ISLAMABAD: The IMF has asked Pakistan to continue the path of fiscal consolidation by broadening the tax base, improving tax administration, enhancing spending efficiency and complying with public financial management at both federal and provincial levels in the upcoming budget.
An International Monetary Fund (IMF) mission led by Ms Iva Petrova has concluded its staff visit to Islamabad between May 13 and May 20, 2026. The staff visit focused on recent economic developments, reform implementation and budget strategy for fiscal year (FY) 2027.
At the end of the visit, Ms Petrova stated, “We had constructive discussions with the authorities on recent economic developments, including the impact of ongoing disruptions from the conflict in the Middle East, the FY2027 budget formulation and progress on the reform agenda under the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF). The authorities reaffirmed their commitment to a primary surplus target of 2 percent of GDP in FY2027, which will support fiscal sustainability and continue to build resilience. The envisaged 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 both federal and provincial levels. Discussions on the FY2027 budget will continue in the coming days.
The State Bank of Pakistan reiterated its commitment to maintaining an appropriately tight monetary policy stance to anchor inflation expectations and will continue to closely monitor potential second-round effects from energy price increases. Furthermore, exchange rate flexibility should continue to serve as a key shock absorber, and efforts should continue to build a deeper foreign exchange interbank market.
Discussions also covered ongoing structural reforms, including in the energy sector and state-owned enterprises, product market liberalisation and financial sector reforms aimed at supporting durable growth and attracting high-quality private investment. Progress under the RSF was also discussed, including efforts to adopt a disaster risk financing framework, integrate climate considerations in the budget and investment planning, and advance power subsidy reforms.
The mission thanked the federal and provincial authorities for their constructive engagement, strong collaboration and continued commitment to sound policies. The next mission, which is envisioned to include the Article IV consultation and EFF and RSF reviews, is expected to take place in the second half of 2026. However, the sources said achieving the FY27 target requires additional revenue collection measures of 0.6 percent of GDP (over 700 billion) to address Pakistan’s low tax buoyancy and ensure that the fiscal effort is achieved through sustained growth of the tax revenue ratio.
At the federal level, revenue mobilisation will focus on gains from the implementation of FBR’s transformation plan and streamlining tax expenditures (0.3 percent of GDP in revenues in FY27) in line with recent IMF recommendations. At the provincial level, revenue mobilisation will continue to focus on broadening the GST tax base on services and application of higher income tax rates on agricultural income. 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. Further expenditure compression (including lower-priority capital spending) may be needed if risks to revenue mobilisation materialise.
Amid exceptionally high budget uncertainty, setting aside an adequate contingency reserve would be critical to buffer fiscal risks, including those related to assumptions about the impact of the war in the Middle East. Any potential interest -- bill savings should also be set aside to safeguard the gradual consolidation path and build fiscal buffers.
