Pakistan Completes IMF Programme Second Review, Unlocking 1.1 Billion Dollar Tranche Under Fiscal Restraint Conditions

Background

Pakistan has had 23 IMF programmes since joining the Fund in 1950, more than almost any other member country, reflecting a recurring pattern in which external payment crises, often following periods of unsustainable fiscal expansion and import growth, force the government to seek IMF balance of payments support. The 2026 Stand-By Arrangement, approved in July 2025, was Pakistan's response to a near-default situation in which reserves fell to approximately 4 billion dollars, the rupee had depreciated sharply, and foreign creditors were demanding repayment of maturing bonds that Pakistan could not meet from available reserves. The programme provided 7 billion dollars over 37 months in exchange for a fiscal consolidation programme requiring Pakistan to reduce its primary deficit, reform its deeply dysfunctional energy sector, and implement structural changes to the banking sector and tax administration. Pakistan's political environment has been turbulent throughout the programme period. Former Prime Minister Imran Khan, convicted and imprisoned in August 2023, continued to mobilise support from prison, creating periodic street protests and political instability that complicated the government's ability to implement unpopular reform measures including energy price increases and tax base expansion. The government of Shehbaz Sharif, sustained by a coalition that includes the Pakistan Muslim League-N, the Pakistan Peoples Party, and military-backed elements, has maintained sufficient political cohesion to pass the necessary legislative measures, albeit with delays that required the IMF to grant programme extensions.

Review Completion and Programme Status

The IMF's second review, completed on October 16, 2026, assessed Pakistan's performance against the quantitative performance criteria and structural benchmarks established in the programme. The key quantitative performance criterion that Pakistan met was the primary balance target, which required the government to achieve a primary surplus of 0.4 percent of GDP in the first quarter of fiscal year 2026-2027, meaning that revenues exceeded non-interest expenditures by the target margin. This target was met primarily through increases in sales tax collections, a broadening of the withholding tax net to capture more services sector transactions, and a reduction in discretionary development spending rather than through the structural tax reform that the IMF had identified as the more durable path to fiscal consolidation. On energy sector reform, Pakistan reduced its circular debt, the accumulated payment arrears within the electricity supply chain, from approximately 4.7 trillion rupees to 4.0 trillion rupees, meeting the 15 percent reduction benchmark through a combination of electricity tariff increases, improved collection rates from government entities, and a partial debt restructuring of distribution company liabilities. Banking sector recapitalisation involved the injection of government capital into Zarai Taraqiati Bank Limited and the Industrial Development Bank of Pakistan, both of which had been operating with capital adequacy ratios below the State Bank of Pakistan's minimum requirements. Reserves, which had been the most visible indicator of Pakistan's precarious external position, recovered to 12.5 billion dollars by the end of September 2026, providing approximately 2.5 months of import coverage.

• Primary surplus of 0.4% of GDP achieved in Q1 FY2026-27, meeting IMF fiscal performance criterion.
• Circular debt reduced 15% from 4.7 to 4.0 trillion rupees through tariff increases and collection reform.
• Two state banks recapitalised: ZTBL and IDBP brought back to minimum capital adequacy.
• Reserves at 12.5 billion dollars, approximately 2.5 months of import coverage.

Sustainability Questions

The successful completion of the second review does not resolve the fundamental questions about Pakistan's economic sustainability that IMF staff reports have raised consistently across multiple programmes. Pakistan's tax-to-GDP ratio remains among the lowest in the world at approximately 11 percent of GDP, reflecting both the structural weakness of direct tax collection and the political difficulty of taxing the agricultural and real estate sectors where significant wealth concentrations exist and where political elites have historically protected their own exemptions. The energy sector's circular debt, while reduced under the programme, remains at a level that will require continued tariff increases and operational reforms to prevent it from re-accumulating to crisis levels as the programme's reform momentum dissipates. Pakistan's external debt servicing burden, which includes significant obligations to Chinese bilateral creditors under the China-Pakistan Economic Corridor, will remain high through the late 2020s regardless of IMF programme success, requiring continued access to external financing from the Gulf states, China, and multilateral institutions. The IMF's own assessment, contained in the published review staff report, notes that Pakistan's debt is 'sustainable but with significant downside risks' and that 'sustained implementation of the reform agenda is essential to exit the pattern of recurring balance of payments crises', language that experienced observers of Pakistan IMF programmes read as cautious optimism about completion but scepticism about long-term impact. The third review, due in early 2027, will test whether Pakistan can maintain fiscal discipline through an electoral cycle in which promises of economic relief from opposition parties will put pressure on the governing coalition to ease the austerity measures that the IMF programme requires.

Sources

• International Monetary Fund
• Reuters
• Dawn Pakistan
• World Bank Pakistan
• Financial Times