Pakistan urged to build on its hard-won stability

ISLAMABAD: The International Monetary Fund (IMF) has urged Pakistan to build on its hard-won macroeconomic stability by adopting a broader, more predictable, fairer and simpler tax system, reducing exemptions, strengthening revenue mobilisation, and coordinating federal and provincial reforms to boost private investment, productivity and competitiveness, and promote sustainable and inclusive economic growth.

“Addressing under-taxed sectors, rationalising concessions and reducing disproportionate burden are elements of a fair tax system,” said Jihad Azour, Director, IMF Middle East and Central Asia Department, in his opening remarks at the Ministry of Finance and Revenue’s workshop on “Reforms for a Modern and Growth-Friendly Tax System in Pakistan” here on Tuesday.

A stronger, broader, fairer and more predictable tax system can support fiscal sustainability while reducing distortions that hold back investment, productivity, growth and formal job creation, he added.

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Despite an era of shocks and uncertainty, Pakistan has made important progress toward restoring macroeconomic stability, rebuilding confidence, strengthening external buffers and supporting gradual recovery, he added.

The next milestone Azour said is to turn this stabilisation into stronger and more durable growth. Moving beyond cycles of adjustment toward a more competitive, investment-friendly and inclusive economy is the ambitious set of reforms that was set clearly by the government and supported by the IMF through the Extended Fund Facility (EFF).

The Fund is committed to help the authorities succeed in building an economy capable of delivering a higher level of productivity, led by a stronger private sector and ready to deliver better opportunities for its young generations. The objective is within reach and was made more urgent by the highly uncertain external environment, he added.

At the last IMF Regional Economic Outlook, it states that stronger policy frameworks and buffers are here to cushion the impact of the shock in many countries. However, inflation, fiscal pressure and financing needs are becoming more visible.

The IMF said that for Pakistan, exposure to higher energy and food prices, disruption to trade and supply chains, weaker external demand and an abrupt tightening in global financing conditions heightens the premium on preserving stability while supporting the recovery.

He further said that in this context, the fiscal must do more than achieving the primary balance targets and protecting debt sustainability. It must reinforce policy credibility, foster the recovery, and create space for the public investment and social spending needed to support stronger long-term growth and the well-being of the Pakistani people. This is why tax reform is critical to Pakistan’s economic growth agenda and it is in fact at the centre of the EFF objectives.

A stronger, broader, fairer and more predictable tax system can support fiscal sustainability while reducing distortions that hold back investment, productivity, growth and formal job creation, he added.

Therefore, broadening the tax base, strengthening revenue, reducing tax expenditures, protecting priority spending, and improving public service provision are Pakistan’s priority.

As said in the EFF-supported program, these objectives are mutually reinforcing. A fairer tax system can encourage compliance. Better services can strengthen trust. And a more neutral tax structure can allow productive firms to expand rather than remain small or informal.

“Let me highlight four themes that I hope we will focus our discussion on in the next two days,” said Azour, adding that the first is credibility. Pakistan’s stabilisation gains have been hard-won. Credibility now depends on continuing to meet fiscal and external objectives, enhancing resilience, while demonstrating that reforms are sustained and institutionally anchored. A medium-term tax strategy can serve this purpose as it sets clear objectives, well-designed policies, ambitious sequencing and transparent implementation responsibilities.

He said that the second theme is growth. The EFF-supported program recognises that stabilisation is necessary but not sufficient. Pakistan needs reforms that raise productivity, improve competitiveness and unlock private investment. Well-designed tax reforms serve this agenda. When the tax system is simpler, more neutral and predictable, it lowers the cost of formality, improves allocations and gives businesses greater confidence to invest and grow.

Azour further said that the third theme is fairness. Fairness is central to reform’s success. Taxpayers are more likely to comply when rules are transparent and when the system does not reward informality or provide preferential treatments. Addressing under-taxed sectors, rationalising concessions and reducing disproportionate burden are elements of a fair tax system.

He further said that the fourth theme is implementation. Many countries have strong reform ideas but fewer translate them into durable results. Implementation requires ownership, coordination, engagement and communication. Ownership across institutions, coordination between the federal government and provinces, engagement with the private sector and civil society, and a careful communication strategy so citizens and businesses can understand and trust. It also requires administrative capacity. Tax policy and tax administration must move together. A simpler policy framework makes administration easier and a strong administration makes policy reform credible.

He said that that the aim of the workshop is not only to agree on principles but to identify policies, sequencing and follow-up mechanisms. A successful reform requires acknowledging trade-offs, constraints and risks. How to broaden the base without undermining recovery. How to simplify while protecting revenues. How to coordinate federal and provincial responsibilities. How to use technology without increasing mistrust and how to build drive for change and transformation.

The value of this workshop will come from bringing together these perspectives and turning them into a coherent reform road map. Around the room are policymakers who appreciate government’s constraints, administrations who understand implementation, experts who bring evidence-based analysis, practitioners who know taxpayers’ behaviour, provincial representatives who understand fiscal federalism, and development partners who can support a coordinated follow-up approach.

Pakistan’s recent stabilisation gains create an opportunity. It needs to be amplified through transformative reforms. Tax reform is at the heart of it and this workshop could be the catalyst moment in this journey, he added.

Addressing on this occasion, Minister for Finance and Revenue Muhammad Aurangzeb said Pakistan’s twin deficit had declined from a cumulative 12.5 percent of Gross Domestic Product (GDP) to 2.6 percent, reflecting progress in macroeconomic stabilisation and fiscal consolidation.

He said that the country had achieved a 22-year low fiscal deficit in the last fiscal year and recorded primary surpluses for three consecutive years.

Aurangzeb said that the Federal Board of Revenue’s (FBR) tax-to-GDP ratio had increased from 8.8 percent to 10.3 percent, while tax revenues had risen by 40 percent over the last two fiscal years. The minister attributed the improvement to stronger enforcement measures and new tax policy initiatives, explaining that 0.9 percentage points of the 1.5-percentage-point increase in the tax-to-GDP ratio over the last two and a half years had come from enforcement, while 0.6 percentage points resulted from new policy measures.

The government would further strengthen enforcement, curb revenue leakages and broaden the tax base to improve revenue mobilisation, he added.

The minister highlighted the ongoing FBR transformation program, covering human resources, processes and technology, which he said was being led by the prime minister and monitored through weekly reviews.

He said that the taxation reforms remained a critical component of the government’s broader structural reform agenda, alongside reforms in the energy sector, state-owned enterprises (SOEs), privatisation, public finance, pensions and tariffs.

Emphasising the need to move from economic stabilisation towards growth, Aurangzeb said Pakistan’s economy had recovered from a contraction of 0.3 percent and returned to a positive growth trajectory.

However, he stressed that the country needed sustainable, export-led growth rather than liquidity-driven, consumption-based expansion, which had contributed to boom-and-bust cycles in the past.

“We will not let that repeat,” he said, underscoring the government’s commitment to ensuring that future growth was sustainable and supported by stronger economic fundamentals.

The finance minister also pointed to improvements in the country’s external position, saying foreign exchange reserves had recovered from a level equivalent to around two weeks of import cover to more than three months, reaching a record high.

He said the quality of reserves was as important as their volume, noting that the recent improvement had not been accompanied by a comparable increase in external debt.

Aurangzeb said Pakistan’s external debt stock had increased by around USD 4 billion over the preceding four years, compared with an annual increase of USD 6 billion to USD 7 billion during the 2015–2022 period, when external liabilities had risen from around USD 55 billion to more than USD 100 billion.

He said the government would continue designing tax policies around economic value and competitiveness rather than focusing solely on meeting revenue targets.

Referring to the previous budget, he said the government had undertaken recalibrations relating to exports and export-oriented industries and would build on these measures to support export-led growth.

The minister identified broadening the tax base, simplifying the taxation code and ensuring policy predictability and continuity as key priorities for the ongoing reform process.

He said frequent and unexpected tax changes could undermine private-sector investment, stressing that businesses needed a predictable policy environment to support long-term planning and economic expansion.

Aurangzeb identified political consensus, stronger institutions, improved taxpayer trust and clear communication as essential enablers of successful tax reforms.

He said cooperation between the federal and provincial governments was particularly important, while rebuilding trust and credibility in the tax authority was necessary to improve compliance and strengthen the relationship between taxpayers and the state.

The minister acknowledged the need for better communication to demonstrate progress on structural reforms and explain the measures being taken to increase revenue collection and improve its quality.

He expressed the hope that discussions during the conference would help assess progress on ongoing reforms and develop a roadmap for advancing from stabilisation to sustainable economic growth.

He said effective tax policy design and administration would remain critical to strengthening the private sector’s role in economic development and ensuring durable economic stability.

The Ministry of Finance and the IMF has convened a two-day high-level workshop in Islamabad on October 20–21, 2026. The two-day workshop is going to bring together senior government officials, representatives of the IMF and World Bank, international tax experts, academics and private-sector leaders to discuss priorities for modernising Pakistan’s tax system and strengthening its contribution to sustainable economic growth.

Copyright Business Recorder, 2026