The first part of the article was published last week prior to the arrival of Staff Mission to Pakistan for the fourth review of the IMF Programme. This Part-II has been written following the initial meetings in Islamabad of the Staff Mission with various Ministries and organizations.
The issues included in the first article related to overall macro-economic targets for 2026-27 in the scenario of continuing war in the Middle East and supply interruptions. The case for reduction of the petroleum levy was presented. The unusual transactions proposed in 2026-27 between the federal and the provincial governments were highlighted and their impact on national public finances indicated. The failure in development of the agricultural income tax as a significant source of provincial tax revenues was also highlighted.
The IMF projections are that the rate of inflation will gradually decline to a single-digit by the end of 2026-27. This is also the view of the SBP. Currently, there are mixed trends. The Sensitive Price Index has shown in its latest estimate a year-to-year rate of inflation of over 11 percent compared to 9 percent a month ago. As opposed to this the Consumer Price Index has shown a fall in the rate of inflation from 11 percent to 10 percent. There is a need by the IMF and the government to carefully project the rate of inflation in the next three quarters of 2026-27.
The next issue relates to the performance of FBR revenues in the first quarter of 2026-27. Apparently, FBR has surpassed the quarterly target of Rs 3,053 billion by Rs 30 billion. IMF was informed of this success.
However, the growth rate achieved during the quarter in the revenues is only 7 percent. The target growth rate for the year is 17.3 percent with revenues rising to Rs 15,264 billion by the end of 2026-27, compared to the actual level of Rs 13,010 billion in 2025-26. Clearly, the first quarter target of revenues by FBR was significantly understated.
The IMF Staff Mission has been articulating an important issue relating to the adoption of a market-determined exchange rate policy. This is considered essential for preserving not only the competitiveness of exporters but also for restricting imports at a time when the trade deficit may rise due to higher import prices of oil and fuel.
However, the SBP has effectively maintained a policy of very small adjustments in the value of the rupee with respect to the US dollar. It currently stands at the selling rate of Rs 279.13 per US dollar. The SBP estimates itself that the Real Effective Exchange Rate index 00of the Rupee is close to 108. This implies that the rupee is overvalued by almost 8 percent.
The IMF projections for 2025-26 and 2026-27 of the rupee exchange rate have been derived from the Third Review report of May 2026. The projected value of the rupee by the IMF was Rs 284.20 per one USD at the end of 2025-26 and Rs 311.57 per one USD by the end of 2026-27. This implies that according to IMF projections the rupee is currently significantly overvalued and that it needs to depreciate by 11.6 percent by the end of June 2027.
The risk factors associated with the continuing war in the Middle East and the explosion of the prices of oil and fuel products means that the current account position is vulnerable. The extraordinary growth seen in the first quarter of remittances is unlikely to be sustained. As such, the position taken by the IMF on the exchange rate policy is appropriate and the SBP should move towards a market-based policy on the exchange rate.
We come next to another important issue. This relates to the subsidy currently being given to owners of motorcycles and small cars in the price of petrol. As highlighted in the previous article, this subsidy does not benefit the lowest income group who do not own motorcycles or small cars.
The IMF proposal to direct the subsidy through the Benazir Income Support Program (BISP) to the identified poor households is also an appropriate recommendation. There are currently 9 million beneficiary families across Pakistan. The Programme provides quarterly financial assistance of Rs 13,500 to Rs 14,500 per family under the Benazir Kafalat Programme. The hike in fuel prices has led to the increase in the prices of food and other items due to rise in transport costs.
The financial assistance to motorcycle owners is Rs 100 per litre up to 20 litres of petrol per month. The cash assistance in the BISP may be raised by Rs 4500 per quarter, implying a rise in the quarterly transfer to Rs 18,000 to Rs 19,000 per month. The additional cost of this subvention quarterly will be Rs 40.5 billion. There is a provision in the federal budget of 2026-27 for emergency spending of Rs 430 billion. This should be the source for financing the additional cash assistance.
There is need to highlight that the BISP coverage of poor households is somewhat limited. Currently, it is estimated that the incidence of poverty in Pakistan by the World Bank and the SPDCI is close to 43 percent. This implies that there are over 17 million households below the poverty line. Therefore, there is need for a reduction of the petroleum levy for across-the-board benefit to all households.
There are also a set of measures related to governance to implement that the government of Pakistan has agreed to implement with the IMF, following the report by the IMF on Governance and Corruption Diagnostic Assessment. These include, first, appropriate amendments in the NAB Ordinance. Second, amendment to the Civil Servants Act to ensure that asset declarations of high-level public officials are digitally filed and publicly accessible. Third, publication of an action plan to mitigate corruption vulnerabilities in identified departments. Fourth, amendment of the SWF Act to adopt an appropriate governance mechanism. These are appropriate measures for tackling corruption and should be implemented on a top priority basis.
The IMF Staff Mission has started by raising an appropriate set of issues in a high-risk environment with the on-going Middle East War. Hopefully, there will be sufficient understanding and sympathy by the IMF for sustaining the GDP growth to the extent possible and preventing any increase in the already high incidence of poverty in Pakistan.
Copyright Business Recorder, 2026
The writer is Professor Emeritus at BNU and former Federal Minister
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