Finally, the IMF and Pakistan have reached a staff-level agreement for the second review under the Extended Fund Facility (EFF) and the first review under the Resilience and Sustainability Facility (RSF). Together, these set the stage for the release of USD1.2 billion.
There had been some market uncertainty about securing the deal, especially after the IMF team left last week without finalizing it. Many expected technical issues or other obstacles to delay the agreement.
However, the hold-up was primarily due to the Fund’s need to assess flood-related losses. While the IMF has largely accepted the government’s estimates, it is unlikely to allow the quantitative target adjustments Pakistan had sought.
It appears both sides were keen to conclude the agreement, as it serves their mutual interests. Moreover, the United States — the IMF’s largest board voter — currently enjoys positive ties with Pakistan. Political and military leadership in Islamabad has recently found favour with President Trump, shifting diplomatic winds in Pakistan’s direction.
Pakistani authorities may have hoped to leverage this goodwill to secure concessions on specific binary targets to offset flood damages. That strategy failed, triggering some market anxiety. To calm nerves, both parties agreed to proceed with the staff-level agreement while keeping the targets largely intact.
The IMF has revised Pakistan’s GDP growth forecast down to 3.25–3.5 percent, while the government has lowered its own projection from 4.2 percent to 3.5 percent. The World Bank expects even lower growth. This is worrying, as growth near 3 percent cannot generate enough jobs for Pakistan’s expanding youth population.
The Fund acknowledged Pakistan’s progress — from early stabilization to improving macroeconomic indicators, with fiscal and external balances outperforming targets. This has helped curb inflation. However, it also warned that flood-related risks could further suppress growth, push inflation higher, and lead to fiscal slippages. It emphasized the need for increased climate adaptation spending.
The primary fiscal surplus target remains unchanged at 1.6 percent of GDP, with no new taxes or major revenue measures expected. Instead, the IMF is pushing for better provincial revenue coordination and a reallocation of flood-related spending. Cash-rich provinces are expected to play a key role in sustaining fiscal consolidation. The Fund also calls for higher spending on the Benazir Income Support Program (BISP) and on education and health outside BISP to address rising poverty — again, placing much of the responsibility on provincial governments.
In the energy sector, the IMF continues to advocate the full cost recovery model, which has historically failed and deepened structural inefficiencies. Instead, the Fund should push more aggressively for real reforms mentioned in the press release — notably, privatizing loss-making distribution companies and rolling out a competitive energy market.
On monetary policy, the IMF recommends maintaining a tight, data-driven stance and a flexible exchange rate. No immediate rate cuts are expected. However, with easing global oil prices and potential U.S. rate cuts, Pakistan’s policy rate could fall into single digits by the end of the fiscal year.
For now, there is no significant pressure for governance reforms, though SOE restructuring and governance improvements are likely to feature more prominently in future reviews.
Overall, progress is steady, and the narrative is beginning to shift toward growth. But achieving sustainable growth will require genuine structural reforms and sustained commitment from both the Fund and the government.
Copyright Business Recorder, 2025