Key Takeaways from the Report:
The IMF Executive Board has completed the first review under Pakistan’s Extended Fund Facility (EFF) arrangement and approved a new arrangement under the Resilience and Sustainability Facility (RSF).
This allows for an immediate disbursement of about $1 billion under the EFF, bringing the total disbursed to approximately $2.1 billion, and provides access to about $1.4 billion under the RSF. Pakistan has demonstrated strong program implementation under the EFF.
Significant progress has been made in stabilizing the economy and rebuilding confidence, despite a challenging global environment. Financial and external conditions have continued to improve. There was a current account surplus in the first eight months of FY25. Gross reserves have increased since August 2024 and are projected to continue to be rebuilt. Inflation has fallen to historic lows (0.3% in April), allowing the State Bank of Pakistan (SBP) to cut the policy rate. However, core inflation remains elevated at around 9 percent.
Fiscal performance has been strong, achieving a primary surplus in the first half of FY25 and remaining on track for the end-FY25 target. The economic recovery is continuing, although growth in the first half of FY25 was softer than expected due to lower crop yields and subdued industrial activity. Real GDP growth is projected at 2.6 percent for FY25.
Pakistan faces elevated risks, including those from global economic policy uncertainty, geopolitical tensions (such as rising tensions with India), persistent domestic vulnerabilities, potential policy slippages due to pressures for concessions, political/social tensions, and substantial climate-related risks.
Recent US tariff announcements are expected to weigh on Pakistan’s exports and GDP, with downside risks skewed. Pakistan is highly vulnerable to climate change and natural disasters, ranking among the top 10 countries most affected worldwide. The catastrophic 2022 floods highlighted this vulnerability. Pakistan is also among the world’s top emitters and has made commitments to reduce greenhouse gas emissions.
The new RSF arrangement is designed to support Pakistan’s efforts in building economic resilience to climate vulnerabilities and natural disasters. It complements the macroeconomic stability efforts under the EFF
Actions Pakistan Needs to Take Going Forward:
1. Sustaining Macroeconomic Stability and Fiscal Consolidation:
Continue prudent execution of the FY25 budget. Firmly anchor the FY26 budget through fiscal consolidation. Broaden the tax base, streamline expenditure, and improve public financial management.
Effectively manage provincial surpluses, including establishing a framework for provinces to invest in government securities. Advance the devolution process in FY26, ensuring provinces cover new Public Sector Development Programme (PSDP) projects that only impact one province. Accelerate the privatization agenda, including completing the privatization of PIA by August 2025, First Women’s Bank and HBFC by May 2025, targeting ZTBL by the end of the year, and initiating the process for Batch II DISCOs privatization by end-April 2025.
Improve the public investment project selection process, enhancing scoring criteria, incorporating negative marking for risks, and assigning higher weighting to climate considerations. Adequately record PPP-related risks and contingent liabilities. Prepare and publish a strategy to mitigate refinancing risks from the Pakistan Investment Bond held by the SBP by end-September 2025. Further develop the domestic government securities market and diversify the investor base.
2. Monetary and Financial Sector Policies:
Maintain an appropriately tight and data-dependent monetary policy stance to anchor inflation within the SBP’s target range. Gradually remove monetary restraint based on clear evidence. Maintain exchange rate flexibility to absorb shocks and facilitate reserve rebuilding.
Continue efforts to deepen the interbank FX market. Proactively address undercapitalized financial institutions. Implement remaining Safeguards Assessment recommendations, including clarifying the prohibition on quasi-fiscal activities and filling SBP senior management positions.
Strengthen AML/CFT frameworks, including supervision and beneficial ownership information. This involves developing a new standalone supervisory framework on TBML by end-June 2025 and granting banks access to asset declarations of high-level provincial public officials.
Deepen the financial sector to support private sector lending by implementing SBP’s strategic plan and modernizing the Real Time Gross Settlement (RTGS) system. Implement the Securities and Exchange Commission of Pakistan’s (SECP) five-year strategic plan to develop the insurance sector. Limit the role of the public sector in the financial sector by transferring SBP’s shareholding in NBP and HBFCL to the government by end-June 2025 and ensuring Development Finance Institutions (DFIs) focus on their mandate.
Assess the Central Directorate of National Savings (CDNS) to avoid public sector duplication of private institutions. Maintain an exchange system free from restrictions on current international transactions
3. Energy Sector Reforms:
Accelerate cost-side reforms to safeguard sector viability and improve competitiveness. Ensure timely implementation of power and gas tariff adjustments in line with costs. Address structural impediments to stem circular debt (CD) flow, aiming for zero new flow by FY31. Implement subsidy reform, including unifying gas pricing across indigenous gas and imported RLNG (WACOG) and adopting a new, targeted, and budgeted gas subsidy framework.
Fully implement the new Competitive Trading Bilateral Contract Market (CTBCM) and the Connectivity Policy, facilitating service-level agreements between Distribution Companies (DISCOs) and Captive Power Producers (CPPs). Pass Competitive Pricing and Logistics (CPL) legislation through parliament by end-May 2025. Increase private sector participation in distribution and transmission networks through DISCO
privatization/concessions and restructuring the National Transmission and Dispatch Company (NTDC). Enact amendments to the criminal code to institutionalize anti-theft procedures. Finalize Pakistan’s first Integrated Energy Plan (IEP) by end-June 2025.
4. Structural Reforms:
Advance reforms to strengthen competition and raise productivity. Reduce trade and investment barriers to enhance competitiveness and attract private investment. Address the anti-export bias. Advance State-Owned Enterprise (SOE) reforms to limit losses, improve services, and reduce the state’s footprint.
This includes full implementation of the new SOE Act and Policy, improving transparency, establishing independent boards, operationalizing the Central Monitoring Unit (CMU), and amending statutory SOE laws by end-June 2025. Decisively strengthen governance and anti-corruption institutions. Publish a governance action plan based on the Governance Diagnostic Assessment recommendations by end-October 2025. Broaden efforts to other commodities, empower competition authorities, and foster agile sectors like agriculture. In the wheat sector, abstain from announcing support prices and discontinue procurement operations that crowd out the private sector, while finalizing a new food security framework. Improve macroeconomic statistics for informed policymaking.
Conduct an annual inflation adjustment of the unconditional cash transfer (Kafaalat) program (endJanuary 2026 SB) to preserve its real purchasing power. Prepare and publish a plan outlining the government’s post-2027 financial sector strategy by end-September 2025
5. Building Climate Resilience (Supported by the Resilience and Sustainability Facility – RSF):
Mainstream climate issues into budget and investment planning at all levels of government. Enhance the climate sensitivity of Public Investment Management (PIM), incorporate climate considerations into project appraisal, improve transparency and tracking of climate-harmful expenditure, and harmonize budget tagging.
Fill remaining gaps in the C-PIMA Action Plan. Strengthen water management and make the use of scarce water resources more efficient. Improve irrigation water pricing and revenue collection, including adopting the e-Abiana system in Punjab and rolling it out in other provinces. Strengthen coordination between federal and provincial governments for natural disaster response and financing.
Develop a National Disaster Risk Financing Strategy (NDRFS). Improve the climate finance enabling environment by enhancing information architecture and disclosure of climate-related risks by banks and corporates. Strengthen climate-related financial risk management and supervision (SBP guidelines by end-September 2025 SB). Adopt and implement Pakistan’s green taxonomy (SECP guidelines for listed companies). Support Pakistan’s efforts to meet its mitigation commitments. This includes aligning energy sector reforms with national mitigation commitments and promoting green mobility and transport decarbonization, such as adopting a carbon levy via the FY26 budget. Build capacity for critical needs assessments and strategies for particularly vulnerable and exposed sectors. Make tangible progress to shore up ex-ante resilience to climate change
Important Disclosures
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