomic improvements. The IMF projects economic growth at 3.5 percent for FY2027, with average inflation expected to hover around 8.4 percent.
In a significant development, the government and IMF have tentatively agreed to increase payments under the Benazir Income Support Programme from Rs14,500 to Rs18,000 to mitigate inflationary and utility cost impacts on lower-income households. Provincial revenues are forecasted to rise to Rs1.95 trillion in the next fiscal year, while consultations continue to finalize budget proposals ahead of the federal budget announcement.
Energy sector reforms were also a key topic, with the IMF insisting on biannual adjustments to gas and electricity tariffs to prevent circular debt accumulation and ensure cost recovery. The State Bank of Pakistan reiterated its commitment to maintaining a tight monetary policy to anchor inflation expectations and manage secondary effects from rising energy prices.
The IMF highlighted the importance of exchange-rate flexibility as a shock absorber and encouraged efforts to deepen the foreign exchange interbank market. Beyond fiscal and monetary policies, discussions covered structural reforms in the energy sector, state-owned enterprises, financial markets, and product-market liberalization to support sustainable growth and attract private investment.
Notably, the IMF recommended against introducing new tax exemptions for Special Economic Zones (SEZs) and suggested that existing incentives for special economic and technology zones be gradually phased out by 2035. Progress under the Resilience and Sustainability Facility was also reviewed, including disaster-risk financing frameworks, climate-sensitive budget planning, and reforms related to power subsidies.
The Fund acknowledged the cooperation of federal and provincial authorities during the talks and confirmed the next IMF mission, which will likely include the Article IV consultation along with EFF and RSF reviews, is expected in the second half of 2026.
