Pakistan assures IMF of farm input tax hikes, cuts in uplift schemes

• Selected items to shift into 18% GST slab.
• Measures tied to completing IMF’s 2nd programme review.
• Islamabad targets $1.2 billion from EFF and RSF.

ISLAMABAD: Pakistan has committed to the International Monetary Fund (IMF) that it will raise tax rates on fertilisers, pesticides and sugary products, and move selected items to the standard 18% GST slab, The News reported on Friday.

These steps form part of Islamabad’s bid to successfully complete the second review and unlock the third $1 billion tranche under the $7 billion Extended Fund Facility (EFF), as well as the first $200 million tranche from the $1.4 billion Resilience and Sustainability Facility (RSF).

Further details of the IMF’s report on Pakistan’s economic performance have been released, with the Fund saying Pakistan has achieved most of the targets under the loan programme.

In its recently released staff report, the IMF projected that the balance of payment gap will continue to widen from the current fiscal year, reaching $3.253 billion by 2029–30, after the existing programme concludes. This projection signals that Pakistan may require another IMF programme in the near future.

The staff report says that contingency measures provide an important safeguard against fiscal risks. 

If revenue were to fall short of expectations by the end of December 2025, the Pakistan authorities plan to adopt additional measures to safeguard the fiscal targets, including increasing excises on fertilisers and pesticides by five percentage points, introducing excises on high-value sugary items, and broadening the sales tax base by moving select items to the standard rate. 

They are also prepared to reduce or postpone spending in response to lower revenues.

The government has also assured the Washington-based lender that it will fully deregulate the sugar sector, continue tariff adjustments in the power sector and reduce system losses and cut costs. A nationwide installation of point-of-sale systems for 40,000 large retailers will be completed over the next two years, while all four provinces will move toward harmonised sales tax procedures.

The IMF report notes that during the current fiscal year, Pakistan will restrict spending on new development schemes to 10% of the PSDP and will prioritise completion of around Rs2.5 trillion worth of ongoing projects. 

From the next fiscal year, greater focus will be placed on climate-related development schemes. Public procurement will shift to digital e-pads, with the Auditor General mandated to submit a compliance report to the president by March 2026.

Under the social protection pillar, the Kafalat cash transfer under the BISP programme will increase to Rs14,500 per quarter from January 2026, while the number of beneficiaries will be expanded to 10.2 million families. Biometric verification for payments will remain mandatory, and the long-awaited e-wallet system will be launched by June 2026.

On energy reforms, the IMF has noted that the government has already decided to shift annual tariff rebasing from July to January 2026. Last fiscal year, the circular debt stock was reduced to Rs1.614 trillion. 

By January 2026, the government aims to settle Rs1.2 trillion owed to commercial banks, out of which Rs660 billion will go to Pakistan Private Holdings Limited and the rest to the Central Power Purchasing Agency. 

The plan also includes eliminating Rs128 billion in interest payments owed to IPPs and keeping the circular debt at zero inflow until fiscal year 2031.

The Fund highlights that 5.2 million income tax returns were filed in FY2024, while the number is expected to reach 7 million in FY2025. It acknowledges Pakistan’s progress on stabilisation, noting improvements in foreign exchange reserves, which have risen to $14.5 billion, and a 1.3% primary surplus delivered in FY2025. 

Fiscal performance remains strong, with the primary surplus recorded at 1.3%, and the IMF report says this surplus was achieved in line with the programme target.

According to the report, within one year, foreign exchange reserves increased from $9.4 billion to $14.5 billion, and reserves are projected to rise further in the coming years. 

The IMF says Pakistan has achieved its first current account surplus in 14 years and terms the primary surplus target for fiscal year 2025–26 achievable. Reforms to increase revenues and reduce debt are described as ongoing.

On inflation, the IMF notes that inflation increased due to food prices following the floods but says this inflationary pressure is temporary. Inflation is projected to ease to 7% in the current fiscal year. The IMF has stressed maintaining a tight monetary policy to keep inflation under control. It also says exchange rate flexibility is necessary to absorb shocks.

At the same time, the IMF warns that the 2022 floods highlighted Pakistan’s deep climate vulnerability, having affected seven million people and claiming nearly 1,000 lives, while causing extensive losses to infrastructure, homes and livestock. 

The report says that following the floods, the importance of reforms and policy continuity has increased further, and it urges stronger climate adaptation measures, improved water management and disaster preparedness.

The global lender has also stressed sustained reforms in taxation, governance, state-owned enterprises and energy to secure long-term growth. 

It says Pakistan must widen the tax net, simplify tax procedures, ensure data transparency, and maintain a strict monetary policy to keep inflation stable. Strengthening forex market transparency and reducing policy uncertainty are also essential.

The IMF report adds that progress has been made in improving the power sector through energy tariff adjustments, but further reforms are required to stabilise the sector. 

It also notes that improving governance in state-owned enterprises and the investment environment is important, and that trade and investment reforms are essential for sustainable growth. It says RSF reforms will help improve flood risk management and water governance.

The report concludes that Pakistan’s economic recovery remains fragile but is moving in the right direction under the current programme. Stronger reforms and consistent policy implementation, it notes, will be critical for lowering debt, raising revenue and sustaining growth in the years ahead.