IMF reaches staff-level deal with Pakistan for $1.2bn tranche after third EFF review

ISLAMBAD:

The International Monetary Fund (IMF) on Saturday announced a staff-level agreement with Pakistan for the release of about $1.2 billion under two loan tranches, while warning that the ongoing Middle East war could cloud the country’s economic outlook by pressuring growth, inflation and external sector stability.

The IMF said it reached the agreement only after seeking assurances that the government would strictly adhere to pre-war fiscal targets, while the central bank would raise interest rates if inflation exceeds the target range and allow exchange rate flexibility to absorb external shocks arising from the conflict.
The Fund’s assessment contrasts with projections by Pakistan’s Ministry of Finance, which has said the war would have no major economic implications.

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IMF Mission Chief to Pakistan Iva Petrova said the Fund had reached a staff-level agreement with Pakistani authorities on the third review under the Extended Fund Facility (EFF) and the second review under the Resilience and Sustainability Facility (RSF).

The IMF team held discussions in Karachi and Islamabad from February 25 to March 2, 2026, followed by virtual meetings. The agreement is subject to approval by the IMF Executive Board.

Upon approval, Pakistan will gain access to about $1 billion under the EFF and $210 million under the RSF, bringing total disbursements under the two arrangements to approximately $4.5 billion.

Petrova said ongoing policies had continued to strengthen the economy and rebuild market confidence.

“The conflict in the Middle East, however, casts a cloud over the outlook as volatile energy prices and tighter global financial conditions risk putting upward pressure on inflation and weigh on growth and the current account,” the IMF said. In contrast, Pakistan’s Finance Ministry has projected inflation would rise only marginally by 0.3%, remain within the target, economic growth would stay around 4%, and the current account deficit would remain within $2 billion despite global oil price shocks.

Petrova said Pakistan authorities “remain committed to pursuing sound and prudent macroeconomic policies to preserve the recent gains in macro-financial stabilization, while deepening structural reforms to accelerate growth and strengthening social protection to mitigate the impact of volatile energy prices on the most vulnerable.”

No relaxation in targets

The IMF did not ease the pre-war primary budget surplus target of 1.6% of GDP despite the State Bank of Pakistan previously indicating the goal might be difficult to achieve due to weak tax collection performance by the Federal Board of Revenue (FBR). The Fund also maintained stringent fiscal targets for the next financial year.

Petrova said authorities remained committed to ensuring a sustainable fiscal position and reducing the still high public debt burden over the medium term.

“Efforts are ongoing to meeting the FY26 budget primary surplus of 1.6% of GDP and to target an underlying primary balance of 2% of GDP in FY27, supported by measures to broaden the tax base and strengthen expenditure discipline,” she said.

She also pointed to efforts to enhance expenditure sharing between the federal and provincial governments, as Islamabad has requested provinces to share the burden of fuel subsidies, which had already risen to Rs125 billion by April 3.

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“Efforts are underway to enhance fiscal burden sharing between federal and provincial governments and to strengthen public financial management,” Petrova said.

The IMF stressed that steadfast implementation of fiscal reforms remains critical to achieving programme objectives. To shield vulnerable households from volatile food and fuel prices, authorities are strengthening the Benazir Income Support Programme (BISP) through inflation-adjusted cash transfers, expanded beneficiary coverage and improved payment systems.

Petrova said the State Bank of Pakistan remains committed to maintaining inflation within its target range and stands ready to raise interest rates if price pressures intensify, including due to passthrough effects from global food and fuel price volatility. Pakistan has set an inflation target of 7.5%, which the Finance Ministry believes remains achievable despite fuel price shocks.

The IMF said exchange rate flexibility should continue to serve as the primary shock absorber against spillovers from the Middle East conflict, while ensuring banks can finance imports and external payments amid potential balance-of-payments pressures. The Fund reiterated that Pakistan must achieve energy sector viability and prevent a recurrence of circular debt.

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“It is critical that sustainability is maintained through timely tariff adjustments that ensure cost recovery,” Petrova said, adding that energy price subsidies should be avoided due to their high fiscal cost and distortionary effects.

The IMF also highlighted structural reforms, saying progress on state-owned enterprise reforms and the privatisation agenda remains central to reducing the state’s economic footprint and improving service delivery.

Authorities are also strengthening institutional capacity and intensifying anti-corruption efforts to promote inclusive growth and ensure a level playing field for businesses and investors.

Petrova said revenue mobilisation efforts were beginning to yield results under the FBR’s transformation plan, including stronger taxpayer audits, expanded digital invoicing and production monitoring, and improved internal governance.

The IMF is now also focusing on weaknesses in the FBR’s internal governance, signalling concerns that government efforts to strengthen the tax machinery have yet to produce fully effective results.