Fund backs fuel pricing policy, warns Middle East conflict may pressure inflation and growth outlook
IMF objects to Rs1tr power subsidy. Design: Mohsin Alam
The International Monetary Fund (IMF) said on Saturday it had reached a staff-level agreement (SLA) with Pakistan for the disbursement of about $1.2 billion, following the successful completion of the third review under the country’s Extended Fund Facility (EFF) and the second review under the Resilience and Sustainability Facility (RSF).
The Fund also tacitly endorsed Islamabad’s fuel pricing policy amid the ongoing Middle East crisis.
According to the IMF, Pakistan’s programme implementation under the EFF has remained broadly aligned with authorities’ objectives to strengthen public finances, keep inflation durably within the State Bank of Pakistan’s target range, improve energy sector viability, deepen structural reforms, and expand social protection while rebuilding health and education spending.
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IMF Reaches Staff-Level Agreement on the Third Review for the 37-month Extended Arrangement under the Extended Fund Facility (EFF) and the Second Review for 28-month Arrangement Under the Resilience and Sustainability Facility (RSF) – Pakistan https://t.co/hYPsALIpbn
— Ministry of Finance, Government of Pakistan (@Financegovpk) March 28, 2026
Under the $7 billion programme, the Washington-based lender is urging Islamabad’s policymakers to keep monetary policy tight and data-dependent to anchor inflation expectations and strengthen external buffers.
Pakistan’s central bank kept its key policy rate unchanged at 10.5% this month, pausing its rate cuts as rising global energy prices and regional tensions pose new inflation risks for the import-dependent economy.
The IMF added that Pakistan’s climate reform agenda, supported by the RSF, is progressing, with authorities committed to policies aimed at enhancing resilience and reducing vulnerabilities to climate-related risks.
Talks between IMF officials and Pakistani authorities were held in Karachi and Islamabad from February 25 to March 2 and continued virtually afterward.
IMF mission chief Iva Petrova said that, subject to approval by the IMF Executive Board, Pakistan will gain access to about $1.0 billion (SDR 760 million) under the EFF and around $210 million (SDR 154 million) under the RSF, bringing total disbursements under the two arrangements to roughly $4.5 billion.
“Supported by the EFF, ongoing policies have continued to strengthen the economy and rebuild market confidence. Following the recovery in FY25, economic activity gained further momentum in the first part of the current fiscal year. Inflation and the current account balance remained contained, and external buffers continued to strengthen,” the IMF said in a statement.
“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 weighing on growth and the current account,” it added.
The Fund said Pakistani authorities remained committed to sound macroeconomic policies to preserve recent stabilisation gains while accelerating reforms and strengthening social protection to shield vulnerable groups from energy price volatility.
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The IMF outlined several policy priorities, beginning with maintaining a prudent fiscal stance. Authorities aim to achieve a primary budget surplus of 1.6% of GDP in FY26 and target an underlying primary balance of 2% of GDP in FY27 through tax base expansion, expenditure discipline, and improved federal-provincial burden-sharing, while increasing spending on health, education and social protection.
The statement said fiscal structural reforms remain critical, noting that revenue mobilisation efforts are already producing results under the Federal Board of Revenue’s transformation plan. Measures include strengthening taxpayer audits, expanding digital invoicing and production monitoring, and improving internal governance.
The newly established Tax Policy Office is developing a medium-term tax reform strategy aimed at ensuring revenue neutrality and policy stability, while broader efforts are underway to strengthen public financial management and fiscal coordination between federal and provincial governments.
On social protection, the IMF said authorities are enhancing targeted support for vulnerable households through the Benazir Income Support Programme (BISP), including inflation-adjusted cash transfers, expanded coverage and improved payment systems.
The Fund added that federal and provincial governments remain committed to scaling up health and education spending to support human capital development and inclusive growth.
Regarding monetary policy, the IMF said the State Bank of Pakistan remains prepared to raise interest rates if inflationary pressures intensify or expectations rise due to global food and fuel price volatility.
Exchange rate flexibility should continue to act as the primary shock absorber against external pressures, including spillovers from the Middle East conflict, while ensuring banks can continue financing imports and external payments amid potential balance-of-payments stress.
The IMF emphasised the importance of restoring energy sector viability and preventing a recurrence of circular debt. It said sustainability depends on timely tariff adjustments to ensure cost recovery and cautioned against energy price subsidies due to their fiscal costs and distortionary effects.
Authorities also plan structural improvements, including upgrading transmission and distribution systems, privatising inefficient generation companies, transitioning to a competitive electricity market, expanding renewable energy, and aligning capacity with demand while maintaining grid stability.
The Fund said Pakistan is advancing broader structural reforms aimed at strengthening governance, reducing market distortions, easing regulatory burdens, boosting productivity, and supporting private sector-led growth.
Reforms of state-owned enterprises and the privatisation agenda remain central to reducing the state’s footprint and improving service delivery, alongside efforts to limit government intervention in commodity markets and encourage private sector initiatives. Authorities are also strengthening institutional capacity and intensifying anti-corruption measures to promote inclusive growth and a level playing field for investment.
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On climate policy, the IMF said reforms supported under the RSF — including green mobility initiatives, transport decarbonisation, improved climate information systems and better management of climate-related financial risks — are helping build resilience.
Further reforms will focus on water system resilience, prioritising climate-related spending, establishing a coordinated disaster risk financing framework, and aligning energy reforms with national mitigation objectives.
“The IMF team is grateful to the Pakistani authorities, private sector, and development partners for their hospitality during the visit to Islamabad and Karachi, and fruitful discussions,” the statement concluded.
