## 1pakea2025001-print-pdf ## Source details **Canonical URL:** [1pakea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1pakea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1pakea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1pakea2025001-print-pdf.pdf.json) --- ### Executive summary — recent developments - Growth and inflation - GDP growth: "2.5 percent in FY24", "1.3 percent and 1.7 percent (yoy) in FY25 Q1 and Q2". - Headline inflation: "0.7 percent (yoy) in March"; core inflation "around 9 percent". - External and financial - Current account: surplus "US$0.7 billion in the first eight months of FY25" vs deficit "US$1.7 billion" in same period FY24. - Gross international reserves: "US$10.7 billion at end-March 2025", down from peak "US$12 billion in November". - Sovereign bond spreads: stabilized "around 600 bps in March", then rose by "more than 300 bps" after April 2 tariff announcements. - SBP regulatory change: new framework for Exchange Companies effective "January 1, 2025 (MEFP ¶15.e)". - Monetary policy and credit - MPC cut policy rate cumulatively "1,000 bps between June 2024 and January 2025", held at "12 percent" at March 10 meeting. - Private sector credit growth moderated after temporary FY25Q2 spike ("25 percent q-o-q"). - Fiscal and social - General government underlying primary surplus: "PRs 2,264 billion (2.0 percent of GDP) in FY25H1". - FBR revenue up "26 percent year-on-year" but missed some targets; direct taxes overperformed. - BISP spending met targets; subsidies, grants, health, education and federal PSDP below budget due to delays. - Energy - Power sector circular debt: rose "PRs 166 billion" from end-June through February 2025; stock "PRs 2,530 billion (2.2 percent of GDP) by end-February". - Electricity tariffs reduced by roughly "PRs 5/kWh" between July 2024 and March 2025. - Gas sector net CD flow "PRs 28 billion during July—December 2024", stock "PRs 2,842 billion (2.7 percent of GDP) (provisional)". ### Program performance and conditionality - EFF and disbursements - "37-month Extended Arrangement under the Extended Fund Facility (EFF), approved on September 25, 2024, is on track." - Completion of first EFF review would make available "SDR 760 million (about US$1 billion)", bringing total disbursements to "SDR 1,520 million". - Quantitative PCs and ITs (end-December 2024) - All seven quantitative PCs met: floors and ceilings including SBP net international reserves, SBP net domestic assets, general government primary budget deficit, government guarantees, SBP FX swap/forward book, targeted cash transfer spending, number of new tax returns from new filers. - Continuous PCs met: "zero new flow of SBP credit to the government"; "zero external public payment arrears". - Majority of ITs met; missed end-December ITs: floors on government health and education spending, net tax revenues collected by FBR, and net tax revenues from retailers under Tajir Dost. - Structural benchmarks (SBs) - Nine SBs met (National Fiscal Pact, safeguards for monetary policy operations, amendments to bank resolution and deposit legislation). - Continuous SBs met (no tax amnesties; ex-ante parliamentary approval for non-budgeted expenditures; maximum average premium between interbank and open market rates). - Missed SBs included provincial Agricultural Income Tax timing (subsequently passed Feb 2025), delays on Civil Servants and SWF Acts, SBs on undercapitalized banks and captive power producers (follow-up actions expected). ### EFF policy priorities and staff recommendations - Fiscal policy - FY25 primary surplus target "on track"; fiscal reforms needed to strengthen revenue mobilization and reduce debt while protecting social/development spending. - Target general government revenue "12.3 percent of GDP in FY25", FBR collections "10.6 percent of GDP (PRs 12,332 billion)". - Primary expenditure containment target "PRs 15,958 billion (13.8 percent of GDP)". - Resolve litigation: outstanding disputed claims "PRs 367 billion of a total of PRs 770 billion", Supreme Court cases "PRs 43 billion", High Courts "PRs 217 billion", Appellate Tribunal "PRs 104 billion". Possible favorable ruling could resolve an estimated "PRs 120 billion (MEFP ¶5.a)". - Monetary and FX policy - Maintain tight, data-dependent monetary policy to anchor inflation within SBP target range. - "More flexible exchange rate" to absorb shocks; continue FX purchases to rebuild reserves but monitor REER appreciation. - Unwind January 2022 repatriation shortening when stability restored (assessed as an outflow CFM). - Energy sector - Ensure cost recovery via timely tariff adjustments; broader reforms to restore viability and reduce high costs. - CD stock operation plan: convert up to "80 percent" of existing CD stock to CPPA debt via new sukuk; payments financed entirely from DSS; remove DSS cap (end-June 2025 SB). - Structural reforms - Deepen governance and trade/investment reforms to support sustainable, inclusive growth. - Prepare post-2027 financial sector strategy given mandated removal of riba by January 2028 (26th constitutional amendment, Oct 2024); recommended publication of strategy and guidance (proposed SB end-June 2026). ### RSF arrangement and reform measures - RSF access and objective - Proposed RSF access "49.2 percent of quota (equivalent to SDR 1,000 million / US$1 billion)". - Objective: reduce Pakistan’s balance of payments stability risks stemming from climate vulnerabilities. - RSF Reform Measures (selected) - RM1–RM3: mainstream climate in public investment and budget planning (increase climate weighting in PSDP selection; require climate assessments for projects ≥ "PRs 7.5 billion"; expand green budgeting). - RM4–RM5: water pricing and irrigation revenue collection — digitize revenue collection (e-Abiana) and introduce irrigation tariff adjustment mechanisms in Punjab and Sindh. - RM6: strengthen federal-provincial disaster risk financing coordination; adopt implementation framework for NDRFS. - RM7–RM8: SBP guidelines for climate-related financial risk management; SECP guidelines for corporate climate disclosure and taxonomy-aligned data. - RM9–RM11: decarbonize transport — carbon levy (supplementary PDL "PRs 5 per liter" phased in), EV subsidy/tax revenue-neutral scheme, VGF framework for charging stations. - RM12–RM13: align energy subsidies with targeted BISP transfers and implement MEPS for appliances. - RSF phasing and financing - RSF disbursements "US$1.3 billion" (table D: "Total (FY25-28) = 1,337" US$ millions) phased "2025/26 = 410; 2026/27 = 514; 2027/28 = 412". - Program financing overview (FY25-28 totals): - Financing gap without RSF: "12,113" (Millions of U.S. Dollars). - IMF EFF: "7,113" (Millions of U.S. Dollars). - Other program financing (A-B): "5,000" (Millions of U.S. Dollars). - RSF Disbursement total: "1,337" (Millions of U.S. Dollars). - Firm commitments: "US$2.6 billion already disbursed or expected to disburse in coming months"; additional firm commitments "US$1 billion in next 12 months". ### Outlook, growth, inflation, and balance of payments - Growth and inflation forecasts - FY25 growth revised to "2.6 percent". - FY25 inflation revised down, but projected to increase in coming months due to base effects; durable return to target "5–7 percent" expected during FY26 if policy remains tight. - External sector - FY25 current account deficit projected "about US$0.2 billion (0.1 percent of GDP)". - Medium-term CAD expected to widen "to around 1 percent of GDP". - Anticipated external issuance: small "Panda" bond in FY26; return to Eurobond/Global Sukuk market assumed FY27. - Gross international reserves expected to strengthen with committed financing and RSF disbursements. - Risks - Downside risks remain high: April 2 US tariff announcements (US tariff on Pakistan "29 percent") and broader external and domestic risks (commodity price shocks, tighter global financial conditions, weakening remittances, policy slippages, political/social tensions, climate shocks). - Box 1 estimates tariff shock effects: FY25 growth revised down marginally and around "0.3ppts in FY26"; sovereign spreads increased sharply since April 2; impacts on inflation modest due to lower commodity prices and weaker growth. ### Energy sector policy and CD operation - CD targets and operation - End-June 2025 CD flow IT tightened from "PRs 417 billion to PRs 337 billion" after FY25H1 overperformance ("PRs 457 billion, 0.4 percent of GDP"). - Plan to convert most (up to "80 percent") of existing CD stock to CPPA debt via sukuk; objective to reduce interest charges and bring new CD flow to zero by "FY31". - Financing safeguard: payments financed entirely from existing debt service surcharge (DSS); remove DSS cap (end-June 2025 SB). - Tariffs and CPL - CPL introduced "February 1, 2025": CPP gas priced at industrial grid plus "5 percent" levy, increasing by "5 percent every six months" until "20 percent in August 2026". - CPL proceeds transferred to electricity grid to reduce average effective grid tariff. - CPL was introduced by ordinance; must be legislated by "end-May 2025" to ensure permanence (new SB). - Gas policy - Net gas CD flow contained to "PRs 28 billion (July–December 2024)"; stock "PRs 2,842 billion (2.7 percent of GDP)". - Semiannual gas tariff adjustment notification legal mechanism; next annual rebasing to be notified "July 1, 2025" (new SB). ### Debt, DSA, and gross financing needs - Debt and risk assessment - Public debt sustainable in baseline but near-term sovereign stress risk assessed as "High". - Fund exposure would peak "SDR 9,466 million in September 2027 (466 percent of quota and about 51 percent of projected gross reserves in 2027)". - Pakistan's outstanding debt to the Fund as percent of gross international reserves above the 75th percentile of comparators; three flow indicators (debt-service to the Fund as percent of government revenues, exports, and gross international reserves) above 75th percentiles. - DSA baseline projections (selected public debt percent of GDP): Actual 2024 "70.3"; 2025 "73.4"; 2026 "71.2"; 2027 "69.3"; 2028 "66.2"; onward declining to "58.1" by 2034. - Medium- and long-term scenarios - DIGNAD model scenarios (illustrative): - Baseline: no adaptive investment—post-shock debt-to-GDP rises ~ "4.5 percentage points to 70 percent". - Adaptation (additional "1 percent of GDP per year" for five years, ~40 percent concessional financing): reduces negative GDP impact by about half; GDP returns to steady state in "5 years"; long-term debt modestly higher (~ "2 percentage points" above baseline). - Adaptation + efficiency improvements (public investment efficiency improvement to global average): quicker recovery (GDP returns in "4 years") and similar long-term debt to Adaptation scenario. - Climate mitigation standardized scenario: mitigation costs ~ "5.6 percent of GDP annually over 2023-30" would markedly raise debt-to-GDP (more than "80 percent" mid-2050s unless financed externally). ### Social protection and poverty reduction - BISP and transfers - FY25: BISP UCT Kafaalat benefit increased from "PRs 10,500 to PRs 13,500" in January 2025; planned increase to "PRs 14,500" (end-January 2026 new SB). - FY25 nominal increase "27 percent over FY24"; stipend generosity rose from "9.6 percent to 12.4 percent of the bottom income quintile’s consumption basket". - Additional "700,000 families" absorbed; total enrollment "10 million". - FY26 BISP allocation "PRs 716 billion (0.5 percent of GDP)", a "20 percent nominal increase relative to FY25". - Commitment to maintain real UCT benefits and target transfers equivalent to "15 percent" of bottom quintile consumption once new HIES available. - CCTs and health/education - Education CCT enrollment increased by "1.1 million to 10.8 million"; nutrition CCT anticipated increase "500,000 to 2.5 million". - FY25 general government health and education spending target "2.4 percent of GDP"; execution shortfalls (notably Sindh and Khyber-Pakhtunkhwa) require improvement; FY26 to allocate similar share ("PRs 3,156 billion"). ### Monitoring, reporting, and program modalities - Monitoring and TMU - Program monitored via semiannual EFF reviews and concurrent RSF reviews; details in the TMU. - Key quantitative PCs: SBP NIR floor (US$ millions); SBP NDA ceiling (PRs billions); SBP FX swap/forward stock; general government primary deficit ceiling (PRs billions); government guarantees stock; BISP cash transfer floor; floor on number of new tax returns (thousands). - Continuous PCs: "No new flow of SBP’s credit to general government"; "Zero ceiling on accumulation of external public payment arrears". - Program exchange rate fixed in TMU: "278.3412 rupee per one U.S. dollar". - Reporting requirements (selected) - SBP: balance sheet weekly; monetary survey monthly; international reserves daily; NIR at program exchange rates quarterly. - MOF: external debt disbursements monthly; federal and provincial fiscal operations monthly. - FBR: total revenue and tax refund claims monthly; new taxpayer data monthly. - Energy, BISP, SOE reports: monthly/quarterly per TMU Table 2. ### Key tables and selected indicators (representative exact figures from source) - Population: "236.0 million (2023/24)". - Main exports: Textiles "US$16.3 billion (2023/24)". - Per capita GDP: "US$1,572.3 (2023/24)". - Poverty rate: "21.9 percent (2018/19, national line)". - Selected fiscal items (billions PRs): revenue and grants series includes "13,321; 18,676; 19,663; 22,552; 25,410; 28,279; 31,459" for various years. - Gross reserves multi-year series (US$ millions): "7,274; 12,175; 17,297; 9,821; 4,455; 9,381; 9,390; 12,757; 13,921". - Balance of payments projections (current account US$ millions): selected entries include "-4,449; -2,820; -17,481; -3,275; -665; -1,695; -3,578; -229; -1,493". - Fund financing schedule (Table 8): EFF purchases of "760 (37.4)" SDR million at approval and repeated semiannual purchases; RSF total "1,000 (49.2)". ### Staff appraisal — summary highlights - Program implementation has restored economic stability but remains fragile; full implementation of fiscal reforms essential for sustainability. - Monetary policy: SBP should remain appropriately tight and data dependent; continue to deepen interbank FX market and rebuild reserves. - Financial sector: complete recapitalizations/resolutions of undercapitalized banks; implement safeguards and clarify post-2027 financial regime. - Energy sector: continue timely tariff adjustments, implement CD conversion and broader structural reforms across distribution, transmission, and generation. - RSF rationale: incorporate climate considerations in PIM and budgeting; strengthen water management; improve federal-provincial DRF; enhance climate finance enabling environment and advance mitigation via energy and transport reforms. _Italic: Source: Excerpts and data from "1pakea2025001-print-pdf" (IMF staff report and MEFP materials, April–May 2025)._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Recent Developments - Macroeconomic conditions - Economic recovery continues, but growth in FY25H1 was somewhat lower than anticipated: GDP growth of 2.5 percent in FY24, and 1.3 percent and 1.7 percent (yoy) in FY25 Q1 and Q2, respectively. - Inflation dynamics: headline inflation fell to 0.7 percent (yoy) in March; core inflation remains elevated at around 9 percent. - External and financial conditions - Current account recorded a surplus of US$0.7 billion in the first eight months of FY25, versus a US$1.7 billion deficit in the same period of FY24. - Gross international reserves stood at US$10.7 billion at end-March 2025, down from a peak of US$12 billion in November. - Sovereign bond spreads stabilized at around 600 bps in March, then rose by more than 300 bps following the April 2 tariff announcements. - No discernible parallel market pressure; interbank and open market rates remain aligned. - Effective January 1, 2025, the SBP adopted a new regulatory framework for Exchange Companies (MEFP ¶15.e). - Monetary policy - The Monetary Policy Committee (MPC) cut the policy rate by a cumulative 1,000 bps between June 2024 and January 2025, and held it at 12 percent at their March 10 meeting. - Forward-looking real rates remain considerably positive; private sector credit growth moderated after a temporary spike during FY25Q2 (25 percent q-o-q). - Fiscal developments - General government recorded an underlying primary surplus of PRs 2,264 billion (2.0 percent of GDP) in FY25H1. - FBR revenue grew by 26 percent year-on-year but missed end-September and end-December targets due to lower-than-expected sales tax and import duties. - Direct tax collection overperformed; provinces met aggregate primary surplus commitments. - BISP spending met targets; expenditures on subsidies, grants, health, education and federal PSDP were below budget projections due to administrative delays. - Energy sector - Power sector circular debt rose PRs 166 billion from end-June through February 2025 and the stock stood at PRs 2,530 billion (2.2 percent of GDP) by end-February. - Electricity tariffs were reduced by roughly PRs 5/kWh between July 2024 and March 2025 due to timely intra-year tariff adjustments and other factors. - In the gas sector, net CD flow was contained to PRs 28 billion during July—December 2024, limiting the stock to PRs 2,842 billion (2.7 percent of GDP) (provisional). ### Program Performance - EFF status - The 37-month Extended Arrangement under the Extended Fund Facility (EFF), approved on September 25, 2024, is on track. - All seven QPCs and five of eight ITs were met at end-December; most continuous and other SBs were met. - Completion of the first EFF review would make available SDR 760 million (about US$1 billion) bringing total disbursements to SDR 1,520 million. - Quantitative Performance Criteria (PCs) - All seven quantitative PCs for end-December 2024 were met: floors on net international reserves of the SBP; targeted cash transfer spending; number of new tax returns from new filers; ceilings on net domestic assets of the SBP; the SBP’s FX swap/forward book; the general government primary budget deficit; and government guarantees. - Continuous PCs met: zero new flow of SBP credit to the government; zero external public payment arrears. - Indicative Targets (ITs) - Majority met at end-December, including ceilings on aggregate provincial primary budget deficit, net accumulation of tax refund arrears, and power sector payment arrears; and floors on revenues collected by provincial revenue authorities and weighted average maturity of local currency debt securities. - Missed end-December ITs: floors on government health and education spending; net tax revenues collected by the FBR; and net tax revenues from retailers under the Tajir Dost scheme. - Structural Benchmarks (SBs) - Nine SBs were met, including approval of a National Fiscal Pact, improved safeguards for monetary policy operations, and approval of amendments to bank resolution and deposit legislation. - Continuous SBs met on not granting tax amnesties; seeking ex-ante parliamentary approval for any non-budgeted expenditures; and maximum average premium between interbank and open market rates. - Missed SBs: provincial Agricultural Income Tax legislation (subsequently passed in February 2025); delays in passing amendments to the Civil Servants and Sovereign Wealth Fund Acts; two SBs relating to resolving undercapitalized banks and to captive power producers (subsequent actions expected to accomplish objectives). ### EFF Policy Priorities - Fiscal policy - FY25 primary surplus target is on track, but further fiscal reforms are necessary to strengthen revenue mobilization and reduce debt, while creating space for social and development spending. - Ongoing revenue mobilization and spending rationalization efforts, including with considerable CD assistance, are expected to support the fiscal path for FY26 and beyond. - Monetary and exchange rate policy - Monetary policy should remain tight and data dependent to ensure inflation stays moderate, within the SBP’s target range. - A more flexible exchange rate remains critical to absorb shocks and support rebuilding of reserves. - Energy sector policy - Efforts to ensure energy sector cost recovery via timely tariff adjustments remain necessary, supported by broader reforms to restore viability and reduce the sector’s high costs. - Structural reforms - Reforms to improve governance and the trade and investment environment need to deepen to support stronger sustainable and inclusive growth. ### RSF Request - Proposed RSF arrangement - Access set at 49.2 percent of quota (equivalent to SDR 1 billion). - Objective: reduce Pakistan’s balance of payments stability risks stemming from climate vulnerabilities. - Reform Measures (RMs) under the RSF aim to: - (i) prioritize resilience to natural disasters and strengthen public investment processes at all levels of government; - (ii) make the use of scarce water resources more efficient, including through better pricing; - (iii) strengthen coordination of natural disaster response and financing between federal and provincial governments; - (iv) improve the information architecture, for and disclosure of, climate-related risks by banks and corporates; - (v) support Pakistan’s efforts to meet its mitigation commitments and reduce related macro-critical risks. - Prospective financing linkages - Prospective RSF disbursements (US$1.3 billion) expected to support reserves; access to external commercial financing is expected to remain limited during the program. ### Outlook and Risks - Growth and inflation projections - FY25 growth revised down to 2.6 percent based on weaker H1 activity and global uncertainty. - FY25 inflation revised down, but projected to increase notably in coming months due to adverse base effects; durable return to target range (5–7 percent) expected during FY26 provided policy remains appropriately tight. - Balance of payments and reserves - Current account deficit for FY25 projected at about US$0.2 billion (0.1 percent of GDP), helped by resilient exports and stronger remittances. - Over the medium term, CAD is expected to widen modestly to around 1 percent of GDP as imports rebound. - Gross international reserves expected to continue strengthening, supported by committed multilateral and bilateral financing and prospective RSF disbursements. - Anticipated external issuance: small “Panda” bond in FY26; gradual return to Eurobond/Global Sukuk market assumed in FY27. - Fiscal outlook and public debt - FY25 primary deficit target within reach, but nominal tax revenues revised down due to lower nominal GDP; offsetting expenditure savings expected to deliver programmed FY25 nominal EFF primary balance. - Under the baseline, public debt remains sustainable over the medium term; nevertheless, near-term risks of sovereign stress remain high given very large gross financing needs and past challenges in obtaining external financing. *Source: Executive Summary, Pakistan — IMF country report (April 25, 2025).* ### 4. Downside risks have declined somewhat but remain high. Uncertainties around the ### 4. Downside risks have declined somewhat but remain high ### Downside risks and uncertainties - Recent tariff announcements create significant uncertainties for Pakistan’s economic and financial conditions, with risks skewed to the downside. - Broader external risks include geopolitically driven increases in commodity prices, tightening global financial conditions, weakening remittances, and higher trade barriers in other trading partners — all could adversely affect external stability. - Immediate domestic risk: policy slippages given pressures to ease policies and provide tax and other concessions and subsidies to connected interests. - Political or social tensions could intensify and weigh on policy and reform implementation. - Climate-related risks are substantial due to Pakistan’s high exposure to natural disasters and large adaptation and mitigation needs. ### Box 1. Impact of Recent US Tariff Announcements - On April 2, 2025, the US announced a large increase in country-specific tariffs, including a 29 percent tariff on Pakistan. - Pakistan’s export sector is relatively small (10 percent of GDP). The US is Pakistan’s largest trading partner; textiles and apparel are the largest export segment to the US. - Many competitors also face large tariffs: Bangladesh (37 percent), China (145 percent), India (26 percent), and Vietnam (46 percent). - Expected macroeconomic effects: - Growth: growth revised down marginally in FY25 (as less than a quarter is left in the year) and around 0.3ppts in FY26. - Balance of payments: indirect effects via partner economies, tighter global financial conditions, potentially lower remittances, and increased trade policy uncertainty; net impact moderated by recent commodity price declines and the downgrade in activity, which will reduce Pakistan’s import bill. - Financial markets: Pakistan’s sovereign spreads have increased sharply since April 2; market access to external financing in the near term is already limited. - Exchange rate: if outflow pressures intensify it will be critical that the exchange rate is allowed to adjust. - Inflation: net impact projected to be modest, with some downward pressure expected from lower commodity prices and weaker growth. ### A. Fiscal Policy — objectives and requirements - Authorities committed to achieving an underlying general government primary surplus of 1.0 percent of GDP in FY25. - Nominal fiscal targets recalibrated to reflect weaker nominal GDP while preserving percent-of-GDP objectives. - Fiscal position relies more on federal non-tax revenue, projected at 3.0 percent of GDP. - Provincial tax authorities have demonstrated robust performance supporting the overall fiscal effort. Key requirements to achieve the FY25 primary balance target: - Strengthen tax revenue collection to ensure general government revenue reaches 12.3 percent of GDP in FY25, including FBR collections of 10.6 percent of GDP (PRs 12,332 billion). - Continue revenue administration measures: compliance risk management (CRM), digital value chain monitoring, detection of irregularities in sales tax returns, closer monitoring of irregular import patterns (MEFP ¶5.d), and strengthened faceless customs assessments. - Resolve outstanding litigation cases: PRs 367 billion of a total of PRs 770 billion under dispute; Supreme Court cases PRs 43 billion; High Courts (Islamabad, Sindh, Lahore) PRs 217 billion; Appellate Tribunal Inland Revenue PRs 104 billion. - The Supreme Court has completed its initial hearing, with a final decision expected by mid-April. A favorable ruling could effectively resolve related cases worth an estimated PRs 120 billion (MEFP ¶5.a). - Contain primary expenditure to PRs 15,958 billion (13.8 percent of GDP), while preserving space for priority social spending (MEFP ¶5.b). - Expected savings relative to the budget: PRs 54 billion from unnecessary energy subsidies and PRs 188 billion from unused contingency allocations. - Additional PRs 87 billion withheld from the Public Sector Development Programme (PSDP) allocation as a contingency. - Proportional expenditure cuts to be applied in the event of a revenue shortfall (MEFP ¶5.a). ### A. Fiscal Policy — reforms and institutional measures - Provincial and Federal Tax reforms: - Provinces amended their AIT regimes to align with federal income tax rules; implementation starting January 2025 and collection in September 2025 (end-October 2024 SB). - Transition of GST on services to a negative list effective FY26; move to a capital-based property tax (MEFP ¶5.e). - All tax policy proposals for the FY26 budget will undergo cost-benefit analysis; a full review of tax expenditures to be conducted so cost-ineffective measures are phased out starting July 1, 2025 (MEFP ¶7.a). - Strengthening tax administration: - CRM systems operational in Large Taxpayer Offices (LTOs) in Islamabad, Karachi, and Lahore (end-December 2024 SB); extended to Corporate Tax Units. - Tajir Dost scheme underperformed; increases in withholding taxes on unregistered retailers produced a 51 percent year-on-year increase in filers among retailers, wholesalers, and traders, and a 38 percent increase in filers with positive tax liabilities as of January 2025. - New indicative target on income tax revenue from this group introduced; bill submitted to Parliament proposing elimination of the “non-filer” category. - Modified QPC to monitor number of new taxpayers with a positive tax liability. - Federal-provincial fiscal relations: - National Fiscal Pact signed on September 30, 2024 (end-September 2024 SB). - Provinces agreed to devolution of specific expenditures in line with the 18th Constitutional Amendment. - Starting FY26, new PSDP projects impacting just one province expected to be financed directly from provincial budgets (MEFP ¶7.d). - Right-sizing Phase IV underway; Phase I recommendations nearly complete (September 2024 SB). Right-sizing committee to finalize recommendations for all ministries by end-June 2025. - Staff recommended developing a framework to guide provincial investment of accumulated cash surpluses in government securities through non-competitive bidding (MEFP ¶7.e). - Public financial management (PFM): - FY26 budget process advanced by one month; budget circular issued in January. - Monthly and mid-year budget execution reports to be enhanced (MEFP ¶7.g.i). - Ongoing implementation of PIMA and C-PIMA, introduction of a scorecard for new development projects, and application of a 10 percent cap on inclusion of new projects in the PSDP pipeline (end-January 2025 SB) (MEFP ¶7.g.ii). - Cash management improving; sweeping arrangements expected to be expanded to all current accounts, then savings accounts (MEFP ¶7.g.iii). - Spending transparency: - Continued roll-out of electronic procurement system at federal and provincial levels (with WB support) to improve spending transparency and public disclosure of beneficial ownership (MEFP ¶7.h). - Planned external audit by the Auditor General; access by National Accountability Bureau and Competition Commission to system information. - Institutionalizing tax policy: - Tax Policy Office (TPO) established within the Ministry of Finance last September. - Authorities requested IMF technical assistance to support TPO short- and medium-term work plans (MEFP ¶7.c). - World Bank providing interim analytical support for budget preparation, including cost-benefit analyses of tax proposals and tax expenditures to be published alongside the budget. - Debt management: - Authorities extended maturities of domestic debt issuance towards the end of 2024, achieving the end-December 2024 IT. - Approximately 80 percent of domestic debt consists of either short-term or floating-rate instruments. - Recommendation: revise medium-term debt management strategy before start of FY26 and publish it to inform annual borrowing plan. - Recommendation: conduct a thorough assessment of the local currency bond market to broaden the investor base. - Issuance of government guarantees (QPC), including those related to SOEs’ commodity operations, should continue to be contained to limit fiscal risks. ### B. Poverty Reduction and Social Protection - BISP (Benazir Income Support Programme) budget on pace to be fully executed; includes a significant increase in unconditional cash transfer (UCT). - FY25: 27 percent nominal increase over FY24. - January 2025 implementation (structural benchmark): increase in quarterly UCT Kafaalat program benefit from PRs 10,500 to PRs 13,500. - The benefit increase included an inflation adjustment and a one-time additional adjustment; stipend generosity rose from 9.6 percent to 12.4 percent of the bottom income quintile’s consumption basket. - An additional 700,000 families absorbed into the program, bringing total enrollment to 10 million in this fiscal year. - Planned further inflation adjustment: increase quarterly benefit from PRs 13,500 to PRs 14,500 (end-January 2026 new SB). - Goal: gradually increase generosity toward 15 percent of the bottom income quintile’s consumption basket upon availability of a new household survey (HIES) (MEFP ¶8). - BISP electronic payment model improvements: more banks participate; users moving from limited mandate to full mandate accounts (MEFP ¶9). - Conditional cash transfers (CCTs): - CCT expansion includes an increase in education program enrollment by 1.1 million to 10.8 million, and an anticipated 500,000 increase in nutrition program enrollment to 2.5 million. - Federal and provincial coordination to ensure CCT programs remain complementary, avoid overlap, and use a common base of users based on the National Socio-Economic Registry. - Provincial health and education spending: - Health and education spending (majority provincial, excluding social support programs) declined since 2018. - FY25 budget targeted a modest increase in general government health and education spending to 2.4 percent of GDP, but execution has fallen short, particularly in Sindh and Khyber-Pakhtunkhwa due to absorption issues. - Recommendation: provinces should improve efforts to execute spending in these areas and allocate a similar amount for FY26 (MEFP ¶10). ### C. Monetary, Exchange Rate, and Financial Sector Policies - Monetary policy: - Monetary policy has successfully lowered inflation and needs to remain sufficiently tight to anchor inflation durably inside the SBP’s target range. - MPC held the policy rate in their March 10 meeting to allow past rate cuts to feed through, to ward against external uncertainty, and to minimize risk of policy reversals given still-elevated core inflation. - Recommendation: continue changes to central bank communication for clarity on the MPC’s assessment of current and desired policy stance. - Revised SBP collateral framework and counterparty eligibility policy to become effective in July 2025 (in line with 2023 Safeguards Assessment) to mitigate financial and reputational risks from monetary policy operations (MEFP ¶14). - Reserves and FX market: - Reserve rebuilding through FX purchases should continue; reserve buildup during FY25H1 is welcome but buffers remain low for Pakistan’s conditions. - Authorities should monitor recent REER appreciation to avoid eroding competitiveness. - Exchange rate flexibility remains necessary to support external rebalancing and resilience to shocks. - Deepen the interbank FX market: banks currently satisfy FX needs mostly in house, resulting in low turnover; banks should use the interbank FX market to manage positions to deepen it. - Staff recommend unwinding the January 2022 shortening of the period of repatriation of export proceeds (assessed as an outflow CFM per the IMF Institutional View) once macroeconomic and BOP stability is being restored. - Financial sector stability: - Progress on undercapitalized institutions: - Two undercapitalized private banks: one completed a merger and the consolidated entity is compliant with capital requirements; the second’s shareholders executing a multi-step recapitalization plan. - The second bank missed the end-November 2024 SB because the plan lacked legally binding status; shareholders gave an unconditional commitment to fully align capital by end-April 2025. - If the second bank fails to meet capitalization requirements by end-April 2025, SBP ready to exercise powers to put the bank under resolution. - An undercapitalized public bank was put into liquidation and its license revoked in December 2024. - Microfinance banking sector: five of twelve microfinance banks remain undercapitalized; SBP should continue engagement with owners and potential investors. - Following approval of amendments to bank resolution and deposit insurance legislation in October 2024 (end-October 2024 SB), SBP should develop operational toolkit to implement the new framework via the “Financial Institutions Resolution Unit” (MEFP ¶16.a). *Source: 1pakea2025001-print-pdf — IMF staff document excerpt.* ### 13. Clarity on the structure and ground rules of the financial system post-2027 will allow ### 13. Clarity on the structure and ground rules of the financial system post-2027 will allow market participants to prepare and to ensure financial stability during the transition ### Financial system transition and mandated removal of riba - Authorities must identify and prepare for the implications of the mandated removal of ‘riba’ (interest) from the economy by January 2028, following the 26th constitutional amendment in October 2024 (MEFP ¶16.d). - Publication of the financial sector strategy, plan, and all necessary guidance is recommended to: - align expectations of market participants, investors, and regulators; - allow time to prepare; and - mitigate concerns about any possible cliff effect (proposed new SB, end-June 2026). - Broader strategic actions recommended: - develop a strategic action plan to support further capital market development to address the sovereign-bank nexus and improve access to private sector financing; - enhance AML/CFT effectiveness with respect to risk-based supervision, beneficial ownership transparency, and risk mitigation of trade-based money laundering (MEFP ¶16.e). ### Institutional assessment note - Staff is currently assessing whether the annual limit on cross-border transactions through debit/credit cards constitutes a CFM measure under the IMF Institutional View on the Liberalization and Management of Capital Flows. --- ### D. Energy Sector Policy ### Power sector recent performance and near-term targets - The end-June 2025 CD flow IT has been tightened from PRs 417 billion to PRs 337 billion, given strong overperformance in FY25H1 over FY24 (PRs 457 billion, 0.4 percent of GDP). - Drivers of overperformance: lower than anticipated interest rates and early initial impact of reforms to strengthen tariff payment/collection. - To achieve the revised target, authorities need: - timely notification of remaining quarterly tariff adjustments and monthly fuel cost adjustments; - continued effort on collection; - improved performance on loss prevention; - disbursement of remaining budgeted subsidies of PRs 353 billion. - Recent near-term cost-reducing measures: - application of the Captive Power Transition Levy (CPL, ¶15); - renegotiation of some independent power producer (IPP) contracts; - a temporary and limited subsidy (ending June 2026) across all non-lifeline consumer categories (MEFP ¶20.c). - Critical upcoming action: timely notification of the annual rebasing for FY26, set at cost recovery and incorporating cautious assumptions (July 1, 2025, new SB). ### Debt (CD) stock operation and DSS - Plan to convert most (up to 80 percent) of the existing CD stock (effectively CPPA payment arrears) to CPPA debt through a new sukuk, reducing the financial burden on the power sector (MEFP ¶20.b). - Expected outcomes of the operation: - significantly reduce interest charges on arrears (interest comprised nearly half of CD flow in recent years); - CD flow projected to continue to decline through the end of the operation (repayment of the sukuk) in FY31; - reduce need for budgeted power subsidy (one third of which is currently dedicated to CD stock clearance). - Financing requirement and safeguard: - payments for the operation must be entirely financed out of the existing debt service surcharge (DSS); - while DSS flows are expected to fully cover payments, the authorities must remove the existing DSS cap (end-June 2025 new SB) to allow DSS adjustment if needed. - Commitment: ensure that implementation of reforms will bring the flow of any new CD to zero by FY31 at the latest (MEFP ¶20.b). ### Structural reforms needed to restore power sector viability - Key measures: - continued progress on DISCO privatization and/or moves toward private concessions to improve DISCO performance and services; - sustained efforts to shift captive power to the electricity grid (¶15); - complete the restructuring of the National Transmission Dispatch Company to improve efficiencies; - privatizing inefficient public generation companies; - make further gradual progress toward a competitive electricity market (MEFP ¶20.d). ### Gas sector policy and CPPs - Gas tariffs should continue to be adjusted on time in line with revenue requirements, while maintaining a progressive tariff structure, including ahead of the next adjustment in mid-2025 (July 1, 2025, and February 15, 2026 new SBs). - Monitoring and reporting: - maintain momentum on developing a well-defined data set of CD statistics; - next step: start regular quarterly CD reporting to form the basis for a gas sector CD Management Plan (CDMP). - Captive Power Plants (CPPs) transition: - target shift of CPPs to the electricity grid remains a priority; - CPP cutoff from gas supplies did not happen at end-January 2025 as planned because ~25 percent of CPPs were not operationally ready to move to the grid. - Captive Power Transition Levy (CPL) design and timeline: - introduced on February 1, 2025; - set price of all gas for CPPs equivalent to the industrial grid plus a 5 percent levy; - levy will increase by an additional 5 percent every six months until it reaches 20 percent in August 2026; - levy proceeds—the difference between the actual price (levy included) and the OGRA-determined CPP gas price—will be transferred to the electricity grid to reduce the average effective grid tariff (evenly across the existing tariff structure). - Implementation and permanence: - authorities have facilitated service-level agreements between DISCOs and CPPs to enable CPPs to use the grid; - CPL was introduced as an ordinance, and to ensure permanence the authorities must pass CPL legislation through parliament (end-May 2025 new SB). --- ### E. Other Structural Policies ### Governance, SOE management, and private sector development - Governance Diagnostic Assessment (GDA): - publication target experienced operational delays related to identification of a focal point (proposed resetting of end-July 2025 SB to end-August 2025). - authorities committed to publish GDA and an action plan to implement GDA recommendations (proposed new SB, end-October 2025). - Anti-corruption institutional strengthening: - authorities are working to enact legislation to publish asset declarations of high-level public officials; legislative delays require resetting end-February 2025 SB to end-June 2025. - Cabinet agreement to publish the full UNCAC Review Report is expected after an assessment by the cabinet committee led by the Law Ministry. - Banks’ access to asset declarations for AML/CFT purposes enhanced via FBR’s new digital portal; future access will include high-level provincial public officials. - Provincial anti-corruption establishments will be authorized to receive and request financial intelligence from the Financial Monitoring Unit in relation to corruption-related investigations. - SOE legal framework and SWF operationalization: - ensure all SOEs are subject to the SOE Act and SOE Policy, including amending laws of nine remaining statutory SOEs (end-June 2025 SB). - Operationalization of the SWF should occur only after governance safeguards for the SWF and SOEs transferred to it meet the new SOE governance framework and international standards. - Needed SWF Act amendments should include: - clarifying SWF’s mandate and strengthening governance arrangements; - requiring transparent and competitive procedures for divestment and procurement; - ensuring appropriate fiscal safeguards; and - subjecting SWF-SOEs to the SOE Act (MEFP ¶23.b; end-March 2026 proposed reset SB). - SOE transparency and governance improvements: - development partner support has assisted in establishing business plans, statements of corporate intent, and published and audited financial statements and annual reports for all SOEs, and identification/contracting of public service obligations. - further acceleration needed: revision of manuals, issuance of supplementary guidance notes, establishment of majority-independent boards (currently in only about half of commercial SOEs). - Central Monitoring Unit (CMU) should continue to refine its electronic database to meet SOE Act reporting requirements and align reporting with OECD best practice. ### Commodity markets, trade, and industrial policy - Commodity market interventions: - authorities refrained from wheat procurement operations during the past year; absence of government-imposed support prices contributed to subdued food inflation. - provinces have paid off most legacy debt related to commodity operations. - authorities are working toward a new food security framework for wheat that avoids market distortions and preserves fiscal sustainability. - recommended: broaden efforts to other commodities, review relevant legislation, and empower competition authorities. - Trade and industrial policy recommendations: - address anti-export bias from restrictive trade policies and an ineffective tariff structure (MEFP ¶¶26–28). - new National Tariff Policy (FY25–30) should substantially streamline and reduce tariffs (customs and regulatory duties), reduce non-tariff barriers, and move away from special duties for particular industries. - automotive sector: next automobile policy (FY26–31) should reduce tariffs and preferential support for local production. - authorities will remove the existing ban on commercial imports of used vehicles (new end-July 2025 SB for submission of legislation). - ineffective incentives for SEZs, EPZs, STZs and other zones should be phased out where contractual provisions allow: - end-June 2025 SB for initial actions; - new end-December 2025 SB for comprehensive implementation plans for STZ/other zones. - no new special zones should be created. - Macroeconomic statistics strengthening: - PBS published quarterly estimates of the expenditure side for the first time in December. - field work for three major surveys (Agricultural Census, Labor Force Survey, and Household Integrated Economic Survey) is at an advanced stage; results will be published by end-December (MEFP ¶29). - preparations underway for three other major surveys in FY26 (Family Budget Survey, large and small-scale manufacturing) and to commence monthly data collection from July 2025 for a new producer price index. --- ### RSF ARRANGEMENT: BOOSTING CLIMATE RESILIENCE ### Climate exposure, risks, and emissions - Pakistan is highly exposed to extreme weather events, creating significant macroeconomic, fiscal, and development risks. - Example analysis: an additional 1 percent of GDP in investment in climate adaptation and resilient infrastructure per year for five years would reduce the negative impact of a natural disaster shock on growth by about half, five years after the shock, and allow a much quicker return of the economy to the previous GDP level (Annex III). - Pakistan’s greenhouse gas emissions have nearly doubled in 30 years; Pakistan is among the world’s top emitters, driven by agriculture and energy sectors. - Main source of energy consumption: fossil fuels, with weak energy policies (including, until recently, underpricing and large subsidies) exacerbating inefficient energy use. ### National commitments and diagnostics - Authorities’ commitments and plans: - 2023 National Adaptation Plan sets sectoral adaptation agenda (Annex II.D) and authorities are working with development partners on implementation and diagnosing policy gaps. - Diagnostics referenced: IMF’s 2023 C-PIMA, World Bank’s 2022 Country Climate Development Report, ADB’s 2024 Climate and Disaster Resilience Enhancement Program. - Mitigation: 2021 Nationally Determined Contribution (NDC) sets a 15-50 percent reduction target (below business-as-usual emission levels) and an ambitious transportation transition for Pakistan by 2030 (Annex II.E). ### RSF objectives and targeted reform measures - RSF aims to support authorities to address adaptation and mitigation policy gaps, focusing on macro-critical and/or transformative reform measures to: - address long-standing vulnerabilities to climate shocks; - build economic resilience and prospective balance of payments stability; - catalyze support from other multilateral/regional partners and private sector investment by strengthening Pakistan’s green investment enabling environment. - Specific ways the RSF package will reduce balance of payments stability risks: - (i) strengthen public investment and budget planning processes at all levels to assess and prioritize resilience projects (RMs 1, 2, and 3); - (ii) advance more efficient use of scarce water resources, including improving water pricing practices (RMs 4 and 5); - (iii) strengthen federal-provincial coordination of natural disaster risk financing (RM 6); - (iv) improve Pakistan’s climate information architecture and disclosure of climate-related risks by banks and corporates to improve the enabling environment for climate finance (RMs 7 and 8); - (v) shift away from imported fuels/petroleum products via decarbonization (RMs 9, 10, and 11); - other reform measures (RMs 12 and 13) to support mitigation commitments and reduce macro-critical risks. ### Reform Area 1: Mainstreaming Climate Issues in Budget and Investment Planning - RSF support priorities: - increase the weight of climate elements in PSDP selection for infrastructure projects (RM1, MEFP ¶32). - revise public investment management (PIM) policies such that, for potential projects costing PRs 7.5 billion or more, only those that have gone through climate assessments will be included in the PSDP (RM2, MEFP ¶32). - build on federal initiatives to introduce and expand green budgeting; enhance federal green budgeting transparency and expand green budgeting practices to provincial governments (RM3, MEFP ¶33). - These reforms fill gaps in the authorities’ C-PIMA Action Plan adopted in December 2023 (a completed SB under the 2023-24 Stand-By Arrangement), where much progress has already been made. *Source: IMF staff report (excerpts provided from content unit 1pakea2025001-print-pdf).* ### 21. Measures to improve irrigation water pricing and revenue collection will bolster ### Measures to improve irrigation water pricing and revenue collection will bolster ### Irrigation water pricing and revenue collection - Pakistan’s irrigation system suffers from weak revenues and irregular tariff adjustments, hindering cost recovery and limiting provinces’ ability to cover operational and maintenance expenditures. - Consequences identified: - Low service standards, poor reliability and supply adequacy. - Problems related to waterlogging, soil salinization, groundwater depletion. - Water insecurity and low irrigation productivity, leaving Pakistan more exposed to climate shocks (Annex II ¶4, Annex II. Figure 7). - Artificially low irrigation water tariffs discourage efficient water use. - RSF-supported measures: - Digitization of revenue collection processes for irrigation authorities in three provinces, following Punjab’s recent example (RM4, MEFP ¶34). - Introduction of an irrigation water tariff adjustment mechanism in Punjab and Sindh (RM5, MEFP ¶34), which represent the large majority of Pakistan’s agricultural production. - Expected outcomes: - Improved water distribution efficiency and improved delivery system. ### Disaster risk financing (DRF) and disaster risk management (DRM) - Identified gap: Inconsistent DRM practices between the federal and provincial governments and weak federal-provincial DRM and DRF coordination; not currently covered by development partners (Annex II. ¶21). - RSF-supported measure: - RM6 (MEFP ¶35) to support adoption of an implementation framework for the National Disaster Risk Financing Strategy (NDRFS). - Establishment of a coordination mechanism consolidating federal and provincial DRF needs and facilitating smooth national disbursement of disaster financing and access to appropriate financing instruments in the event of a relevant shock. - Expected outcome: - Fills a gap in Pakistan’s existing DRM framework. ### Strengthening the climate information architecture and management of climate-related financial risk - Objectives: - Strengthen enabling environment for green investment. - Improve climate-related financial risk management and supervision. - Adopt and implement Pakistan’s green taxonomy (in development with the World Bank; anticipated completion by end-June 2025). - RSF-supported measures: - SBP to issue guidelines for implementation of climate-related financial risk management and supervision, in line with 2022 BCBS principles, applicable to supervised commercial banks (RM7, MEFP ¶36). - SECP to develop phased guidelines enabling listed companies to disclose climate-related risks and opportunities information, including taxonomy-aligned data (RM8, MEFP ¶37). - Expected outcome: - Allow banks and private firms to incorporate climate-related risk considerations into risk management and investment activities, supporting adaptation and green finance. ### Promoting green mobility and transport decarbonization - Package of reforms: - Adoption of a carbon levy via the FY26 Finance Act (RM9, MEFP ¶38), phased in over two years for gasoline and diesel products, and applied to fuel oil. - Annual BISP UCT benefit inflation adjustments to counterbalance possible distributional impacts (inflation ¶7). - Implementation support for the 2025-30 New Energy Vehicle (NEV) Policy to ensure 30 percent of new vehicles are EVs by 2030, including: - A subsidy scheme for EVs combined with a supplementary sales tax on ICE vehicles (RM10, MEFP ¶38), calibrated revenue-neutral and aligned with Pakistan's NDC targets for new EV uptake. - A viability gap funding framework for private sector development of charging station infrastructure via one-off subsidies (RM11, MEFP ¶38), with modalities to be determined in line with FAD recommendations. - Quantified impact (CPAT and transport module): - By 2030 these policies would reduce emissions by 9.6 MtCO2e per year relative to the current policy scenario and support Pakistan meeting its NDC commitments (Annex II. ¶14, Figure 15). - The emission reduction is equivalent to a 4 percent reduction from the baseline CO2 emission in 2030. - Attribution and carbon pricing details: - Estimate attributable to RM9—5 per liter on top of current policy efforts. - Current policy scenario includes recent increase of PDL to Rs 70 per liter of gasoline and diesel in March 2025. - Current PDL translates to carbon prices in the range of US$100-112 per tCO2. - RM9 expected to raise carbon prices to US$107-120 per tCO2, while introducing a carbon price on fuel oil for the first time at US$100 per tCO2. - Additional benefit: - Significant reduction in health impacts from pollution in Pakistani cities. ### Aligning energy sector reforms with national climate mitigation commitments - Problems noted: - Energy subsidies are poorly targeted, resulting in overconsumption among upper income quintiles. - RSF-supported measures: - RM12 (MEFP ¶39): Transfer power subsidies from the budget and tariff structure to budget-financed, targeted subsidies delivered through BISP, supporting the poorest forty percent of energy consumers while wealthier consumers face higher tariffs. - RM13 (MEFP ¶40): Implement minimum energy performance standards (MEPS) requirements for new electric appliances (fans, LEDs, refrigerators, air conditioners, and motors) by setting targets for each by the end of the RSF, and ensuring MEPS applicability in all public procurement. - Expected outcomes: - Reduce regressive overconsumption, losses, and wastage. - Deliver large energy savings and spur private sector efficiency adoption, complementing RMs 9 and 12. ### Program modalities, financing, and targets - Updates to EFF-related conditionality (MEFP Tables 1-2) include: - Modifications to end-June targets: tighten PCs on the floor on SBP net international reserves and ceiling on SBP net domestic assets; raise end-June PC on number of tax returns (definition narrowed); tighten IT on power sector payment arrears; reduce PC on general government primary deficit and IT on net tax revenues by FBR; replace IT on net tax revenues from Tajir Dost with an IT on income tax revenues collected by the FBR from retailers. - New quantitative targets: New PCs and ITs proposed for end-September 2025 and end-December 2025. - Structural Benchmarks: Reset test dates for four SBs and add new SBs covering fiscal structural reforms, governance, the energy sector, and trade liberalization. - RSF access and phasing: - Pakistan is eligible for RSF financing (Group C). - Access proposed at 49.2 percent of quota (SDR 1,000 million). - Access to begin in parallel with the second review of the EFF and continue over remaining reviews; monitored through semiannual reviews concurrent with EFF reviews. - RSF to be used as budget support to create fiscal space and substitute for more expensive domestic commercial financing; disbursements will increase reserves. - Financing status and figures: - Program fully financed with firm commitments for next 12 months and good prospects for remainder of Fund-supported program. - US$2.6 billion already disbursed or expected to disburse in coming months, including from Saudi Arabia, the Islamic Development Bank, and a commercial loan backed by an ADB-partial guarantee. - Firm commitments in place for an additional US$1 billion in next 12 months. - Pakistan: Program Financing (Millions of U.S. Dollars) — figures as presented: - A. Financing gap (without RSF) 1/: 2024/25 = 3,636; 2025/26 = 4,428; 2026/27 = 3,032; 2027/28 = 1,018; Total (FY25-28) = 12,113 - Underlying BoP Gap 2/: 2024/25 = -933; 2025/26 = 1,078; 2026/27 = -1,794; 2027/28 = 25; Total (FY25-28) = -1,623 - Gross international reserves (+= accumulation, without RSF): 2024/25 = 4,568; 2025/26 = 3,350; 2026/27 = 4,826; 2027/28 = 992; Total (FY25-28) = 13,736 - B. IMF EFF: 2024/25 = 2,036; 2025/26 = 2,028; 2026/27 = 2,032; 2027/28 = 1,018; Total (FY25-28) = 7,113 - C. Other program financing (A-B) 3/: 2024/25 = 1,600; 2025/26 = 2,400; 2026/27 = 1,000; 2027/28 = 0; Total (FY25-28) = 5,000 - Commercial loan (w/ ADB partial guarantee): 2024/25 = 1,000; 2025/26 = 1,000 - Saudi Arabia Oil Financing: 2024/25 = 400; 2025/26 = 800; 2026/27 = 1,200 - Additional IsdB Trade Financing: 2024/25 = 200; 2025/26 = 200; 2026/27 = 400 - Additional Commitments 3/: 2025/26 = 1,400; 2026/27 = 1,000 - D. RSF Disbursement: 2024/25 = 0; 2025/26 = 410; 2026/27 = 514; 2027/28 = 412; Total (FY25-28) = 1,337 - Additional change in GIR (+ = accumulation): 2024/25 = 0; 2025/26 = 410; 2026/27 = 514; 2027/28 = 412; Total (FY25-28) = 1,337 - Memorandum items: - IFI Budget Support: 2024/25 = 1,100; 2025/26 = 250; 2026/27 = 550; 2027/28 = 650; Total (FY25-28) = 2,550 - WB: 0 across all years - ADB: 2024/25 = 1,100; 2025/26 = 250; 2026/27 = 550; 2027/28 = 650; Total (FY25-28) = 2,550 - External Bond Issuance 4/: 2025/26 = 400; 2026/27 = 1,000; 2027/28 = 2,000; Total (FY25-28) = 3,400 - (Net) Commercial Bank borrowing 5/: 2024/25 = 815; 2025/26 = 85; 2026/27 = 853; 2027/28 = 1,022; Total (FY25-28) = 2,775 - Footnotes (as presented): 1/ Excluding financing needs associated with rollover of short-term bilateral financing, and expected commercial bank rollovers; 2/ Change in reserves absent IMF and other program financing; 3/ Additional financing commitments, including from China and IFIs.; 4/ Including through prospective "Panda" bond in FY26; 5/ Including through ITFC facility. ### Risks, capacity to repay, and staff appraisal highlights - Enterprise risks: - Broadly unchanged since EFF request approval; residual risks to program performance persist. - RSF increases Fund’s financial exposure but helps mitigate financial risks by improving climate resilience and reduces business risks by addressing critical challenges. - Capacity to repay: - Improved somewhat but subject to significant downside risks and dependent on policy implementation and timely external financing. - Fund’s exposure would peak at SDR 9,466 million in September 2027 (466 percent of quota and about 51 percent of projected gross reserves in 2027). - Pakistan’s outstanding debt to the Fund as a percent of gross international reserves is above the 75 percentile of comparator countries. - Three flow indicators (debt-service to the Fund as a percent of government revenues, exports, and gross international reserves) are all above the 75 percentiles of the comparator group. - Risks include resistance to reforms, underperformance of tax revenue, high gross financing needs, low gross reserves, sizeable net FX derivative position of the SBP, sociopolitical tensions, and external geoeconomic uncertainties. - Adequate and timely execution of firm and credible financing assurances from official creditors remains essential. - Staff appraisal main points: - Program implementation has restored economic stability and is laying foundations for sustainable growth, but gains are fragile. - Full implementation of fiscal reforms is necessary to bolster fiscal sustainability; strict adherence to FY25 budget recommended. - Revenue administration improvements, broadened tax base, legislative approval of AIT by provinces, and the National Fiscal Pact are important achievements. - Monetary policy: SBP should remain appropriately tight and data-dependent; continue to deepen interbank FX market and build gross international reserves. - Financial sector: Complete addressing undercapitalized institutions; implement Safeguards Assessment recommendations; clarify post-2027 regulatory/institutional changes. - Social protection: Maintain UCT benefits in real terms; improve complementarity between BISP and provincial CCT programs; absorb greater provincial health and education spending. - Energy sector: Continue timely tariff adjustments in line with cost recovery and implement broader reforms across distribution, transmission, and generation. - Structural reforms: Implement SOE governance framework, reduce protection and subsidies, improve macroeconomic statistics. - RSF intent: Help incorporate climate considerations into PIM and budgeting, strengthen water management and infrastructure, improve federal-provincial DRF coordination, enhance climate finance enabling environment, and address mitigation and macroeconomic risks via energy and transport reforms. *Source: 1pakea2025001-print-pdf* ### 40. Risks remain elevated amidst rising global uncertainty. External risks are increasing, ### 40. Risks remain elevated amidst rising global uncertainty ### External and domestic risk assessment - External risks are increasing, notably from the economic and financial impact of the April 2 US tariff announcements and subsequent market reaction. - Broader geopolitical tensions and elevated global economic policy uncertainty present potential spillovers to (already tight) global financial conditions and commodity prices. - Domestic political economy pressures to unwind and delay reforms remain present and may intensify, which would quickly eviscerate Pakistan’s hard-won economic stability. ### IMF program status and staff position - On the basis of the authorities’ program implementation and policy commitments, staff supports the authorities’ request for: - completion of the first review under the EFF, and - an RSF arrangement. - Staff also supports the authorities’ request for modification of performance criteria under the EFF. ### Key economic indicators and recent developments - Growth: - Growth rebounded in FY24, supported by agriculture and services. - Current account and remittances: - Surging remittances supported a move into current account surplus in FY25 H1, even as imports rebounded. - Reserves and SBP derivatives: - Although reserves have risen from their lows in early 2023, further reserve build-up is critical. - The narrowing of SBP’s derivative position should continue. - Exchange rate and external conditions: - Stronger external conditions have helped the exchange rate stabilize. - Credit: - Credit to the private sector picked up sharply in late 2024, largely due to non-fundamental factors. ### Financial sector and market indicators - Policy rates and transmission: - The SBP has cut the policy rate by a cumulative 1000 bps since June 2024. - Policy rate cuts have been broadly passed through to market rates. - Sovereign spreads and market reaction: - Pakistan’s bond spreads have been declining, but rose sharply following the April 2 US tariff announcements. - Equities and portfolio flows: - The stock market boom continued through early 2025, some portfolio outflows notwithstanding. - Net foreign portfolio purchases shown at daily aggregation (10 WDA) in PRs Million illustrate episodic flows alongside the KSE 100 index movements. - Liquidity operations: - Liquidity injections via OMOs have moderated somewhat. ### Banking sector structure and soundness - Non-performing loans: - NPLs rose in FY24 but remained relatively contained in the context of the large economic deceleration. - Credit allocation: - The banking system remains oriented toward providing credit to the government, leaving Pakistan behind peers in terms of private credit relative to the size of its economy. - Capital and profitability: - In part due to investments in government securities with zero risk weights, banks’ capital ratios appear healthy. - Banks remain very profitable. - Liquidity: - Banks are highly liquid; indicators such as liquid assets to total assets and liquid assets to total deposits show strong cushions. ### Climate indicators — mitigation - Emissions and intensity: - Pakistan is among the world’s top emitters. - Although Pakistan's per capita emissions are relatively low compared to other MCD countries, its carbon intensity (emissions per unit of GDP) is relatively high compared to peers in the MCD region. - Emissions have nearly doubled in the past 20 years and stand significantly above the world average. - Sectoral composition: - The agriculture, manufacturing, and energy sectors account for 70% of the country’s emissions. - Energy consumption and trade: - Energy consumption has nearly doubled in the last twenty years, while energy production, primarily used to meet domestic demand, has stagnated. - As a result, Pakistan imported over 50% of its final energy consumption in 2022. ### Climate indicators — adaptation and risks - Vulnerability and readiness: - Pakistan is ranked in the 34th position in the IMF-Adapted ND-GAIN. - Pakistan is vulnerable to climate risks yet faces low readiness to face these risks. - Key hazards and impacts: - Water risks and disaster risk management drive food insecurity in Pakistan. - Pakistan is particularly vulnerable to floods, droughts, storms and extreme temperatures. - The country frequently faces multiple and concurrent hazards yearly, yet most damages have been tied to floods. - Floods in 2010 and 2022 have affected more than 20 million inhabitants. - Disaster statistics: - Frequency and intensity metrics show floods, storms, droughts, wildfires, landslides, extreme temperature events, and mass movement (dry) as recurrent hazards, with floods driving the largest number of people affected. ### Capacity to repay indicators - Comparative framework: - Capacity to Repay (CtR) indicators are presented relative to GRA-only borrowing countries and all programs, using IMF Finance Department and World Economic Outlook data. - Notes clarify: T = date of GRA arrangement approval; comparator series runs up to T+5; total debt service to the Fund consists of GRA, RST and SDR-related obligations and reflects prospective payments, including for the current year. *Source: 1pakea2025001-print-pdf — Pakistan chapter, IMF staff figures and text.* ### 7. All charts use data at the time of program approval with the exception of the chart on the right-hand side of section ### 7. All charts use data at the time of program approval with the exception of the chart on the right-hand side of section C, which uses ex-post data due to data limitations. ### Charts and data note - All charts use data at the time of program approval except the chart on the right-hand side of section C, which uses ex-post data due to data limitations. - The peak value for LBR (2011) is 81.7% and is not fully visible in the chart. ### Table 1 — Pakistan: Selected Economic Indicators, 2018/19–2024/25 (key statistics) - Population: 236.0 million (2023/24) - Main exports: Textiles (US$16.3 billion, 2023/24) - Unemployment: 6.2 percent (2021/22) - Poverty rate: 21.9 percent (at national line; 2018/19) - Per capita GDP: US$1,572.3 (2023/24) - Gross reserves (in millions of U.S. dollars): 7,274; 12,175; 17,297; 9,821; 4,455; 9,381; 9,390; 12,757; 13,921 (multi-year series shown in table) - In months of next year's imports of goods and services (reserves): 1.7; 2.3; 2.5; 1.9; 0.8; 1.6; 1.6; 2.1; 2.3 (multi-year series shown in table) - Key fiscal indicators (selected years, percent of GDP): Revenue and grants 11.3; 13.3; 12.4; 12.1; 11.5; 12.6; 12.6; 15.4; 15.9; Expenditure (including statistical discrepancy) 19.1; 20.3; 18.5; 20.0; 19.2; 19.3; 19.4; 21.4; 21.6; Budget balance (including grants) -7.8; -7.0; -6.0; -7.8; -7.7; -6.7; -6.8; -6.0; -5.6 - General government debt incl. IMF obligations (percent of GDP) series: 78.7; 80.8; 74.7; 77.3; 78.2; 69.2; 70.1; 71.4; 73.6; 71.2 (multi-year series shown) - External public and publicly guaranteed debt (in US$ millions) and debt service (multi-year series shown): External public and publicly guaranteed debt 277.2; 312.6; 301.5; 245.4; 259.0; 244.8; 244.4; 249.4; 251.4; Debt service 40.8; 51.5; 34.1; 37.5; 57.9; 42.0; 42.0; 37.2; 40.4 - Notes: 1/ Fiscal year ends June 30. 2/ Including changes in inventories. 3/ Excludes one-off transactions (details listed in source table). 4/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan. ### Table 2 — Pakistan: Medium-Term Macroeconomic Framework, 2019/20–2029/30 (selected projections) - Real GDP at factor cost (annual series): -0.9; 5.8; 6.2; -0.2; 2.4; 2.5; 3.2; 2.6; 3.6; 4.1; 4.5; 4.5; 4.5 - GDP deflator at factor cost (annual series): 9.9; 10.4; 14.1; 25.9; 23.2; 21.9; 9.5; 5.1; 7.7; 6.5; 6.5; 6.5; 6.5 - Consumer prices (period average) (annual series): 10.7; 8.9; 12.2; 29.2; 23.4; 23.4; 9.5; 5.1; 7.7; 6.5; 6.5; 6.5; 6.5 - Gross national saving (percent of GDP) series: 13.3; 13.7; 10.9; 13.1; 13.0; 12.5; 12.7; 13.5; 13.9; 14.3; 14.5; 15.0; 14.9 - Current account balance (in percent of GDP) series: -1.5; -0.8; -4.7; -1.0; -0.2; -0.5; -0.9; -0.1; -0.4; -0.5; -0.8; -0.9; -1.1 - Gross reserves (in months of imports) series: 2.3; 2.5; 1.9; 0.8; 1.6; 1.6; 2.1; 2.3; 2.8; 3.4; 3.4; 3.5; 3.7 - General government and government guaranteed debt (incl. IMF; % GDP) series: 86.2; 79.4; 82.3; 83.2; 73.0; 74.1; 75.1; 77.6; 75.6; 73.5; 70.3; 67.0; 64.0 - Primary balance (excluding grants) series: -1.6; -1.2; -3.1; -0.9; 0.9; 0.9; 2.0; 2.1; 1.6; 2.0; 2.0; 2.0; 2.0 - Memorandum: Nominal GDP (market prices, billions of Pakistani rupees) series: 47,540; 55,836; 66,658; 83,949; 106,679; 105,616; 121,662; 115,446; 129,517; 143,839; 160,079; 178,157; 198,176 ### Table 3a — Pakistan: Balance of Payments, 2019/20–2029/30 (selected flows, US$ millions) - Current account (US$ millions) series: -4,449; -2,820; -17,481; -3,275; -665; -1,695; -3,578; -229; -1,493; -2,125; -3,851; -4,735; -5,744 - Balance on goods (US$ millions) series: -21,109; -28,634; -39,050; -24,819; -22,065; -22,089; -25,428; -26,330; -26,618; -27,184; -28,546; -30,213; -31,738 - Exports, f.o.b. (US$ millions) series: 22,536; 25,639; 32,493; 27,876; 31,101; 30,967; 31,751; 31,305; 32,981; 35,970; 38,591; 41,491; 44,629 - Imports, f.o.b. (US$ millions) series: 43,645; 54,273; 71,543; 52,695; 53,166; 53,056; 57,180; 57,634; 59,599; 63,154; 67,137; 71,704; 76,368 - Services (net) (US$ millions) series: -3,316; -2,516; -5,840; -1,042; -2,306; -2,822; -3,190; -3,716; -4,090; -4,513; -4,975; -5,501; -6,102 - Income (net) (US$ millions) series: -5,459; -4,400; -5,248; -5,765; -8,623; -8,996; -6,636; -8,440; -8,802; -8,977; -9,426; -9,543; -9,713 - Current transfers: credit (of which Workers' remittances) (US$ millions): Workers' remittances series: 23,131; 29,450; 31,279; 27,333; 30,250; 30,251; 29,831; 36,201; 35,761; 36,161; 36,461; 37,556; 38,487 - Financial account (US$ millions) series: 6,479; 8,268; 10,207; -1,643; 5,446; 6,083; 6,273; 4,272; 3,271; 5,943; 5,920; 9,018; 10,207 - Net use of Fund credit and loans (US$ millions): 2,089; -580; 38; 199; 1,362; 1,362; 498; 519; 1,872; 1,424; -757; -1,734; -986 - End-period gross official reserves (millions of U.S. dollars) (multi-year): 12,175; 17,297; 9,821; 4,455; 9,381; 9,390; 12,757; 13,921; 17,682; 23,022; 24,426; 27,069; 30,640 - In months of next year's imports of goods and services (reserves): 2.3; 2.5; 1.9; 0.8; 1.6; 1.6; 2.1; 2.3; 2.8; 3.4; 3.4; 3.5; 3.7 ### Table 3b — Pakistan: External Gross Financing Requirements and Sources, 2022/23–2029/30 (summary) - Gross External Financing Requirements (A) (US$ millions) series: 23,859; 20,357; 21,368; 18,813; 16,399; 19,316; 19,757; 31,351; 23,133; 22,162 - Current account deficit (US$ millions) series: 3,275; 665; 1,695; 3,578; 229; 1,493; 2,125; 3,851; 4,735; 5,744 - Amortization (US$ millions) series: 19,617; 18,049; 18,030; 13,719; 14,653; 17,257; 16,510; 25,313; 16,665; 15,432 - Available Financing (B) (US$ millions) series: 17,327; 22,278; 23,298; 18,175; 18,895; 19,239; 21,551; 31,325; 25,776; 25,733 - Underlying BOP Gap (C=A-B) (US$ millions) series: 6,532; -1,921; -1,930; 638; -2,496; 78; -1,794; 25; -2,643; -3,571 - Borrowing from IMF (EFF) (D) (US$ millions) series: 1,166; 3,005; 3,005; 2,014; 2,036; 2,028; 2,032; 1,018; 0; 0 - Reserves without RSF (decrease = +) (E=C-D-E) (US$ millions) series: 5,366; -4,926; -4,935; -3,376; -4,532; -3,350; -4,826; -992; -2,643; -3,571 - Gross official reserves (stock, US$ billions) series (memorandum): 4.5; 9.4; 9.4; 12.8; 13.9; 17.7; 23.0; 24.4; 27.1; 30.6 - In months of prospective imports (memorandum): 0.8; 1.6; 1.6; 2.1; 2.3; 2.8; 3.4; 3.4; 3.5; 3.7 ### Table 4a / 4b — Pakistan: General Government Budget, 2019/20–2029/30 (selected fiscal aggregates) - Revenue and grants (billions of PRs) series (selected): 6,306; 6,933; 8,076; 9,671; 13,321; 13,321; 18,676; 18,402; 19,663; 22,552; 25,410; 28,279; 31,459 - Tax revenue (billions of PRs): 4,748; 5,755; 6,943; 8,448; 11,159; 11,159; 14,954; 14,545; 17,035; 19,640; 22,174; 24,681; 27,460 - Expenditure (including statistical discrepancy) (billions of PRs): 9,649; 10,306; 13,301; 16,137; 20,476; 20,476; 26,020; 24,888; 26,250; 28,164; 30,781; 33,906; 37,228 - Overall Balance (including grants) (billions of PRs): -3,343; -3,373; -5,225; -6,465; -7,155; -7,155; -7,344; -6,485; -6,588; -5,612; -5,372; -5,627; -5,769 - Financing composition (billions of PRs): External and Domestic disaggregation provided in table (selected entries include IMF and bank/nonbank financing series) - Fiscal ratios (percent of GDP, selected): Revenue and grants 13.3; 12.4; 12.1; 11.5; 12.6; 12.6; 15.4; 15.9; 15.2; 15.7; 15.9; 15.9; 15.9; Expenditure 20.3; 18.5; 20.0; 19.2; 19.3; 19.4; 21.4; 21.6; 20.3; 19.6; 19.2; 19.0; 18.8 - Debt aggregates (percent of GDP, selected): General government debt incl. IMF obligations 80.8; 74.7; 77.3; 78.2; 69.2; 70.1; 71.4; 73.6; 71.9; 70.0; 67.0; 63.9; 61.0 ### Table 5 — Pakistan: Monetary Survey, 2020/21–2025/26 (selected levels and growth) - Broad money (levels, billions PRs) multi-quarter series: 23,662; 26,768; 30,943; 35,882; 35,594; 35,583; 36,147; 39,829; 41,209; 42,637; 44,115; 45,644 - Net foreign assets (NFA) (levels, billions PRs) series: 1,232; -195; -1,797; -1,138; -998; -514; -514; -141; 13; 158; 436; 521 - Net domestic assets (NDA) (levels, billions PRs) series: 22,431; 26,963; 32,740; 37,020; 36,592; 36,097; 36,661; 39,970; 41,196; 42,479; 43,679; 45,123 - Reserve money (levels and contributors) and banks' reserves series provided - Broad money growth (percent change) entries: 16.0; 13.1; 15.6; 16.0; 15.0; 10.1; 9.0; 11.0; 15.8; 19.8; 22.0; 14.6 - Memorandum items include Velocity, Money multiplier, Currency to broad money ratio, Currency to deposit ratio, Foreign currency to deposit ratio, Reserves to deposit ratio, and NFA changes in US$ terms. ### Table 6 — Pakistan: Financial Indicators for the Banking System, 2013–24 (selected ratios) - Regulatory capital to risk-weighted assets (Dec series): 14.9; 17.1; 17.3; 16.2; 15.8; 16.2; 17.0; 18.6; 16.7; 17.0; 19.7; 20.6 - Nonperforming loans (NPLs) to gross loans (Dec series): 13.3; 12.3; 11.4; 10.1; 8.4; 8.0; 8.6; 9.2; 7.9; 7.3; 7.6; 6.3 - Provisions to NPLs (Dec series): 78.4; 79.8; 84.9; 85.0; 87.2; 83.8; 81.4; 88.3; 91.2; 89.5; 92.7; 103.9 - Return on assets (after tax) (Dec series): 1.1; 1.5; 1.5; 1.3; 0.9; 0.8; 0.8; 1.0; 1.0; 1.0; 1.6; 1.3 - Liquid assets to total assets (Dec series): 48.6; 49.2; 53.8; 53.7; 54.0; 48.7; 49.7; 54.8; 55.4; 56.6; 63.5; 60.3 - Loans/Deposits (Dec series): 49.5; 48.2; 46.4; 46.6; 50.1; 55.8; 51.7; 44.8; 46.6; 50.4; 41.8; 49.7 ### Table 7 — Pakistan: Indicators of Fund Credit, 2023–47 (SDR and percent metrics) - Disbursements (SDR million) series: 894; 2,116; 1,674; 1,828; 2,058; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0... - GRA (2023 SBA, 2025 EFF) disbursements (SDR million) series: 894; 2,116; 1,520; 1,520; 1,520; 0; 0; 0... - RSF disbursements (SDR million) entries indicate specific RSF phasing (table provides detail) - Stock of existing and prospective Fund credit (SDR million) series: 5,660; 6,512; 7,417; 8,766; 9,466; 7,946; 6,977; 6,201; 5,201; 4,202; 4,103; 3,217; 2,330; 1,633; 1,167; 919; 819; 719; 619; 519; 419; 319; 219; 119; 42; 0 (multi-year projection series shown) - Fund obligations (repurchases and charges) series and projections detailed (Obligations, Principal repurchases, Charges and interest) - Fund credit outstanding in percent of Quota and other denominators series (detailed percent series by year provided) - Memorandum items include Quota (millions of SDRs = 2,031) and gross official reserves (millions of U.S. dollars) multi-year projection series. ### Table 8a / 8b — Schedule of Reviews/Purchases Under the EFF and Proposed RSF Disbursements - EFF schedule (millions of SDRs / percent of Quota): Approval March 15, 2025: 760 (37.4); First review & end-December 2024 performance continuous criteria Sept 25, 2024: 760 (37.4); Subsequent semiannual reviews each 760 (37.4) through March 15, 2027; Total 5,320 (261.9) - RSF proposed schedule (millions of SDRs / percent of Quota): Approval May 2, 2025: 0.0 (0.0); Disbursements linked to Implementation of RMs with multiple entries of 76.9 (3.8) each; Total 1,000 (49.2) ### Table 9 — Decomposition of Public Debt and Debt Service by Creditor, 2023/24–2025/26 (selected breakdown) - Total debt (US$ million, Dec-24): 281,707 (100.0 percent total debt) - External debt (US$ million; percent total debt): 101,299 (36.0) - Multilateral creditors total: 48,546 (17.2) - IMF: 8,493 (3.0) - World Bank: 20,253 (7.2) - ADB/AfDB/IADB: 15,933 (5.7) - Other Multilaterals: 3,868 (1.4) - Bilateral creditors: 37,930 (13.5) - Paris Club: 5,746 (2.0) - Non-Paris Club (incl. China 23,016; Saudi Arabia 5,323) - Bonds and commercial creditors detailed in table (local currency bonds held by non-residents included) - Domestic debt (US$ million): 180,408 (64.0) - T-Bills: 31,256 (11.1) - Bonds: 132,721 (47.1) - National Savings Scheme: 11,430 (4.1) - Debt service (US$ million) — total series for 2023/24; 2024/25; 2025/26 provided in table (selected totals): 85,260; 97,743; 81,608 - Memo items and contingent liabilities: - Contingent liabilities: public guarantees 15,129 (5.4 percent total; 3.9 percent GDP) - Central bank deposit liabilities: 3,700 (1.3 percent total; 0.9 percent GDP) - Central bank bilateral swap liabilities: 4,181 (1.5 percent total; 1.1 percent GDP) - Notes: Debt coverage includes commodity operations by provincial governments. Nominal GDP used for debt shares: 390,092 (memo). *Sources: Pakistani authorities; World Bank; State Bank of Pakistan; IMF staff estimates and projections.* ### 1. P ### 1. P ### Debt stabilization in the baseline - If the macroeconomic prudence continues for the medium term as envisioned by the EFF baseline, the debt path is expected to remain on a downward trajectory. - The GFNs, although high, would be covered by official bilateral and domestic financing. - Underlying vulnerabilities and risks are very high, including due to the significant sovereign exposure of domestic banks, and the scope for policy to respond flexibly is extremely limited. - Long-term risks are assessed as moderate. - Public investment to address adaptation needs and actions underpinning mitigation goals would slow the reduction of debt and financing requirements. - Pension reform in the public sector is urgent. ### Overall risk of sovereign stress and mitigating factors - Final assessment: Overall risk of sovereign stress is High. - Near term: not applicable (1/ The near-term assessment is not applicable in cases where there is a disbursing IMF arrangement). - Medium term: High (mechanical signal: High). - Long term: Moderate. - Risks mitigants: - (i) fiscal adjustment which commenced under the SBA and is to be safeguarded by the EFF onto the medium term; - (ii) financial commitments by bilateral partners; - (iii) the ability of the banking system to rollover existing domestic debt. ### DSA Summary Assessment (staff commentary) - Public debt continues to be assessed as sustainable in the baseline scenario underpinned by steadfast implementation of the proposed EFF policies, with fiscal consolidation continuing in FY26 and beyond, and a further pick-up of growth in the coming years. - Elevated gross financing needs continue to pose high risks to debt sustainability, particularly as fiscal and reserve buffers are very low. - Timely disbursements of committed bilateral and multilateral support are critical. - Significant downside risks: higher-for-longer interest rates; a prolonged stagnation due to tight macro policies; renewed pressures on the exchange rate; possible policy reversals; contingent liabilities related to SOEs. ### Debt coverage and disclosures (Figure 2) — perimeter and contingent liabilities - Chosen coverage: Budgetary central government: Yes; State governments: Yes; Local governments: Yes; Extra budgetary funds (EBFs): No; Social security funds (SSFs): No; Public nonfinancial corporations: No; Central bank: No; Other public financial corporations: No. - Debt coverage includes bilateral FX swap liabilities of the central bank and deposits of official creditors at the central bank, domestic PIA debt, provincial commodity operations debt. - As of end-December 2024, contingent liabilities not included in the perimeter consist of: - (i) guarantees, including for SOE's commodity operations (PRs 4,211 billion), - (ii) non-guaranteed circular debt in the power and gas sector (PRs 1,701 billion and PRs 2,842 billion), - (iii) non-guaranteed SOE debt (PRs 141 billion external, PRs 939 billion domestic), - (iv) other contingent liabilities (PRs 500 billion, estimated). - The estimated total of those exposures amounts to 9.3 percent of GDP. ### Public debt structure indicators (Figure 3) — key points - Pakistan's external debt is predominantly to bilateral and multilateral creditors. - The maturity structure has improved somewhat, but the high share of short-term debt poses risks to debt sustainability and will require careful management. - Pakistan’s domestic debt is mostly to domestic banks, increasing the sovereign-bank nexus. - Residual maturity: 4.5 years (projection panel). ### Baseline scenario projections (Figure 4) — key series (Percent of GDP unless otherwise indicated) - Public debt: - Actual 2024: 70.3 - 2025: 73.4 - 2026: 71.2 - 2027: 69.3 - 2028: 66.2 - 2029: 63.1 - 2030: 61.2 - 2031: 60.4 - 2032: 59.6 - 2033: 58.8 - 2034: 58.1 - Change in public debt: - 2024: -8.2 - 2025: 3.1 - 2026: -2.3 - 2027: -1.9 - 2028: -3.1 - 2029: -3.1 - 2030: -1.9 - 2031: -0.8 - 2032: -0.8 - 2033: -0.8 - 2034: -0.8 - Contribution of identified flows: - 2024: -5.4 - 2025: 1.8 - 2026: -1.5 - 2027: -2.1 - 2028: -2.8 - 2029: -2.8 - 2030: -1.7 - 2031: -0.7 - 2032: -0.7 - 2033: -0.7 - 2034: -0.7 - Primary deficit: - 2024: -1.0 - 2025: -2.1 - 2026: -1.6 - 2027: -2.0 - 2028: -2.0 - 2029: -2.0 - 2030: -1.0 - 2031: 0.0 - 2032: 0.0 - 2033: 0.0 - 2034: 0.0 - Noninterest revenues: 2024: 12.6; 2025: 15.9; 2026–2034: 15.1–15.8 (various years shown as 15.1, 15.6, 15.8, etc. ending 15.8). - Noninterest expenditures: 2024: 11.7; 2025: 13.8; 2026–2034: 13.5–15.8 (various years shown). - Automatic debt dynamics: - 2024: -4.4 - 2025: 3.1 - 2026: 0.1 - 2027: -0.1 - 2028: -0.8 - 2029: -0.8 - 2030: -0.7 - 2031: -0.7 - 2032: -0.7 - 2033: -0.7 - 2034: -0.7 - Real interest rate and relative inflation: - 2024: -1.3 - 2025: 4.9 - 2026: 2.8 - 2027: 2.7 - 2028: 2.1 - 2029: 2.0 - 2030: 2.0 - 2031: 1.9 - 2032: 1.9 - 2033: 1.9 - 2034: 1.8 - Real growth rate: - 2024: -1.9 - 2025: -1.8 - 2026: -2.7 - 2027: -2.8 - 2028: -3.0 - 2029: -2.9 - 2030: -2.7 - 2031: -2.6 - 2032: -2.6 - 2033: -2.6 - 2034: -2.5 - Gross financing needs (GFN): - 2024: 22.3 - 2025: 22.3 - 2026: 20.1 - 2027: 16.8 - 2028: 16.3 - 2029: 18.8 - 2030: 16.8 - 2031: 16.6 - 2032: 15.5 - 2033: 14.4 - 2034: 15.5 - Of which debt service (percent of GDP): - 2024: 23.3 - 2025: 24.4 - 2026: 21.7 - 2027: 18.8 - 2028: 18.3 - 2029: 20.8 - 2030: 17.4 - 2031: 16.6 - 2032: 15.5 - 2033: 14.4 - 2034: 15.5 - Local currency vs foreign currency composition of GFN: - Local currency (percent of GDP): 2024: 20.3; 2025: 22.1; 2026: 18.5; 2027: 15.8; 2028: 14.5; 2029: 17.6; 2030: 14.3; 2031: 12.9; 2032: 12.1; 2033: 11.2; 2034: 12.2 - Foreign currency (percent of GDP): 2024: 3.0; 2025: 2.3; 2026: 3.2; 2027: 2.9; 2028: 3.9; 2029: 3.2; 2030: 3.1; 2031: 3.7; 2032: 3.4; 2033: 3.2; 2034: 3.4 - Memo: - Real GDP growth (percent): 2024: 2.5; 2025: 2.7; 2026: 3.8; 2027: 4.1; 2028: 4.5; 2029–2034: 4.5 each year. - Inflation (GDP deflator; percent): 2024: 21.9; 2025: 5.6; 2026: 8.3; 2027: 6.4; 2028–2034: 6.5 (repeating). - Nominal GDP growth (percent): 2024: 25.8; 2025: 9.9; 2026: 13.1; 2027: 11.0; 2028–2034: 11.3 (repeating). - Effective interest rate (percent): 2024: 12.4; 2025: 11.9; 2026: 10.3; 2027: 9.0; 2028: 8.3; 2029: 8.3; 2030: 8.4; 2031: 8.4; 2032: 8.5; 2033: 8.6; 2034: 8.6 - Staff commentary: With the continuation of prudent policies under the baseline, public debt is projected to decline gradually from FY26 onwards. The margin of error for policy slippages and delays in urgently needed structural reforms remains very small. ### Realism of baseline assumptions (Figure 5) — staff commentary - The programmed fiscal adjustment path is ambitious but feasible given: - broad political support for the EFF, - support from a broad set of partners, - favorable demographic dynamics, - significant scope for revenues by widening the tax base (limiting adverse consequences for growth from fiscal consolidation). - Renewed efforts for structural reforms are needed to lift growth potential and avoid negative debt dynamics. - T-bill issuance as a share of total domestic issuance is projected to decline gradually. ### Medium-term risk analysis (Figure 6) — indices and probabilities - Debt fanchart module: - Fanchart width: 34.2 (percent of GDP) - Terminal debt-to-GDP x: 48.4 1.1 (notation as in source) - Debt fanchart index (DFI): 1.6 - Risk signal: Moderate - Gross Financing Needs (GFN) module: - Average baseline GFN: 18.4 6.3 (percent of GDP) - Initial banks' claims on the gen. govt (pct bank assets): 60.3 19.5 - Change in banks' claims in stress (pct banks' assets): 1.3 0.4 - GFN financeability index (GFI): 26.3 - Risk signal: High - Medium-term aggregated index: Risk signal: High (aggregated index marginally improved relative to 2024). - Probabilities: - Prob. of missed crisis, 2025-2030, if stress not predicted: 54.5 pct. - Prob. of false alarms, 2025-2030, if stress predicted: 8.0 pct. - Staff commentary: Debt Fanchart Module points to moderate risk given strong fiscal effort; GFN Financeability Module points to high risk due to high share of bank assets invested in government securities and average GFN-to-GDP ratio above the 75th percentile of the comparator group. ### Long-term risk analysis (Figures 7a–7d) — summary findings and scenarios - Triggered long-term modules: Pensions and Health. - Large amortizations: - Not triggered: projected GFN-to-GDP and Amortization-to-GDP ratios for years t+6 through t+30 do not exceed the historical average (plus one standard deviation) threshold. - Custom scenario: primary balance set to zero from 2031 onwards to reflect unmet development needs; with baseline year t+5 primary balance held constant at 1 percent of GDP, Pakistan would experience rapid debt decumulation. - Climate change — Mitigation: - Estimates of mitigation costs by development partners amount to 5.6 percent of GDP annually over the 2023-30 period, close to the 5.7 percent of GDP under the standardized scenario. - Customized scenario distributes these costs over a 20-year period. - Result: massive increase in the debt-to-GDP ratio relative to baseline, to more than 80 percent of GDP by the mid-2050s, pointing to the need for a well thought-out climate financing strategy and support from bilateral and multilateral partners. - Climate change — Adaptation: - Pakistan is exceptionally vulnerable to climate change; freeing up fiscal space for adaptation investment within debt sustainability constraints is critical. - Customized scenario assumes adaptation investment of 1 percent of GDP annually over a five-year period; standardized scenario reflects adaptation costs of 0.6 percent of GDP annually. - Higher adaptation investment would reduce the growth impact of natural disaster significantly and only modestly increase debt-to-GDP relative to baseline. - Demographics — Pensions: - Pension system covers public servants and the military; system currently non-contributory with running expenditures around 0.9 percent of GDP. - Permanent adjustment needed in the pension system to keep pension assets positive over: - 30 years: 0.3% (pp of GDP per year) - 50 years: 0.7% - Until 2100: 1.2% - Pension financing needs and total benefits paid are projected in long-run scenarios (figures shown in source charts). - Staff: reforms to contain the fiscal burden over the medium term are ongoing. - Demographics — Health: - Health expenditures are currently very limited. - Given favorable demographics, debt-related risks from excess health care costs appear manageable. *Source: Fund staff.* ### Annex II. Pakistan’s Climate Challenges and Policies ### Annex II. Pakistan’s Climate Challenges and Policies ### A. Background: Significant Climate Vulnerabilities - Climate characteristics - Pakistan’s climate is diverse and characterized by extremes: mostly dry and hot near the coast and lowland Indus plains; cooler in northern uplands and Himalayas. Continental air prevails most of the year, interrupted by the monsoon in summer and Western Disturbances in winter. - Temperatures peak in June. Extreme diurnal cycles, with daily ranges exceeding 20°C in arid regions, are not reflected in the averages. - Precipitation is concentrated: more than half of annual levels come with the summer monsoon and the bulk of the remainder with winter Western Disturbances, producing sizable sub-national and intra-year variation that historically yields successive droughts and floods. - Observed climate trends and disasters - Pakistan has seen annual mean temperatures increase by some 1.2°C since pre-industrial times; global average increase is 1°C. - Annual precipitation is unpredictable and masks sizable sub-national variation. - On average, the country experienced almost 6 events annually over 2000–22, a near-doubling over the preceding two decades. The number of events caused by hydrological hazards increased the most, followed by biological, climatological, and meteorological hazards. - Hydrological hazards (2000–22) represented: - over 90 percent of affected people, - over 75 percent of fatalities, - some 93 percent of material damage from climate disasters. - Drivers of vulnerability and low resilience - High exposure of population and activity to hazards concentrated in the Indus Valley: more than half of the country’s arable land depends on river-fueled irrigation; northern dams are a key power source. - Agriculture: - represents 20 percent of Pakistan’s economy, - represents 40 percent of its labor force, - is the largest source of export earnings. - Sectoral challenges: inefficient and wasteful use of water and land, environmentally damaging agricultural practices and food price supports, inadequate value chains, and weak irrigation system. - Inefficient water management (exacerbated by underpricing and weak collections) has left irrigation authorities short of resources and unable to invest in infrastructure, contributing to water insecurity and low irrigation productivity. - Low readiness driven by: historically weak, volatile, and non-inclusive growth and macroeconomic instability; low socioeconomic and financial development; inadequate infrastructure and social investment; weak institutional frameworks, capacity, and regulation. - Specific climate stressors and projected impacts - Pakistan has increased melting of its 7,200 glaciers, stressing hydropower infrastructure. - Pakistan is among the 30 most water “at-risk” countries in the world. - High risk from sea-level rise, prolonged cyclonic activity, and greater salt-water intrusion in Karachi. - Projected weather changes (RCP 4.5 scenario, relative to 1986–2005 reference): - Drought conditions likely to worsen across time horizons (2020–39, 2040–59, 2060–79, 2080–99). - Intense rains and heavy precipitation are likely to increase, raising flood risk. - Ramifications of increased climate stress: - pressure on health, livelihoods, and ecosystems; - reduced yields in many key food and cash crops; - strains on urban dwellers and outdoor laborers. - Economic severity: climate-related developments could cause up to 20 percent GDP loss per year by 2050; damages could grow in non-linear ways when physical thresholds are surpassed or when compound hazards and waning resilience occur. - Climate trends contribute to internal migration linked to soil degradation and other impacts. ### B. Background: Large Emissions - Pakistan’s contribution and trajectory - In 2021 Pakistan contributed about 1 percent of the world’s total GHG emissions, which represented 488 million tons of GHG. - Since 1990, Pakistan’s GHG emissions have grown by 190 percent (greater than the MENAP average of 165 percent and well above the world’s 60 percent). - Emissions composition - Energy and agriculture together account for nearly 90 percent of Pakistan’s GHG emissions. - Energy-related CO2 emissions arise mainly from electricity and heat production, transportation, and manufacturing/construction. - Agricultural methane emissions are dominated by enteric fermentation and agricultural soil; enteric methane accounts for a large share of agricultural methane. - Methane’s importance: methane is more than 25 times as potent as CO2 at trapping heat (note: conversion to CO2-equivalents is used across GHG measures). - Energy consumption and mix - Primary energy consumption nearly doubled in the last 20 years. - In 2021, natural gas, oil, and coal accounted for about 85 percent of the consumption mix; renewables accounted for about 11 percent. - Pakistan’s fossil-renewable mix is relatively greener compared to the rest of MENAP, leaning more toward natural gas and less toward oil and coal. - In 2024, about 78 percent of Pakistan’s renewables came from hydropower; the remainder from solar, wind, and bagasse. - Energy sector inefficiencies and climate mitigation implications - The energy sector is a major contributor to GHG emissions and pollution. Long-running mismanagement and reluctance to align tariffs with costs produced large financial gaps and poorly targeted, often regressive subsidies. - Underpricing contributed to spikes in circular debt (CD) over 2013–21 and 2020–23 for electricity and gas respectively, causing: delayed payments to energy producers, deferred maintenance, declining services, lower collections, and reduced incentives to invest in energy-efficient production capacity. - Consequences include rapid depletion of indigenous natural gas and greater imports of costly RLNG, a highly inefficient energy sector, poor distribution and transmission infrastructure, underperforming public utilities, and very high transmission and distribution losses (above permitted levels). - Pakistan’s energy intensity of GDP is higher than many peers, increasing dependence on imported fossil fuels and exacerbating energy insecurity. - Persistently high system circular debt, large losses, and underpricing have limited public funds for investment in greater efficiencies and improved infrastructure and deterred private sector involvement. ### C. Policy and Implementation Context (summary of authorities’ response) - Recent policy and institutional responses - Authorities have improved Pakistan’s legal and institutional framework and adopted policies to build resilience and adapt to climate change, including the 2023 adoption of the National Adaptation Plan. - Pakistan has made significant international commitments to mitigate climate change and reduce emissions, and has sought to improve the enabling environment and green financial architecture to attract climate finance. - The authorities maintain close engagement with development partners on implementation. - Remaining gaps and IMF engagement - Significant gaps remain in adaptation infrastructure, resilience, and the enabling environment to attract sufficient climate finance. - Support under an RSF, backed by strong reform measures, is expected to help close these gaps, create space for adaptation infrastructure investment, and catalyze additional sources of climate finance. *Annex II. Pakistan’s Climate Challenges and Policies — IMF staff summary excerpts from the supplied content.* ### 12. Pakistan’s energy subsidies have exacerbated these issues. They are large, poorly ### 12. Pakistan’s energy subsidies have exacerbated these issues. They are large, poorly ### Energy subsidies, structure, and distributional effects - On the power side: - Large on-budget subsidies of about 1 percent of GDP, centered on bridging the gap between regulator-determined and government-notified tariffs and clearing CD stock. - A complex network of cross-subsidies intended to provide progressivity to the tariff structure but ineffective due to data limitations at inception (household consumption used as a proxy for income). - On the gas side: - A smaller amount of on-budget subsidies but a similarly complex network of cross-subsidies; about 70 percent of residential gas consumption falls under subsidized slabs. - Targeting and incidence: - World Bank analysis suggests cross-subsidies are poorly targeted: low-income, high-consumption households often paying higher tariffs, and vice versa. - Policies are regressive, subsidize overconsumption and energy wastage by higher-income households, and shift costs to industry, creating pressures from interest groups and risks to cost recovery and sector viability. ### Pollution, health, and vehicular trends - Air quality: - As of 2019, mean concentrations of fine particulate matter in urban areas in Pakistan were nearly double the global average and well above most MENAP peers. - Concentrations in Lahore reported as high as 24 times the WHO’s Air Quality guidelines. - Many cities’ air quality indices breach 400 in the winter months (WHO 2024). - Vehicle growth: - Road vehicles increased from 5.2 million in 2007 to 26.5 million in 2018 (Government of Pakistan 2023a). - Sources of pollution: - Poor regulation of industrial and vehicular emissions, open burning of waste, land use planning issues, heavy reliance on fossil fuels, inefficient agricultural practices, and increased motor vehicle usage. - Economic and social impacts: - Poor health outcomes from pollution contribute to Pakistan’s slow progress on inclusion and labor force adaptability and productivity (IMF 2024). ### Mitigation measures and projected emissions impacts - Carbon/fuel levy proposal: - Adding fuel oil to Pakistan’s existing Petroleum Development Levy and gradually increasing this as a supplemental carbon levy on gasoline and diesel by Rs 5 per liter between July 2025-27: - Would reduce projected 2030 CO2 emissions by 17 percent from the no-policy baseline and by 4 percent from the existing policy path. - EV uptake and charging infrastructure: - Policies to incentivize substitution of EVs for ICE vehicles and development of charging station infrastructure, calibrated to Pakistan’s 2030 EV uptake objectives, would result in an overall 16 percent (6.4 million tons of CO2) net reduction in transport-related emissions by 2030. - Combined policy scenario notes: - Figure 14a and Figure 14b present CO2 emissions across policy scenarios and emissions savings from recommended reforms (sources: country authorities, IMF staff calculations). ### Methane emissions - Pakistan is the 7th-largest emitter of methane globally. - Major methane sources: - Agriculture (primarily livestock), mining, water sector, and methane leakage from the inefficient gas sector (onshore gas, gas pipelines, and LNG facilities) (World Bank 2022). - Agricultural drivers: - Inefficient agriculture practices and policies (e.g., poor crop choices and overuse of fertilizer due to subsidies) increase methane emissions. ### Legal and institutional climate framework - Key laws and institutions: - March 2017 Climate Change Act established: - Climate Change Council (CCC), chaired by the Prime Minister, for overseeing implementation and international agreements. - Pakistan Climate Change Authority (CCA) to formulate adaptation and mitigation policies, plans, and mechanisms. - Pakistan Climate Change Fund (CCF) to gain financial assistance for adaptation and mitigation initiatives. - Ministry of Climate Change and Environmental Coordination (MoCC) established in August 2017 as a focal cabinet-level agency to lead coordination and implementation. - 2021 National Climate Change Policy (NCCP) updated from 2012, aligned with the 2015 Paris Climate Accord and Sustainable Development Goals; linked climate action with economic growth and mainstreaming climate change into other policies. - National Electric Vehicle Policy (2019) supports EV adoption and is currently being revised. - National Adaptation Plan (NAP) developed with the World Bank, formally adopted in 2023, lays out a cross-sectoral framework for resilience and adaptation. ### International commitments and targets - Paris Accord and NDCs: - Pakistan’s updated NDCs include: - An unconditional commitment to reduce emissions by 15 percent below its business as usual level by 2030 (resulting in a 240.15 MtCO2e emissions reduction). - An additional 35 percent conditional on climate finance availability (resulting in another 561.05 MtCO2e emissions reduction). - Increase renewable energy’s share of all energy produced in the country to 60 percent by 2030. - Increase share of EVs among all new vehicles sold in various categories to 30 percent by 2030. - Restrictions on new coal power plants and a ten-year afforestation program. - Pakistan signed the Global Methane Pledge in 2021 to curb methane emissions by 30 percent from its 2020 level by 2030. - Regional context: - Pakistan’s emission targets are among the more ambitious within the MENAP region (see Figure 15 for comparative NDC reduction targets, sources: Country NDC reports as publicly available on January 2, 2025). ### Decentralization and intergovernmental coordination challenges - Constitutional and institutional context: - The 2010 18th Amendment mandates devolution to Pakistan’s four provinces; provinces play key roles via their Environmental Protection Agencies. - Provinces (Punjab, Sindh, Khyber-Pakhtunkhwa) have developed their own policies and action plans attempting to align with federal policy; capacity is inconsistent and responsibilities overlap with provincial irrigation and agricultural departments. - No sub-provincial climate institutions exist; such entities would be required for certain municipal-level climate investments. - Fiscal and coordination constraints: - Provinces’ limited capacity to act on climate change has been constrained by reliance on federal revenues and the transboundary nature of climate issues. - Recent EFF-supported efforts: realignment of federal-provincial revenue and expenditure sharing; boosting provinces’ capacity to raise more own revenues; and enhancing federal-provincial coordination via a National Fiscal Pact could help improve policy alignment and fiscal capacity. ### Adaptation priorities and NAP sectoral approach - Immediate priorities: - Embed climate change in medium-term inclusive growth and development agenda informed by the NAP; advance critical needs assessments and strategies for vulnerable sectors. - NAP key sectors and policy areas: - Agriculture-water nexus: - Transition farmers to climate-smart water and land management practices; restructure existing policies (e.g., wheat price support/procurement) to incentivize crop diversification, improved water productivity, and improved land management; modernize irrigation services; plan for river flow and rainfall variability. - Natural capital: - Preserve and improve forest cover and waterways; mainstream sustainable land, watershed, and wastewater management; invest in coastal and marine resources; invest to address air pollution. - Urban resilience: - Mainstream climate adaptation across government levels; improve land-use regulation and planning; bolster climate-smart municipal services; leverage nature-based solutions for climate risks. - Human capital: - Mainstream climate adaptation into health and education; enhance disaster emergency preparedness and response; build workforce capacities for climate risks. - Disaster risk management (DRM): - Address shortcomings highlighted by the 2022 floods: poor federal-provincial coordination, unclear roles and responsibilities, weak stakeholder capacity, insufficient integrated disaster risk reduction investment, and inadequately disaster risk financing (DRF). - Gender, youth, and social inclusion: - Support marginalized groups to strengthen DRM capacity and foster climate-resilient livelihoods. ### Progress on Disaster Risk Management (DRM) - Institutional capacity-building (with ADB support): - National Disaster Management Authority (NDMA) implementing National Disaster Management Plan III: - Establishment of the National Emergencies Operation Center to monitor and analyze disaster risk and response. - Establishment of the Disaster Management Coordination Forum. - National Disaster Risk Management Fund’s (NDRMF’s) operationalization of the NatCat model. - Ministry of Water Resources advancing a risk-based approach to flood risk management in strategic planning. - NDMA plans to approve an ex-ante disaster recovery framework; NDRMF plans to broaden NatCat access for public and private entities. - Risk-layering DRF: - NDRMF approved National Disaster Risk Financing Strategy 2024-2034 for a risk-layered approach. - Ministry of Finance established an ex ante contingency allocation for disaster events in the FY25 budget. - Benazir Income Support Program (BISP) launched a dynamic registry and issued a methodology for identifying and targeting affected households after disasters. - Future ADB-supported efforts: NDRMF operationalize a fund to support risk-transfer solutions (e.g., agriculture insurance); National Insurance Company to complete a registry of public sector assets and insure prioritized assets. - Remaining challenge: inconsistent federal-provincial DRF coordination. - Parallel World Bank-supported program to build a social protection savings mechanism via BISP with an initial target of 150,000 families. ### Gaps in climate public investment planning (C-PIMA findings) - Key gaps identified by the Fund’s 2023 Climate Public Investment Management Assessment (C-PIMA): - Gaps in the national planning framework weaken investment planning to meet climate objectives despite improvement from NAP. - Insufficient analysis of vulnerability of infrastructure assets to climate-related risks. - Spatial and urban planning and construction regulations fail to address climate risks and public investment impacts. - Weak incorporation of climate factors into project appraisal; absence of a standard methodology with technical details. - Low transparency on climate-related actions with budgetary implications. - Lack of comprehensive selection criteria for budget funding that includes climate change. - Lack of analysis of climate change disaster risks in government DRM strategy and fiscal risk analyses. - Capacity constraints for implementing Pakistan’s climate agenda. - Institutional coordination and capacity: - National Climate Change Policy provides a foundation for coordinating climate-relevant public investment across the federal government, but coordination does not always translate to federal-provincial planning. - Capacity constraints particularly affect MoCC and Planning Commission: limited budget and authority at MoCC; limited staff at the CCA; challenges at the Planning Commission for integrating climate considerations into development planning. _Italic: Source: IMF staff summary of the content unit "1pakea2025001-print-pdf - 12. Pakistan’s energy subsidies have exacerbated these issues. They are large, poorly"._ ### 23. Strong progress has been made in addressing the above gaps in Pakistan’s C-PIMA ### 23. Strong progress has been made in addressing the above gaps in Pakistan’s C-PIMA ### Progress on C-PIMA implementation - The C-PIMA Action Plan was formally adopted in December 2023 and authorities have taken strong steps to implement it. - Actions completed with support from ADB and others: - NDRF adoption of a model analyzing sectoral vulnerabilities to flood risks and a Business Strategy 2022-23 with a three-year investment plan. - Development of manuals to integrate climate considerations into project design and development planning. - Publication of climate-related spending for FY2024. - Incorporation of climate-related fiscal risks into the authorities’ Statement on Fiscal Risks (analysis included modeling of long-term fiscal sustainability under different climate scenarios and discrete risks). - Announcement of operationalization and staffing of the CCA. - Establishment of a Climate Finance wing at the MoCC to facilitate and report on climate finance mobilization. - Initiation of preparation of the national climate finance strategy. - Remaining C-PIMA Action Plan items to complete: - Updating provincial urban planning codes to adopt climate resilient principles. - Extending the FY24 federal green budget tracking exercise to provide more guidance to line ministries and gradually extend the practice to revenue measures. - Rolling out green budget tracking to the provinces. - Enhancing climate-related training for public officials involved in development planning. ### Policies to mitigate climate change (NCCP and NDC priorities) - NCCP (2021) and 2021 NDCs prioritize mitigation in the energy and agriculture sectors. - Energy sector policy goals highlighted: - Preferences for development and promotion of hydro power generation and renewable energy resources when additional capacity is needed. - Consideration of a carbon tax on fossil fuel energy generation. - Prioritization of imports of natural gas and LNG over oil and coal. - Steps to improve energy efficiency across Pakistan; fuel efficiencies and improved emissions standards targeted in transport. - Agriculture and forestry priorities: - Improved agricultural and livestock practices to reduce methane emissions. - Policies geared at carbon sequestration and forestry: urban forestation drive launched in 2021; Ten Billion Tree Tsunami Program (TBTTP) actions; work toward REDD+ membership. - TBTTP: sequestered 8.4 MtCo2e over 2016-21 and projected to sequester another 149 MtCo2e by 2031 (Government of Pakistan 2021b). ### Energy sector reform agenda and required follow-through - Background: - Significant tariff adjustments in electricity and gas began in 2022 and 2023 after years of underpricing. - These adjustments, along with still-sizeable subsidies, have broadly stabilized the flow of CD. - Continued tariff increases will become increasingly socio-politically difficult; fiscal space cannot accommodate persistently large power subsidies. - Energy efficiencies and large losses and wastage continue; fundamental cost-side reforms are required. - Reform agenda (supported by World Bank TA) aims to reduce GHG emissions, create fiscal space, and finance climate investments. Key elements: - Supply-side efficiency improvements: - Continued steps to keep tariffs in line with costs and improve the tariff adjustment framework: annual tariff rebasing supplemented by quarterly and monthly adjustments; regulator-determined tariffs now automatically notified after 40 days if government takes no action. Gas adjustment framework has automatic notification in law but not operationalized. - Subsidy reform: reform costly electricity and gas subsidy schemes (¶12) to reduce overconsumption incentives, boost fiscal savings, and increase progressivity of energy tariffs. - Private sector participation in distribution and transmission networks: DISCO privatization and/or private management concessions; restructuring NTDC into three constituent regulatory entities to increase independence and oversight, enabling private investment preparations. - Institutionalizing anti-theft procedures: amendment to the criminal code to legally institutionalize anti-theft procedures that were in place in 2023 (associated with declines in losses and increases in recoveries) to incentivize private investors in DISCO privatization. - Demand-side efficiency improvements: - NEECA’s draft NEECA Action Plan (2023-30) provides roadmap for cross-sectoral policies to increase energy saving and reduce GHG emissions by 9 MtCO2e and 35 MtCO2e, respectively. - Residential sector focus: World Bank estimates residential sector accounted for more than 20 percent of Pakistan’s energy consumption in FY 2021 via cooking, lighting, and space cooling; space-cooling fans consume 46,524 GWh annually. - World Bank estimates: electric fan replacement program payback period of 8-9 months; LED lightbulb replacement payback period of 1 month. - NEECA estimates over 16 GWh (14 percent of total consumption) of electricity could be saved through more efficient domestic appliances. - World Bank (2022) estimates 5,500 GWh could be saved via LED lightbulb replacement. - NEECA’s plan for minimum energy performance standards for domestic electric and gas appliances remains in draft form. ### Indicative Generation Capacity Expansion Plan (IGCEP 2024-34) — renewable targets - IGCEP base case anticipates increase in renewables’ share of installed capacity by 2034: - High-potential hydropower share: from 24 percent in FY24 to 38 percent in 2034. - Variable renewable energy (solar, wind, and bagasse) share: from 7 percent in FY24 to 15 percent in 2034. - Total renewable increase: from 31 percent in FY24 to 54 percent in 2034. - RLNG share: from 24 percent in FY24 to 15 percent in 2034. - RFO share: from 12 percent in FY24 to 2 percent in 2034. - Gas share: from 8 percent in FY24 to 5 percent in 2034. - Nuclear share: remains at 8 percent. - Imported coal and local coal shares fall (Imported coal 9 percent in 2024 to 9 percent in 2034; Local Coal 8 percent in 2024 to 6 percent in 2034; figure shows detailed shifts). ### Transport decarbonization and Electric Vehicles (EVs) - 2020-25 New Electric Vehicle Policy targets: - EVs to be 30 percent of new vehicles in Pakistan by 2030, and 90 percent by 2040. - Current uptake: - About 2,000 fully electric cars and a few electric buses in Karachi and Punjab. - 8 charging stations nationwide. - EVs could yield about 57 percent of the emission reduction (relative to a business-as-usual baseline) in the passenger sector by 2050 (World Bank 2022). - New Electric Vehicle Policy (2025-30) offers opportunity to refine incentives; policy design should spur EV uptake without creating market distortions or misplaced incentives given limited fiscal space. ### Costs of climate action and financing needs - World Bank (2022) estimates: - $348 billion investment needed over 2023-30 (equivalent to 10.7 percent of projected cumulative GDP over this period) for a comprehensive response. - This includes $152 billion for adaptation and resilience measures and $196 billion for decarbonization efforts. - NDC estimates: - Total cost of implementing proposed policies nearly $200 billion. - Energy transition would require $101 billion by 2030 and an additional $65 billion by 2040. - MoCC estimate: - $85.6 billion over 2022-30 for adaptation associated with disaster response and recovery. - Financing implications: - Given limited fiscal space, required financing will need greater support from bilateral and multilateral sources, expansion of Pakistan’s green financing architecture, domestic resource mobilization and spending reprioritization (such as via subsidy reform), and attraction of private capital. ### External climate financing and recent mobilization - OECD data: total climate financing commitments of nearly $16 billion over 2000-2022, largely via debt (concessional and non-concessional). - About two-thirds of this amount came from multilateral development banks. - About two-thirds also went toward adaptation efforts, largely in energy, transport, and agriculture sectors. - Multilateral climate financing can help catalyze private sector green financing, which has so far been very small. ### Climate financing framework and financial sector measures - SECP actions: - Published green bond and green sukuk guidelines in 2021. - WAPDA issued Pakistan’s first green bond: $500 million 10-year bond to finance hydropower generation in 2021. - SECP issued guidelines on green bonds and green sukuks for corporate entities to encourage private sector participation. - MoCC and related initiatives: - Established Climate Finance wing at the MoCC to oversee and coordinate green financing efforts. - Working with World Bank on National Climate Finance Strategy. - Plan to submit applications for three national entities to the Board of the Green Climate Fund. - State Bank of Pakistan (SBP) progress and gaps: - Issued first green banking guidelines in 2017 to integrate environmental risk into banks’ credit policies and scale up green finance. - Issued Environmental and Social Risk Management (ESRM) manual in 2022; allows banks a three-year window to implement and green guidelines for listed firms in 2023. - Guidelines are voluntary and promote incorporation of climate risks into bank and firm activities and credit risk evaluation. - SBP’s 2023 Financial Stability Review included a climate scenario analysis and plans to develop climate stress-testing guidelines for banks in FY26. - SBP is developing a national green finance taxonomy with World Bank support, focusing on mitigation and adaptation, expected to be in place by mid-2025. - After the taxonomy, implementing mandatory disclosure requirements for financial institutions will be required. - SECP has established a digital disclosure platform for ESG for listed companies. - SBP plans to develop a framework for acquisition of climate risk–related data. ### Role of broader fiscal and structural reforms - Reforms under Pakistan’s EFF will be important to: - Broaden Pakistan’s overly narrow tax base and achieve fiscal consolidation to create fiscal space. - Improve public investment efficiency, freeing bank balance sheets for private lending including green lending. - Support cross-sectoral structural reforms to raise productivity and competitiveness: expand and improve social protection, health, and education spending; shore up financial sector stability; achieve energy sector viability; reform business environment; reduce state footprint; and improve public service provision. - Establish enabling environment for greater private sector participation and investment in climate efforts. ### Resilience and Sustainability Facility (RSF) strategy and reform measures - Objective: RSF support requested to advance climate risk addressing, strengthen climate agenda, and catalyze additional climate financing. - RSF will build on prior diagnostics (2023 C-PIMA, SIPs, World Bank 2022 CCDR, ADB 2024 CDREP) and help catalyze donor support and private sector environment. - Reform measures (RMs) proposed to address gaps and complement existing efforts: - Mainstream climate issues in budget and investment planning: - Three proposed RMs to fill gaps in C-PIMA by supporting climate-sensitivity in project selection and assessment and provincial rollout of green budget tagging. - Improve water system resilience and disaster response financing: - RM to support digitization of irrigation service charges among the provinces. - RM to introduce a water tariff adjustment mechanism in Punjab and Sindh to increase water revenue collections and enhance cost recovery. - RM to strengthen federal-provincial Disaster Risk Financing (DRF) coordination. - Strengthen climate information architecture: - RMs to issue guidelines for implementation of climate-related financial risk management and supervision for the banking sector. - Guidelines to enable listed companies to disclose climate-related risk. - Promote green mobility and transport decarbonization: - RMs to advance the EV agenda via: - An additional carbon levy on the use of liquid fuels based on carbon content, incorporating more carbon-intensive fuels not previously subject to levies. - A budgeted subsidy for adoption of EVs, particularly favoring two- and three-wheelers (about 80 percent of all registered vehicles in Pakistan (Pakistan Economic Survey 2022-23)), paired in a revenue-neutral fashion with a supplementary tax on ICE vehicles. - A PPP-viability gap financing framework to promote development of charging station infrastructure. - Align energy sector reforms with national mitigation commitments: - Energy-centric RMs to boost supply- and demand-side efficiencies, reduce CD pressures and subsidy bills, and improve targeting of energy price support aligned with need. - Unwind the cross-subsidized tariff structure and replace the existing tariff differential subsidy with transfers run through BISP targeted at qualifying lower-income families. - Cover enhanced efficiency standards for new consumer appliances and public procurement practices. - World Bank analysis indicates such a scheme would protect all consumers in the two lowest quintile income groups from the price increase that would apply to most higher-income residential consumers (Figure 18). *Source: IMF staff.* ### 35. Current and ongoing work with development partners covers a broad range of the ### 35. Current and ongoing work with development partners covers a broad range of the authorities’ climate agenda, including several areas identified as key priorities by World Bank and Fund diagnostics ### Public financial management (PFM/PIM) - ADB’s Climate and Disaster Resilience Enhancement Program (CDREP) focuses on building climate considerations into Pakistan’s PFM/PIM framework, drawing explicitly from the C-PIMA Action Plan (¶22). - Steps include incorporating climate into the Planning Commission’s project selection and appraisal manuals, guidelines, and processes. - The FCDO is providing assistance to build federal line ministries’ budget tagging capacities. - ADB’s PPP program supports adoption and implementation of guidelines for resilient infrastructure PPPs. ### Disaster risk management (DRM) - ADB CDREP includes a strong DRM component: - Strengthening NDMA’s coordination role. - Improving DRM systems and databases. - Linking federal and provincial disaster response mechanisms (¶21). - World Bank projects focus on flood reconstruction and emergency housing, largely at the provincial level. ### Climate finance - ADB CDREP’s third core area focuses on building Pakistan’s disaster risk financing (DRF) framework (¶30): - Scaling up DRF instruments. - Implementing a DRF strategy and monitoring system. - Seeking to mobilize at least PRs 200 billion of risk-informed DRF at the federal level. - Facilitating disaster-responsive cash transfers through BISP. - World Bank supported establishment of the National Climate Finance Strategy (NCFS). - World Bank, with IFC, supports development of climate-related financing instruments. ### Greening the financial sector - World Bank engagement with SBP includes: - Climate scenario analyses. - Development of a national green finance taxonomy, anticipated to be completed in June 2025 (¶31). - Developing a stress testing framework for climate risk assessment. - A project addressing climate-related risks faced by microfinance institutions. - SBP engagement with Alliance for Financial Inclusion to improve climate-smart agriculture financing. ### World Bank FY26-35 Country Partnership Framework (CPF) priorities and near-term engagements - Two of six CPF key goals: Increased climate resilience; Cleaner energy and better air quality. - CPF anticipates potential new engagements in the coming 24 months (World Bank 2025), complementing ongoing work and proposed RSF reforms (¶34). - Potential CPF engagements for Increased resilience to climate change: - Strengthening agriculture and markets in Punjab. - Flood resilience in Balochistan. - Sindh emergency housing reconstruction and expansion of flood-resilient infrastructure. - IFC investments in and/or advice on ag-tech and agri-value chains and climate-resilient urban and industrial infrastructure. - Potential CPF engagements for Cleaner energy and better air quality: - Expansion of power distribution efficiency. - Improving power transmission. - Clean air and clean cities programs (latter focusing on waste management). - IFC investment in and advice on power transmission and distribution. - Investments in decarbonization across sectors. - Engagement in networked geothermal heating and cooling. ### RSF (Resilience Support Facility) gaps and partner technical support - RSF will target gaps not covered by development partners and will draw on partner technical support in key areas: - Irrigation water pricing (RM4, 5): - World Bank previously provided support on digital water tariff (e-Abiana) scheme in Punjab. - World Bank will support Fund staff in design and adoption of e-Abiana across Pakistan’s other three province (RM9) and institutionalization of water tariff adjustments in Punjab and Sindh (RM10). - Energy subsidy reform (RM12): - World Bank engaging with Power ministry and BISP to develop: 1) a method to identify electricity consumers by income rather than consumption level; 2) a transfer mechanism that could replace current energy subsidy frameworks. - World Bank will continue advisory role and serve as close partner of the Fund for RM12. - Energy efficiency standards (RM13): - World Bank’s previously prepared energy efficiency project forms analytical and policy underpinnings for RM13. - Fund staff anticipate working closely with Bank staff on implementation and monitoring. - Other RSF actions not covered by existing partner efforts: - Promoting green mobility. - Strengthening climate-related budget and investment planning. - DRF strengthening (where ADB covers similar areas). - Creating a climate information architecture (where World Bank covers similar areas). - Fund staff will remain in close coordination with development partners to address these gaps. ### DIGNAD model application and implications for policy - DIGNAD model purpose: - Dynamic general equilibrium model to analyze impact of public investment on growth and debt under climate shock scenarios. - Accounts for damage to public and private capital, productivity, public investment efficiency, and debt sustainability. - Considers ex-ante policies (adaptive infrastructure investment and improved public investment efficiency) as buffers to climate shocks. - Calibration to Pakistan: - Steady state calibrated to historical averages, excluding FY2020 (COVID-19) and FY2022 (the flood). - Public infrastructure investment set at 3 percent of GDP per year. - Public investment efficiency gap set at 62 percent (in line with FAD corruption database value, IMF 2021). - Model applies, after a five-year period of growth and investment, a shock of 5 percent of GDP (broadly in line with 2022 floods), and assumes a five-year recovery process. - Three illustrative scenarios and key quantitative outcomes: - Baseline (status quo): - Public investment remains at steady state; no adaptive infrastructure investments. - Climate shock in year six leads to large declines in GDP, private consumption, and private investment. - Large reconstruction spending raises public investment; GDP remains below steady state 13 years after the shock. - Debt-to-GDP ratio increases sharply by about 4.5 percentage points of GDP to 70 percent following the shock and remains at that level in the long term. - Adaptation: - Conventional public investment at steady state plus additional 1 percent of GDP per year in adaptation infrastructure. - Financing: about 40 percent of additional investment via concessional debt; most of the balance financed by domestic debt (in line with Pakistan’s current debt structure). - Negative deviations of GDP, private consumption, and private investment from steady state following the shock are between about one third and one half of those in the baseline. - Pakistan’s GDP returns to steady state 5 years after the shock. - Debt-to-GDP rises before the shock and increases to a greater degree following the shock, settling about 2 percentage points of GDP higher in the long term than under the baseline scenario. - Adaptation + efficiency improvements: - Same adaptation investment and financing as previous scenario. - Assumes improvement in public investment efficiency score to the global average (IMF 2021). - Downturn is moderately shallower; GDP returns to steady state 4 years after the shock. - Long-term debt path broadly in line with the Adaptation scenario. - Policy implications from DIGNAD results: - Ex-ante adaptation investments reduce growth impact of a natural disaster shock by about half and speed recovery to previous GDP levels. - Improvements in public investment efficiency (PIMA and C-PIMA Action Plans) further enhance resilience, particularly immediately after a shock. - Additional resilience-building investment leads to moderately higher debt levels. - If fiscal instruments—consumption and income taxes—respond to the shock, public debt could be on a downward path following recovery, though such fiscal response may not be feasible or desirable after a large natural disaster. - Further progress on fiscal consolidation and fiscal structural reforms is critical to maintain fiscal space necessary to weather such shocks. ### Letter of Intent highlights (Islamabad, April 24, 2025) - Program achievements and macro outcomes: - Economic growth has started to resume. - Inflation is at historic lows. - Sovereign spreads have moderated significantly. - External balances have improved. - Foreign buffers have almost tripled. - Fiscal and program performance: - Met all end-December 2024 Quantitative Performance Criteria (QPCs). - Surpassed floor on net international reserves by a wide margin (thanks to sizeable FX purchases by the SBP). - Met ceiling on general government primary budget deficit by a significant margin (owing to prudent budget execution). - Met end-December Indicative Target on floor on average time-to-maturity on domestic debt after previously missing end-September IT. - Missed end-September and end-December ITs on floor on net tax revenues by FBR due to lower-than-anticipated nominal growth and weaker performance in indirect taxation; committed to achieving agreed tax-to-GDP ratio at end-FY25. - ITs on general government health and education spending not met due to lack of execution capacity in Sindh and KP. - Structural reform progress: - Nine structural benchmarks (SBs) met on time, including approval of a National Fiscal Pact with four provinces and inflation adjustment of Kafaalat cash transfers. - Adoption of the Agricultural Income Tax implemented with a small delay. - Missed end-January 2025 SB on switching captive power plants (CPPs) to the grid; forceful price-based incentives introduced to induce shift to grid. - SB on recapitalization of two private sector banks missed; prospects favorable to achieve objective within next few months. - SB on amendments to Sovereign Wealth Fund (SWF) Act missed due to need for extensive consultations; progress underway. - All three continuous SBs were met. - Policy commitments going forward: - Prudent execution of FY25 budget; FY26 budget to serve as fiscal anchor with an underlying primary surplus of 1.6 percent of GDP. - Continue efforts to raise revenue-to-GDP, broaden revenue base, and improve tax compliance. - Monetary policy to remain appropriately tight, with exchange rate allowed to adjust freely to buffer external pressures. - Accelerate cost-reducing reforms in energy sector; implement energy tariff adjustments promptly to minimize fiscal risks. - Redouble efforts to implement SOE governance framework across all SOEs; enhance SWF governance via key legislative amendments. - Advance governance and anti-corruption reforms, gradually relax trade barriers, and adopt policies to build climate resilience. *Source: Excerpts from IMF country material in the supplied content unit.* ### 5. Considering the progress made over the last two years and to support our program going ### 5. Considering the progress made over the last two years and to support our program going forward, we request approval by the IMF Executive Board for (i) modifications to the end-June 2025 targets for net international reserves and net domestic assets, to lock in our progress in rebuilding reserves and containing monetary aggregates; (ii) modification of the QPC on the floor on the number of new tax returns from new filers, to reflect a narrower perimeter of filers; and (iii) the completion of the first review under the Extended Arrangement and the related purchase in the amount of SDR 760 million. ### Program requests and financing - Request approval by the IMF Executive Board for: - Modifications to the end-June 2025 targets for net international reserves and net domestic assets. - Modification of the QPC on the floor on the number of new tax returns from new filers. - Completion of the first review under the Extended Arrangement and the related purchase in the amount of SDR 760 million. - Request support for a 28-month arrangement under the Resilience and Sustainability Facility (RSF) in the amount of SDR 1,000 million (49 percent of quota), with reform implementation monitored through semi-annual reviews to occur concurrently with EFF reviews. - Disbursements under the RSF arrangement are requested to be provided as budget support. - A Memorandum of Understanding (MoU) between the State Bank of Pakistan and the Ministry of Finance has been finalized to clarify responsibilities for timely servicing of the financial obligations to the IMF under the RSF arrangement. ### Commitments, consultations, and transparency - Provinces agree not to introduce any policy or action undermining the commitments or policies in this letter or the attached MEFP. - Government will consult with the IMF before modifying MEFP measures or adopting new measures that deviate from program goals, and provinces will consult the IMF through the federal Ministry of Finance before modifying or adopting any measures that could affect the program. - The government will supply the IMF with timely and accurate data as needed for program monitoring. - Understandings on performance criteria and structural measures are specified in the attached Technical Memorandum of Understanding. - The government consents to publication of this letter, the MEFP, the TMU, and accompanying Executive Board documents. *Signed by Muhammad Aurangzeb (Minister of Finance and Revenue) and Jameel Ahmad (Governor of the State Bank of Pakistan).* ### A. Recent Economic Developments and Outlook - FY25H1 economy continued to recover with a sharper decline in inflation and more subdued growth; external conditions remained favorable. - Headline CPI reached 1.54 percent (yoy) in February 2025. - Core inflation declined to 7.8 and 10.4 percent (yoy) in urban and rural areas, respectively. - GDP growth estimated at 1.3 percent yoy in Q1, and 1.7 percent in Q2. - Gross reserves increased to US$10.7 billion at end-March as SBP undertook substantial FX purchases. ### Baseline macroeconomic scenario (reflecting recent developments and agreed policy stance) - Real GDP growth expectations: - Range of 2½–3 percent in FY25. - Medium-term gradual pickup to 4½ percent. - Headline CPI inflation: - Expected to pick up toward the upper end of the SBP’s 5–7 percent target range by June 2025. - Core inflation expected to remain contained and return to target range during FY26 with tight monetary policy. - Current account: - Surplus of US$1.1 billion in FY25H1 (improvement from a deficit of US$1.4 billion in FY24H1). - FY25 current account deficit projected at 0.0 percent of GDP. - Expected to increase gradually to around 1 percent of GDP by 2030. - Note: Current account was in deficit in FY25H2 due to strong acceleration in imports. ### Risks to the baseline - Risks remain very high, including: - Uncertain external environment and geopolitical frictions affecting commodity prices, global financial conditions, or trade protectionism. - High exposure to natural disasters and weather-related events (e.g., 2022 floods) that could elevate fiscal and external pressures. - Delays or slippages in policy and structural reforms could jeopardize recovery and debt/external sustainability and adversely affect external financing from bilateral partners. ### B. Economic Program — Fiscal Policy: overall stance and recent performance - Commitment to achieve an underlying primary surplus of at least 1.0 percent of GDP and continue fiscal consolidation in the FY26 budget. - General government's primary surplus reached PR 3,604 billion in FY25H1. - Provinces met their joint primary surplus target through FY25H1. - Spending restraint contributed to overperformance: PRs 718 billion observed against PRs 1,130 billion projected for grants and development projects. - Direct taxes and provincial non-tax and tax revenues increased 29 percent and 32 percent yoy, respectively. - FBR revenue increased 26 percent (yoy) but underperformed relative to program projections. - FY26 budget to be prepared budgeting a primary surplus of at least 1.6 percent of GDP (new end-June 2025 SB). ### Fiscal strategy and specific commitments (enumerated measures) - Key fiscal commitments and actions: - (a) Revenue measures: - Resolve pending litigation cases in courts, with most expected to be settled by April and May 2025. - Ensure revenue-to-GDP reaches at least 12.3 percent of GDP in FY25 (including FBR revenue of 10.6 percent of GDP). - IMF team to receive timely monthly data on agreed performance indicators. - If FBR revenue falls short by end of month from March to April and other tax revenues are insufficient, implement proportional expenditure adjustments. - Withhold PRs 87 billion from PSDP allocations until litigation cases are resolved in court (anticipating resolution in May and June). - (b) Expenditure measures: - Refrain from granting any further increases in salaries and pensions beyond those approved in FY25H1; keep within FY25 appropriated limits. - Safeguard BISP unconditional cash transfer (UCT) Kafaalat program per FY25 budget allocation. - Create fiscal space via: (ii) savings on energy subsidies over what is needed to meet the CD target; (iii) expediting prioritization and rationalization of the PSDP based on FY25H1 review; (iv) delaying non-priority PSDP expenditure. - (c) Prudent use of SBP dividends windfall: - Windfall from SBP dividends received in September 2025 used to reduce borrowing need, retire debt and lower gross financing requirements (¶7.j). - Going forward, any windfall from SBP dividends exceeding 1.0 percent of GDP will be used similarly. - (d) Enhancing revenue administration and compliance: - Leverage CRM system to identify high-risk taxpayers (including retail, real estate, corporate). - Augment number of auditors and maintain targeted mass nudging/notification strategies. - Expand retailer participation in integrated Point-of-Sale (POS) system. - Monitor import declarations for irregular patterns and sustain anti-smuggling initiatives. - Measures to combat informal tobacco market tax evasion: - Conduct thorough audits of acetate tow imports misclassified under incorrect HS codes. - Mandate use of bonded warehouses for these imports. - Restrict acetate tow imports to registered tobacco and filter-producing companies. - Prohibit transit imports of acetate tow to Afghanistan. - Continue implementation of track-and-trace system to monitor production and escalate anti-smuggling campaigns and checkpoint operations, particularly in northwestern regions. - (e) Provincial tax reforms: - Four provinces amended Agriculture Income Tax (AIT) regimes to align with federal personal income tax regime for small farmers and corporate income tax regime for commercial agriculture (end-October 2024 SB). - New tax regimes apply on income from January 1, 2025; tax liability for second half of FY25 to be collected in September 2025. - Provinces developing implementation plans with World Bank and IMF (new end-June 2025 SB). - Provinces transitioning GST on services from positive to negative list approach effective start of FY26; negative list not harmonized across provinces. - Provinces developing harmonized property taxation framework to commence in FY26, transitioning from rent-based to capital valuation. - Provincial efforts to be discussed at National Tax Council meeting scheduled for early April 2025. - (f) Improving information: - Enhance collaboration with provincial revenue authorities and streamline information-sharing with the FBR, including AIT reported in income tax filings and GST credit claims. - Ringfencing fiscal program (commitments going forward): - (i) No supplementary grants for additional unbudgeted spending over parliamentary approved level, except in cases of severe natural disasters; seek ex-ante National Assembly approval for expenditures exceeding budget appropriation (continuous SB). - (ii) No new tax amnesties or new preferential tax treatment (including exemptions, zero rating, tax credits, accelerated depreciation allowances, or special rate), including via budget or SROs (continuous SB). - (iii) Continue focus on critically urgent energy sector policies. - (iv) Commitment not to introduce any fuel subsidy or cross-subsidy scheme. ### Structural fiscal reform priorities (continued) - (a) Tax Policy reforms: - Launch pilot to subject all tax policy proposals for FY26 budget to a cost-benefit analysis. - Develop standardized ex-ante and ex-post evaluation framework for tax policy measures. - Develop a simplified tax return and redesign simplified tax regimes for micro and small enterprises. - Conduct comprehensive review of tax expenditures to phase out non-cost-effective measures starting July 1, 2025. - New TPO to expand tax expenditure assessment capacity. - (b) Revenue administration reforms: - Established compliance risk management in LTO Islamabad, Karachi, and Lahore as of December 2024 (end-December 2024 SB). - Integrate FBR internal data and proceed with data cleaning and quality control to incorporate information shared by 145 agencies under MOUs. - Continue Compliance Improvement Plan and efforts to bring more taxpayers (including retailers) into tax net. - (c) Tax Policy Office (TPO): - TPO established within Ministry of Finance in September 2024. - Staffing initiated with FBR support and World Bank financing seven experts to support tax proposal evaluations. - Finalize data-sharing arrangements between FBR and TPO; establish collaboration framework with FBR’s International Centre of Tax Excellence (ICTE). - With IMF support, develop short- and medium-term TPO work plans by end-July 2025 covering staffing, stakeholder engagement, and operation of TPO Advisory Board. - (d) National Fiscal Pact: - Signed by federal government and provinces end-September 2024 (end-September 2024 SB). - Formalizes devolution of specific spending responsibilities in line with 18th Constitutional Amendment (higher education, health, social protection, regional public infrastructure). - Provinces committed to improving tax collection (sales tax on services, property tax, AIT). - Implementation underway, highlighted by passage of new AIT laws. - From FY26 budget onwards, aim that all new PSDP projects affecting only one province will be covered entirely by provincial budget. - (e) Use of provincial budget cash surplus: - Establish framework for provinces to invest in government securities via non-competitive bids at auction-determined prices; intended bid amounts disclosed in advance. - Any allocation of cash surpluses to other instruments will be treated as expenditure. - (f) Progress on privatization agenda: - Renewed efforts to privatize PIA, anticipate completion by August 2025. - Significant progress with privatization of First Women’s Bank and HBFC; aim to complete both by May 2025. - Financial advisor hired for privatization of three Batch I DISCOs (IESCO, FESCO, GEPCO); sell side due diligence underway; bidding targeted for December 2025. - Target ZTBL for privatization by end of this year; initiate hiring of financial advisor for Batch II DISCOs (HESCO, SEPCO, PESCO) by end-April 2025. - GENCO privatization progressing; bidding for Nandipur targeted for January 2026. - Nearing final decision on transaction structure for the Roosevelt Hotel. - Prioritize privatization of profitable commercial SOEs supported by SOE privatization classification. - (g) Enhancing public financial management (PFM): - Improve budget practices: - Incorporate additional clarification notes in monthly fiscal operation reports comparing actual outcomes with projections. - Improve mid-year and year-end budget execution reports with detailed analysis of drivers behind discrepancies. - Move issuance of budget circular forward to January for FY26 budget preparation to provide more time for negotiations and establish strategic budget goals. - Public Investment Management: - Implement recommendations from PIMA and C-PIMA. - Completed review of all investment projects within PSDP and produced comprehensive report to be shared with the Fund in the first week of April. *Source: Memorandum of Economic and Financial Policies (Attachment I) and staff letter excerpts contained in the provided content unit.* ### 2025. This review has allowed significant streamlining of the PSDP pipeline by identifying ### 1pakea2025001-print-pdf - 2025. This review has allowed significant streamlining of the PSDP pipeline by identifying ### PSDP pipeline and project selection - 152 projects identified for expenditure capping; these projects "will not receive any additional funding beyond what has been allocated in FY25 and will be removed from the PSDP pipeline starting in FY26." - 175 priority projects are planned for completion in FY25. - A scorecard-based system has been developed (end-January 2025 SB) that: - outlines criteria for project selection, weighting for each criterion, and methodology for calculating sectoral project scores. - will be further enhanced to: (i) streamline criteria to eliminate overlap and prevent double counting; (ii) introduce pass/fail criteria for certain dimensions; (iii) provide explicit guidance on scoring; (iv) allow negative marking for impacts such as risks or for projects that contradict policy objectives; (v) increase the focus on climate considerations by assigning a higher weighting and distinguishing between environmental impacts, climate mitigation, and climate adaptation; ensure appropriate treatment of project financing in the project selection process; and (vi) clarify the interaction between sectoral ranking and cross-sectoral scoring. - Commitment to subject Public-Private Partnerships (PPPs) to the same rigorous selection criteria applied to projects funded through other sources. ### Cash management - Continue expanding coverage of sweeping arrangements to encompass all bank accounts, covering all current accounts and then savings accounts. ### Spending transparency and e-PADS procurement system - e-PADS integrated: as of end-February 2025, a total of 623 procuring agencies belonging to 51 federal ministries and departments/organizations are already integrated. - Federal-level planned procurement contracts in e-PADS for the current fiscal year: 32,359 contracts amounting to PRs 821.13 billion. - Completed contracts at federal level in e-PADS: 21,339 contracts amounting to PRs 74.5 billion. - Suppliers must disclose beneficial ownership information upon registration; verification with National Database and Registration Authority, Federal Board of Revenue and Securities and Exchange Commission of Pakistan. - PPRA posts beneficial owners of suppliers of awarded procurement contracts above PRs 50 million on its website. - PPRA entered memoranda of understanding: December 2024 with the Competition Commission; February 2025 with the National Accountability Bureau. - The Auditor General of Pakistan will conduct an external audit of the e-PADS to be initiated this year, and the final report completed by Q1 2026. - PPRA continues quarterly reporting on public procurement made through e-PADS (see Table 2 of the TMU). - PPRA supports procuring agencies and suppliers with trainings to increase familiarity and usage of e-PADS. - Two provinces are ramping up e-PADS usage; another province piloting use in 2025; the fourth province reviewing integration options. ### Fiscal risks and PPP contingent liabilities - Commitment to prudent issuance of government guarantees, including guarantees for SOE’s commodity operations, through the Ministry of Finance. - Risk Management Unit (RMU) in the Ministry of Finance, in coordination with provincial RMUs, DMO, and other agencies, supported by the ADB, will introduce a risk monitoring framework for quantifying contingent liabilities related to PPPs and publish first estimates by end-December 2025. - Policy commitment: "we will not offer any new fiscal incentive or guaranteed returns (in any currency) to firms or any investment project." ### Debt management and debt-market development - Buy-back auctions in September-October 2024 helped mitigate refinancing risks concentrated at end-2024. - Met end-December IT on the average time to maturity (ATM) of the local currency domestic debt stock by lengthening domestic debt maturities. - Updated medium-term debt management strategy to be published before start of FY26; will prioritize portfolio composition considering costs and risks. - By end-September 2025, the Ministry of Finance and SBP will prepare and publish a strategy to mitigate refinancing risks arising from the PRs 5.2 trillion Pakistan Investment Bond held by the SBP (maturing in June 2029). - By end-FY26, undertake a comprehensive study to evaluate stages of development of key pillars within the market environment. - Comprehensive assessment of the Central Directorate for National Savings (CDNS) due by end-FY25, to provide actionable recommendations consistent with debt management objectives and financial market development strategy. ### Poverty reduction and social protection (BISP and related programs) - FY26 budget includes a PRs 716 billion (0.5 percent of GDP) BISP allocation, a 20 percent nominal increase relative to FY25. - UCT Kafaalat benefit adjustment: quarterly benefit increasing from PRs 13,500 to PRs 14,500 beginning in January 2026 (new end-January 2026 SB). - Maintain total number of enrolled households at 10 million. - Commitments: (i) continued annual inflation adjustments for UCT benefits to ensure at minimum constant real purchasing power for the most vulnerable; (ii) readjust UCT benefits upon release of any new household surveys to continue transfers equivalent to 15 percent of the bottom quintile’s consumption once this threshold is reached. - Work with World Bank to enhance education and health and nutrition CCT programs; provinces to avoid overlap of BISP and provincial CCT programs; FY26 budget will keep spending on these programs constant as a share of GDP. - NSER commitments: keep NSER live and covering all of Pakistan’s poor; keep BISP enrollment open; administer regular re-declaration of beneficiaries on the intended three-year cycle. - Electronic payment model expansion: bank accounts in pilot districts by FY26Q1. - Exceeded FY25 education CCT enrollment target of 10.4 million by 400,000; on track to achieve nutrition CCT target of 2.1 million. - Enrollment database opened for other provinces; MoU signed with Punjab. ### Federal and provincial health and education spending - Commit to rebuild non-BISP health and education spending at federal and provincial levels. - Full execution target: budgeted PRs 2,882 billion (2.4 percent of GDP) by end-FY25 (noted missed targets in FY25H1 due to execution constraints in Sindh and KP). - FY26 budget will include similar level of health and education spending as a share of GDP, equivalent to PRs 3,156 billion. ### Monetary policy stance and communication - Medium-term inflation target range: 5-7 percent. - Monetary policy: remain appropriately tight and data dependent as inflation rebounds; stand ready to increase policy rates if new inflationary pressures emerge or external pressures threaten stability. - Inflation expectations survey: new survey to be launched and published by end-June 2025. - Continue strengthening communication around policy decisions, including issuance of a dedicated monetary policy report. ### Credit allocation, Export Finance Scheme, and SBP refinancing - Refrain from involvement or influence in decisions allocating credit; commit to refrain from sectoral disbursement targets and remove barriers to credit in respective sectors (¶17). - Export Finance Scheme (E-EFS) action plan from July 1, 2025 to improve targeting and support non-traditional exports and new markets. - Legacy EFS: phase out accelerated, rolling off the final 40 percent of the initial (June 2022) EFS portfolio envelope during FY27, such that all EFS refinancing via SBP will cease by end-June 2027. - Future E-EFS envelope will depend on fiscal space for on-budget subsidy and Exim Bank capacity. - SBP committed not to introduce any new refinancing schemes during the transition period or thereafter. ### SBP risk mitigation and safeguards - Revised regulations and methodologies for risk mitigating measures (including enhanced collateral policy and requiring counterparties to be financially sound); circular issued December 26, 2024 (end-December 2024 SB). - Implementation of adopted measures to begin from July 2, 2025 onwards (end-September 2025 SB). - SBP will refrain from outright secondary market purchases of government securities or further extension of maturities of securities currently held by SBP. ### FX market policy and reserve management - FX policy principles: - Embracing flexibility: maintain a flexible exchange rate with price discovery in the interbank market. - Building buffers: limit net FX sales to banks to at most balancing FX purchases within each quarter; consult with the Fund if gross sales exceed US$200 million in any rolling 30-day period. - Improving communication and transparency: publish SBP’s monthly FX interventions with a three-month lag (started in September 2024); announce semiannually a six month-ahead gross reserve target and FX debt service of the government over the corresponding period. - Refraining from restrictions: maintain an exchange system free from restrictions on payments and transfers for current international transactions and in accordance with Article VIII; report that no payments, having cleared regulatory processes, are pending execution. - Upgrading FX market frameworks: December 2024 updated regulatory framework for Exchange Companies; work on an FX swap mechanism for Islamic institutions and a local USD clearing mechanism. ### Financial sector stability, supervision, and reforms - Strengthen bank resolution and crisis management frameworks, including deposit insurance; amendments to bank resolution and deposit insurance legislation signed into law at end-October 2024 (end-October 2024 SB). - Financial Institutions Resolution Department established within SBP in December 2024 to perform resolution of distressed regulated entities. - Under-capitalized public bank wind-down: customers requested to withdraw deposits by December 2024; remaining deposits transferred to National Bank of Pakistan as of January 2025; legal entity put into liquidation as of December 17, 2024; liquidation order passed by the court and banking license revoked. - Two undercapitalized private banks: one completed a merger effective March 11, 2025; the second pursuing a multi-step recapitalization plan expected to result in compliance with nominal Minimum Capital Requirement (MCR) and prescribed Capital Adequacy Ratio (CAR) at end-April. Shareholders provided SBP unconditional commitment to align capital by end-April 2025; if full recapitalization not achieved, powers to put these banks under resolution by May 2, 2025. - Microfinance sector: currently 5 out of 11 microfinance banks are undercapitalized; engaged with owners and potential investors; deposit insurance system will not be extended to this sector until issues addressed and preconditions met. - Ongoing efforts with development partners to develop schemes for longer-term sustainability of the microfinance sector. ### Non-Performing Loans (NPLs) and banking supervision - SBP issued guidelines in July 2024 requiring banks to develop comprehensive plans for dealing with existing stock of NPLs and minimizing further build-up by January 2025. - Almost all banks, particularly those with higher NPLs, have submitted plans, with a few banks expected to follow by end-March 2025; SBP will closely monitor implementation. ### Post-2027 financial system strategy - Ministry of Finance will lead a government effort, in collaboration with SBP, to prepare a plan outlining the government’s post-2027 financial sector strategy (new end-June 2026 SB), with work starting by end-October 2025. ### AML/CFT and TBML efforts - National AML/CFT Authority coordinating implementation and monitoring of relevant AML/CFT agencies to address high risk offenses identified in the 2023 National Risk Assessment (corruption, smuggling, tax crimes and unlicensed hawala operators). - Reforms focus on: (i) enhancing effectiveness of AML/CFT supervision of designated non-financial businesses and professions and virtual asset service providers; (ii) improving availability and accuracy of beneficial ownership information (including through risk-based verification by the Securities and Exchange Commission of Pakistan). - To counter trade-based money laundering (TBML): SBP updated overall AML/CFT supervisory framework in August 2024 and plans to issue a new standalone supervisory framework on TBML by end-June 2025. - Financial Monitoring Unit (FMU) developed guidance on TBML risks, conducted training with banks on TBML-related suspicious transaction reports in its GoAML system, and coordinated with customs authorities in sharing TBML-related financial intelligence. *Source: 1pakea2025001-print-pdf - 2025. This review has allowed significant streamlining of the PSDP pipeline by identifying* ### 17. We recognize that Pakistan’s financial sector requires further deepening to play an ### 17. We recognize that Pakistan’s financial sector requires further deepening to play an effective role as an intermediary of capital to the private sector. ### Financial sector deepening and digitalization - Objective: bring the financial inclusion level (percent of adults with bank accounts) up to 75 percent over the next 5 years (from 64 percent currently), with a particular focus on reducing the gender gap. - Actions: - SBP’s 2023-28 Strategy prioritizes inclusive and sustainable access to financial services, including through innovative digital solutions. - Published National Financial Inclusion Strategy for 2024-2028 to leverage progress since 2015. - Move swiftly towards the complete digitalization of government payments and promote digitalizing public records to enhance access to credit for currently underserved segments. - Completed rollout of the instant payment system RAAST; aims to: - advance further integration of micropayment systems with other countries to reduce costs to consumers; and - modernize the Real Time Gross Settlement (RTGS) system and integrate it with the Central Securities Depository (CDS). - Commit to implement the five-year strategic plan of the Securities and Exchange Commission of Pakistan (SECP) to develop the insurance sector; current insurance penetration rate remains below 1 percent. ### Limiting the public sector role and reforming DFIs - By end-June 2025, SBP will transfer its stakes in two financial institutions to the government to limit conflicts of interest. - Federal and provincial governments will reassess public interest in government ownership of banks and propose guardrails to ensure government-owned banks are not co-opted into off-budget lending schemes. - Development Financial Institutions (DFIs): - Working towards consolidation and redesign of the business model. - Supported by a revised regulatory regime to ensure DFIs focus on development finance mandate instead of principally investing in government securities. - Forthcoming assessment of the CDNS (¶7.j) will lead to actions to ensure the public sector neither duplicates functions of private institutions nor inhibits growth and innovation; recognition that more Pakistanis are served by banks and access market-based saving opportunities (e.g., via asset managers or retail investment in government securities traded at PSX). ### Energy sector overview and circular debt (CD) context - Strategy aim: stem circular debt (CD) flow while addressing structural impediments to a viable energy sector and protecting vulnerable consumers from elevated tariffs. - FY25H1: strategy overperformed by around PRs450 billion, reflecting lower financing costs and early success on recoveries. - Stock of power CD: PRs 2,444 billion (2.1 percent of GDP) at end-January 2025. - Stock of gas CD: PRs 2,294 billion (2.2 percent of GDP) at end-June 2024. - Commitment to keep energy tariffs in line with costs while implementing reforms to reduce fiscal risks, ensure sector viability, support growth, and ease price pressures. ### Circular debt (CD) flow targets and FY25-FY31 plan - Target: achieve net zero CD flow for FY25 and strive for the same in FY26. - FY26 CD Management Plan (CDMP) to be adopted by cabinet by end-July 2025. - Key elements: a. Timely electricity tariff increases consistent with cost recovery: - NEPRA to continue timely automatic notifications of regular quarterly tariff adjustments (QTAs) and monthly fuel cost adjustments (FCAs). - Ensure full implementation of the July 2025 annual rebasing (new SB, July 1, 2025), QTRs, and FCAs going forward. - All provinces agree not to introduce any subsidy for electricity or gas. b. Reducing financial burden by converting existing CD stock to CPPA debt: - Existing CD stock of PRs 2.4 trillion (2.1 percent of GDP) conversion and clearance plan: - Clear, by end-FY25, PRs 348 billion via renegotiation of arrears with IPPs (PRs 127 billion via already-budgeted subsidy for CD stock clearance and PRs 221 billion via CPPA cash flow). - PRs 387 billion via waived interest fees. - PRs 254 billion via additional already-budgeted subsidy for CD stock clearance. - PRs 224 billion in non-interest-bearing liabilities will not be cleared. - Remaining PRs 1,252 billion will be borrowed from banks to repay all PHL loans (PRs 683 billion) and to clear remaining stock of interest-bearing arrears to power producers (PRs 569 billion). - Loan terms: taken at a rate favorable to current CD stock rate; annual payments financed through debt service surcharge (DSS) revenues over six years. - DSS specifics: - DSS set at 10 percent of the NEPRA-determined revenue requirement, adjusted each year at annual rebasing, per current practice. - Legislation to remove the 10 percent DSS cap by end-June 2025 (new end-June 2025 SB). - In event of DSS revenue shortfall, DSS will be increased to cover shortfall; no fiscalization of any revenue shortfall. - Plan to retire interest-bearing CD stock anticipated at end of FY25 (expected to be no greater than PRs 337 billion) alongside FY26 budget process, which will not utilize subsidy resources. - CD targets set lower and will continue to decline to zero by FY31, the end of the operation. c. Necessary budget allocations for power subsidies: - FY26 budget will include lower subsidies than in FY25 due to CD stock operation impacts and ongoing reforms (¶20.d). - From March 17, 2025, introduce a limited subsidy financed by a PRs 10 per liter PDL increase, expiring June 30, 2026, at an annualized amount of PRs 182 billion. - Revenues will finance a subsidy applied to all non-lifeline consumer categories, resulting in an average electricity tariff reduction of PRs 1.7/kwh. - CPP transition levy (CPP levy) revenues will allow additional tariff reduction; estimated initial impact PRs 0.90/kWh. - Subsidy will be limited to at most 0.8 percent of GDP and will cover: - (i) PDL-derived revenues of PRs 182 billion noted above to provide further temporary tariff relief; - (ii) the projected tariff differential; - (iii) arrears payments of FATA and KE; - (iv) agricultural tubewells; and - (v) CD stock payments to compensate for any CD flow (targeted to be much lower following the CD conversion operation (¶20.b)). d. Parallel fundamental cost-reducing reforms (with World Bank, ADB, and other development partners): i. Improving distribution efficiencies: - Policy and financial prerequisites taken, with World Bank support, to privatize three DISCOs (IESCO, GEPCO, and FESCO) (end-January 2025 SB). - Financial advisor hired in February; due diligence underway. - First bidding for these three DISCOs to begin by end-December 2025. - Process to privatize three additional DISCOs and seek concessions for private management of three additional DISCOs expected to proceed through 2026. ii. Shifting captive power to the electricity grid: - Finalized and shared service level agreement with all CPPs setting NEPRA-prescribed performance standard of uninterrupted supply for CPPs that connect to the grid, including penalties for DISCOs that fail to meet standard. iii. Improving the transmission system: - Restructuring NTDC into three entities: - Independent System Operator and Market Operator (ISMO) to assume system operator function; - Energy Infrastructure Development Management Company (EIDMC) responsible for projects and development, operational by end-August 2025; - National Grid Company (NGC) to operate and maintain the grid and transmission lines, restructuring complete by end-December 2025. iv. Privatizing inefficient generation companies (GENCOs): - Plans to privatize at least two GENCOs (Nandipur and Guddu 747). - Prior actions to be completed by end-April 2025 to enable hiring a financial advisor by end-May 2025; bidding for Nandipur targeted for January 2026. v. Complete transition to a competitive electricity market: - Operationalization of the Competitive Trading and Bilateral Contract Market (CTBCM) to enable bulk power consumers to purchase electricity from DISCOs or competitive suppliers. - At outset, 800 MW will be allowed in the market until 2031, in line with IGCEP capacity planning. - Transition carried out in a phased and responsible manner to minimize consumer and budgetary impact. vi. Accelerate move to renewable energy: - Build upon IGCEP and TSEP (2024-34) updates to mandate an increased share of cheaper renewable energy in the generation mix. - Projects to be on a least cost basis; expect elimination of a significant portion of surplus, unused capacity. vii. Expansion of capacity: - Given excessive cost pressures from capacity payments on idle plants, carefully review need for additional capacity and not enter further capacity commitments without prior transmission infrastructure commitment and full utilization of existing capacity at peak times. viii. Fiscal and settlement discipline: - Continue to refrain from netting out cross-arrears (unless independently audited); using “non-cash” settlements (e.g., payables against reimbursement of on-lent loans to DISCOs); and issuing government guarantees except to substitute an existing government guarantee on maturity. ### Gas sector reform agenda - Focus: price normalization across sectors and captive power elimination; keep end-user gas prices in line with costs, including the cost of diverted RLNG. - Reforms: a. Timely tariff adjustments: - Semiannual gas tariff adjustment notified as determined by OGRA on January 26, 2025 (SB, February 15, 2025), preserving progressive tariff structure and protecting vulnerable households. - Continue to notify semiannual adjustments as determined by OGRA (new SBs, July 1, 2025, and February 15, 2026). - Gas tariff adjustments will include cost of imported RLNG. b. Eliminating captive power (CPPs): - Did not immediately end captive power usage by end-January 2025 (end-January 2025 SB) to avoid adverse impacts from large take-or-pay RLNG contracts. - Increased price of all gas for CPPs to equivalent of industrial grid price plus a 5 percent through increase in cost of gas to CPPs and created a new CPP Transition Levy (CPL) via Presidential Ordinance on January 31. - CPL will automatically increase premium over grid-equivalent price by an additional 5 percentage points every six months until premium is 20 percent in August 2026. - Levy proceeds (delta between headline CPP gas price and baseline CPP gas price of PRs 3,500/mmbtu) will be transferred to the electricity grid monthly to reduce average effective tariff and reduce prices across existing power tariff structure. - CPL passed by ordinance; commit to legislating to make levy permanent in current form (new end-May 2025 SB) to avoid lapse. - Commit to refrain from contracting any additional external RLNG contracts given large RLNG surplus. c. Unifying pricing across indigenous gas and imported RLNG: - Work to develop implementation strategy for WACOG to allow full cost recovery of more expensive imported RLNG and provide price signal to guide gas consumption and reduce power generation costs. - Work toward adopting a new, targeted and budgeted gas subsidy framework to eliminate current cross-subsidy system (¶32). d. Automatic notification of semiannual gas price determinations: - 2022 amendment to OGRA Ordinance mandates automatic notification of OGRA determinations. - Commit to provide timely advice to OGRA within 40 days of determination of revenue requirements in respect of category-wise consumer gas prices. - OGRA empowered to notify prices if government cannot provide advice within 40 days; government will provide policy guidance to enable OGRA to do so. e. Improving monitoring and management of gas CD: - Progress with private consultants and development partners to: - devise precise definition of gas CD (includes oil but excludes power sector elements); - compile detailed and verified gas CD stock statistics, including sub-components and drivers; - establish a monthly gas CD flow reporting system; - devise a gas CDMP. - Third-party consultant completed evaluation and analysis of existing gas CD and gas company cash flow data; an international development partner is completing modeling and reporting on gas CD. - Commit to provide development partners, including the Fund, quarterly data on CD stock and flow details and to publish initial CDMP by end-June 2025. ### Structural policies (summary) - Remainder of structural reform agenda will seek to reduce inefficiencies, boost productivity, and support private sector development. *1pakea2025001-print-pdf - 17. We recognize that Pakistan’s financial sector requires further deepening to play an* ### 23. Following through on our SOE reform agenda is key to scaling back the state’s ### Following through on our SOE reform agenda is key to scaling back the state’s footprint and improving services ### SOE governance framework and Sovereign Wealth Fund (SWF) - Commitments to amend SOE-dedicated laws for the remaining 9 statutory SOEs to fully align them with the provisions of the SOE Act (end-June 2025 SB). - Remaining statutory SOEs listed in the source: EXIM Bank of Pakistan, National Bank of Pakistan, State Life Insurance Corporation, Pakistan Railways, Water and Power Development Authority, National Telecommunication Corporation, Gwadar Port Authority, Karachi Port Trust, and Port Qasim Authority. - SWF legal and governance reforms (end-December 2024 SB, reset to end-March 2026; enact necessary legal amendments by end-March 2026 in consultation with Fund staff): - Clarify legal nature and mandate: legally define the SWF as a SOE, subject it to the SOE Act, narrow mandate to (i) holding and managing SOEs to create value via operational and financial improvement; and (ii) attracting FDI by facilitating and mobilizing co-investment in strategic commercial ventures that generate financial returns in line with the SWF’s Investment Mandate, with conditions that the SWF and any sub-funds are neither the sole investors nor the first loss and that investments are motivated only by financial risk-return considerations. - Divestments and procurement: require privatization/sales and procurement to follow SWF Board-published rules and policies aligned with international standards, ensuring open, competitive, transparent and non-discriminatory procedures and minimum disclosure requirements, including on beneficial ownership. - SWF governance: appointments to the SWF Board and Advisory Committee to be transparent, merit-based, participatory, with strong independence requirements and effective cooling off periods. - Governance of SWF-SOEs: amend section 50 of the SWF Act to explicitly establish that SWF-owned SOEs are subject to the SOE Act and SOE Policy and operationalize SWF ownership functions with SWF as owner/holding entity with appropriate oversight systems as agreed with Fund staff. - Fiscal safeguards: require all SWF and sub-fund revenues to be provided directly to the government and not retained by the SWF; require funds for SWF investments to be allocated by the Federal Government through the budgetary process; prohibit the SWF from (i) incurring debt or borrowing in any way; (ii) providing guarantees or collateral, including over SWF-SOEs shares or assets; (iii) lending to public or private entities, or any persons, foreign or domestic; (iv) participating in PPPs; (v) acquiring financial assets or instruments of any kind; or (vi) receiving any contributions from the central bank, SOEs or any other public body. - Execution of the SWF Act and preparatory actions will only occur after the above reforms are complete and the agreed amendments become law. ### Compliance, restructuring, and monitoring of SOEs - SOE compliance and transparency targets: - Completed categorization and reform recommendations updating the March 2021 Triage Plan in line with paragraph 11 of the SOE Policy. - Federal rightsizing committee review of purpose and rationale of various SOEs to be completed by end-December 2025. - The 15 largest commercial SOEs by asset size have adopted business plans, published statements of corporate intent (SCI), and adopted and published externally audited, IFRS-compliant financial statements and annual reports. - Commitment: another 40 commercial SOEs to have business plans, SCIs, and externally audited, IFRS-compliant financial statements and annual reports by end-December 2025. - A similar number of SOEs will fully adopt IFRS at all SOEs, per the SOE Act, by end-December 2025. - Ensure all commercial SOE Boards are majority independent per section 12(2) of the SOE Act. - Commitment: achieve majority-independent Boards for the remaining 28 SOEs that currently do not have majority-independent boards by end-December 2025. - Develop a database to identify suitable directors by end-October 2025. - Identification, costing, and contracting of public service obligations (PSOs) in the seven commercial SOEs with the largest PSO claim on government, and entering into PSO agreements with the government in line with the SOE Act (Schedule II) and SOE Policy, on track to be completed by end-June 2025. - Two SOEs selected for comprehensive restructuring and reforms; detailed implementation and monitoring plans to be published on respective SOE websites by end-December 2025. - CMU (Central Monitoring Unit) operationalization: - Complete development of electronic database such that the CMU can meet reporting requirements under Section 31 of the SOE Act by end-June 2025. - Further develop aggregate SOE report (first published December 2023) to meet OECD good practice guidelines for SOE aggregate reporting; included SOEs’ performance against FY24 financial and non-financial benchmarks in December 2024 report. - Issue guidance notes on PSO framework and review/update director selection and appointment guidelines in coordination with ADB and per SOE Policy; ‘preparation of business plans and SCI’ and ‘CMU Operational Manual’ already issued. ### Agriculture: phasing out price-setting and wheat sector framework - Policy direction: phase out federal and provincial government price-setting for agricultural commodities by end-FY26. - Wheat sector specific actions: - Refrain from announcing support prices and discontinue procurement operations that crowd out private sector; abstained from announcing support prices and undertaking provincial procurement during the 2025 Rabi season and committed to continue this approach. - Explore improving availability of information on growing season and prices and inclusion of wheat on the Pakistan Mercantile Exchange to support market development. - Working group led by Ministry of National Food Security and Research, with provinces and stakeholders, finalizing a new food security framework for wheat which includes winding down PASSCO and transferring functions to a new entity envisioned to be jointly owned by four provinces, two regions, and the federal government; objectives and parameters to be clearly defined ex ante; all transactions executed at market prices and any sales from stocks to happen at cost recovery. Alternative arrangements possible in agreement with provinces, with same objectives and principles. - Current provincial stocks to be either transferred to the new entity or sold at market prices according to a pre-announced schedule, but not used to manage prices. - By end-December 2025, review relevant legislation underpinning government interventions in commodity markets and prepare a report with comprehensive recommendations on addressing market abuse and uncompetitive behavior through competition policy and less protectionist trade policies; recommendations to inform further deregulation steps in end-FY26 while ensuring producers do not extract undue rents from consumers. - Legislation under review includes federal and provincial acts such as The Price Control and Prevention of Profiteering and Hoard Act, 1977; The Food Stuff Control Act, 1958 (Punjab); and The Sindh Essential Commodities Price Control and Prevention of Profiteering and Hoarding Act, 2005. ### Strengthening anti-corruption and governance institutions - Governance and Corruption Diagnostic (GCD) Assessment with IMF CD support: - Publish full GCD report (end-July 2025 SB, reset to end-August 2025). - Develop and publish an action plan to implement priority recommendations (new end-October 2025 SB). - UNCAC Review Report: Cabinet convened a committee in March to assess the UNCAC Review Report; subject to committee recommendations, cabinet intends to publish the full UNCAC Review Report and make it publicly available on a government website. - NAB and PACEs: - Enhance NAB’s operational effectiveness and independence in investigating corruption cases above the PRs 500 million threshold and coordinate with other investigative bodies including the Federal Investigation Agency and PACEs. - Federal notification process by the Financial Monitoring Unit to designate PACEs to investigate money laundering related to corruption offenses within their jurisdiction and to request and receive financial intelligence from FMU as an investigating agency to be issued by end-December (year implied by context in source). - Asset declaration reforms: - Amend the Civil Servants Act of 1973 to ensure asset declarations of high-level public officials (BPS 17-22), including domestic and foreign assets beneficially owned by them or a member of their family, will be digitally filed and publicly accessible through the FBR with data protection safeguards; deadline end-February 2025 SB, reset to end-June 2025. - Establish regulations to centralize collection, digitize submissions, publish information subject to safeguards, and enable risk-based verification by the Establishment Division and FBR. - Bank access for AML/CFT: - SBP, FBR and FMU support banks’ access to asset declarations of high-level federal public officials (BPS17-22) to help comply with AML/CFT obligations and better risk-profile politically exposed persons. - In December 2024, FBR launched Customer Due Diligence Online Portal to electronically receive information requests from banks and reply (usually within 24 hours). - Provinces, with support from FBR, Establishment Division and Ministry of Finance, will issue regulations to grant banks access to asset declarations of high-level provincial public officials (BPS17-22) per National Fiscal Pacts. ### Trade liberalization, tariffs, and auto policy - National Tariff Policy (NTP) 2025–30: - Expected to come into effect on July 1, 2025 after cabinet approval and incorporation into Finance Act for FY26. - Policy measures: phase out all additional customs duties (ACDs); reduce all regulatory duties (RDs) by 80 percent; reform the 5th Schedule to the Customs Act. - Result: gradual reduction in the weighted average applied tariff from 10.6 percent in FY25 to 7.4 percent by FY30. - Commit to avoid introducing any new RDs going forward. - Auto policy and AIDEP 2021–26: - Substantial reduction in protection for automobile sector in next auto policy coming into effect from July 1, 2026. - Commitment to set a path to progressively reduce protection by 2030, including eliminating all ACDs and RDs in the sector and substantially reducing CDs; combined with NTP tariff reductions this will bring weighted average tariff to below 6 percent by FY30. - Remove all quantitative restrictions on commercial importation of used motor vehicles initially only for vehicles less than five years old (subject to meeting minimum environmental and safety standards) during FY26Q1; submit required legislation to parliament by July 2025 (new end-July 2025 SB). - For FY26, tariff rates for such used vehicles will initially be set 40 percent above the corresponding rate for new vehicles, with premium reduced by 10 percentage points per year to reach zero by 2030. - During FY26, put in place regulation and testing regime for safety and environmental standards of imported used vehicles, which will replace the vehicle age limit from July 2026 onwards. - Non-tariff measures: - Complete a stock-take of the existing export-import policy order by end-December 2025 to simplify and eliminate distortionary NTBs. ### Investment facilitation, competitive neutrality, and SIFC - Special Investment Facilitation Council (SIFC) commitments: - Ensure SIFC does not propose and government does not provide regulatory, spending, or tax-based incentives, guaranteed returns, or any action that could distort the investment landscape. - Ensure all investment under SIFC follows the standard Public Investment Management framework. ### Fiscal incentives, SEZs, localization, and regulatory streamlining - Fiscal incentives and SEZs: - Hired a consultant and agreed TORs for review of fiscal costs and effectiveness of each existing Special Economic Zone (SEZ) including Export Processing Zones (EPZs); results to be published in FY25. - Based on study results, formulate plan to fully phase out all current SEZ (and EPZ) incentives by 2035, subject to preexisting contractual obligations (end-June 2025 SB). - Publish a report on fiscal costs and effectiveness of Special Technology Zones (STZs) and other industrial parks; by end-October 2025 prepare a plan to phase out these incentives by 2035, subject to preexisting contractual obligations (new end-December 2025 SB). - During transition, seek to replace preexisting profit-based incentives with cost-based incentives (e.g., immediate expensing on tangible assets) and where contractual provisions allow, seek early termination or renegotiation of existing incentives. - Commit to refrain from creating any new SEZs or providing new fiscal or other incentives to any new or existing SEZs firms, sectors or investments; not to renew any existing incentives. - Eliminating preferential treatment of local production: - Phase out all additional duties (including through import and sales taxes) charged for “localized” items/inputs in the auto sector and remove special duties applied to imports used for the auto sector including via the 5th Schedule to the Customs Act and SRO 655(I)/2006; implemented gradually per NTP 2025–30. - Extend principle of removing preferential treatment of local production to other industries by July 2026, to be implemented gradually until FY30 in consultation with relevant ministries. - Apply the same principle to new electric vehicle (EV) production, implying an increase and regularization of tariffs and other protection for some inputs. - Regulatory streamlining and Asaan Karobar Act: - Draft Asaan Karobar Act to create legal framework for reforms including: (i) establishing a single-window system for business registration and documentation; (ii) developing an electronic registry for business-related records; (iii) eliminating redundant regulatory requirements to lower compliance costs and improve ease of doing business. - Cabinet approved draft Asaan Karobar Act for placement before parliament by June 2025. - Collaborate with provincial governments to enact similar legislation for nationwide consistency. *Source: IMF content unit titled "Following through on our SOE reform agenda is key to scaling back the state’s footprint and improving services."* ### 29. Our efforts to improve the timeliness, reliability and coverage of macroeconomic data ### 29. Our efforts to improve the timeliness, reliability and coverage of macroeconomic data ### Improvements in macroeconomic data collection and dissemination - Data collection for three major surveys—Agriculture Census, Labor Force Survey and Household Integrated Economic Survey—is well underway. - The Pakistan Bureau of Statistics will publish the final reports (and post the results to the National Summary Data Page portal) by end-December 2025. - A new PPI index: modalities agreed with provincial statistics agencies for monthly data collection starting in July 2025. - Preparations underway to conduct three major surveys in FY26: - Census of Manufacturing Industries - Survey of Small and Household Manufacturing Industries - Family Budget Survey, which will incorporate spending on online platforms for the first time - Quarterly National Accounts strengthening continued; a first set of estimates covering the expenditure side were released in December 2024. - Government Financial Statistics (GFS) strengthening: - Establishment of a GFS team - Agreement of a multi-year roadmap for GFS expansion and improvements, including transitioning to GFSM 2014 and incorporating SOE data *Italic: Source — 1pakea2025001-print-pdf - 29. Our efforts to improve the timeliness, reliability and coverage of macroeconomic data* --- ### 30–41. Building Climate Resilience ### Overall objective and RSF focus - Urgent need to reduce economic and social vulnerabilities and build resilience to climate change, highlighted by the catastrophic 2022 floods. - Pakistan ranks among the world’s most climate change-vulnerable and least climate change-ready countries. - National frameworks in place: National Adaptation Plan (2023) and updated Nationally Determined Contribution (NDC) (2021). - The RSF will support: - (i) mainstreaming climate issues into budget investment and planning - (ii) improving water system resilience and disaster response financing - (iii) enhancing the enabling environment for green investments by strengthening Pakistan’s climate information architecture - (iv) promoting green mobility and transport decarbonization - (v) aligning energy sector reforms with national climate change commitments ### Reform Area 1: Mainstreaming Climate Issues Into Budget and Investment Planning - Strengthen climate sensitivity of public investment management (PIM) building on the 2023 PIMA and C-PIMA and the Handbook on Climate Risk Screening. - Two further steps: - a. Project weighting (RM1, end-August 2026) - Update draft project selection criteria - Increase the climate change weighting in the PSDP selection process for infrastructure sectors to at least 30 percent - Provide explicit protocols for scoring projects and publish the distribution of scores for new projects entering the PSDP - Annual reporting: include selection process and distribution of scores for projects reviewed by CDWP and ECNEC - b. Adaptation and mitigation assessment (RM2, end-August 2027) - Screen all major new infrastructure projects; only projects that have undertaken climate vulnerability, adaptation and mitigation assessments will be included in the PSDP - Initially focus on new infrastructure projects costing over PRs 7.5 billion (current ECNEC threshold) - Publish a consolidated report summarizing the Climate Adaptation and Resilience Assessments and the Climate Mitigation Assessments in line with the Handbook on Climate Risk Screening - Publish PC1 forms of all new infrastructure projects costing over PRs 7.5 billion on the PC website - Improve quality of project appraisals and climate screening assessments - Note: Projects covered are those in the “infrastructure sectors” category in the PC-I Proforma: transport and communication, telecommunication, energy, power, housing, government buildings, and town planning, and irrigation, drainage and flood control. ### Reform Area 1 — Climate-sensitive public spending and budget tagging - Publish a climate budget statement in the annual budget statement disaggregated to the sub-classification of expenditure in the Budget Call Circular. - Establish a quarterly climate budget execution report to provide consolidated details of actual expenditure against the sub-classification of climate change, comparing budgeted expenditure to outturns and explaining variances. - Expand the federal government's budget tagging system to incorporate spending on grants and subsidies and extend methodology to provincial governments (RM3, end-August 2027). - Work towards tagging and tracking climate-harmful expenditure and harmonizing budget tagging with other green taxonomies in use in Pakistan. ### Reform Area 2: Improving Water System Resilience and Disaster Response Financing - Adopt the e-Abiana irrigation service charge collection system in Sindh, Khyber Pakhtunkhwa, and Balochistan (RM4, end-August 2027), following Punjab’s example. - Introduce an irrigation water tariff adjustment mechanism in Punjab and Sindh to fully recover operational and maintenance (O&M) costs incurred by the respective province for irrigation infrastructure under their administrative control (RM5, end-February 2027). - For O&M costs where administrative control differs from beneficiary province, the Federal Government will evolve a consensus mechanism with the respective provinces at the Council of Common Interest (CCI). - Publish design documents for the two provinces, including tariff-setting methodologies reflective of O&M cost recovery principle. - Roll out similar mechanisms in Balochistan and Khyber Pakhtunkhwa. - National Disaster Risk Financing Strategy (NDRFS): - Adopt an implementation framework encompassing federal and provincial financing needs and establish a coordination mechanism for disaster risk financing across federal and provincial authorities (RM6, end-August 2026). ### Reform Area 3: Strengthening the Climate Information Architecture - SBP to expand capacity for enhanced and comprehensive oversight and issue guidelines for climate-related financial risk management and supervision in line with the 2022 BCBS principles (RM7, end-December 2025). - Guidelines will include time-bound targets to monitor implementation progress. - Operationalize NDC-aligned green taxonomy (finalized for adoption). - SECP actions (RM8, end-December 2025): - Develop specific requirements or guidelines for listed companies to disclose climate-related risk and opportunities information, including relevant taxonomy-aligned data. - Phased approach for disclosures: - Voluntary disclosures until July 1, 2029, during which SECP and World Bank will provide training. - SECP will develop thresholds and timelines for mandatory reporting in a phased manner. - Listed companies above certain size thresholds (assets and turnover or number of employees) will comply over three phases from the annual reporting period starting on or after 2029: - First phase: largest size threshold companies comply with mandatory reporting. - Second phase: next size threshold companies comply. - Third phase: companies below those thresholds comply. - SBP to establish a dedicated Sustainable Finance Implementation Unit with authority and oversight capabilities, including providing detailed guidance for assessing taxonomy-aligned investment. ### Reform Area 4: Promoting Green Mobility and Transport Decarbonization - Commitment to shift away from fossil fuels and accelerate cleaner transport; New Energy Vehicle Policy (NEVP) 2025-2030 targets EV penetration of 30 percent new sale of EVs by 2030. - a. Carbon Levy (RM9, end-June 2025) - Supplementary carbon levy via the PDL on gasoline and diesel of PRs 5 per liter, phased in over two years. - Fuel oil will be added to the PDL, with base and supplementary rate applicable to it. - Scope, phasing and level legislated through the FY26 Finance Act; future Finance Acts may raise the carbon levy beyond initial rate. - b. Electric vehicle adoption (RM10, end-June 2025) - Adopt a revenue-neutral scheme in the FY26 budget law: subsidy for EVs and a supplementary tax on internal combustion engine vehicles, in line with draft NEVP 2025-2030. - Continue implementation in subsequent fiscal years over the RSF program. - c. Charging stations (RM11, end-February 2027) - Adopt a viability gap funding (VGF) framework to incentivize private investment in EV charging stations: - Provide one-off subsidies - Ensure sufficient competition via open bidding and clear eligibility criteria - Implement the first bid window - With ADB or IFC support, ensure VGF framework aligns with international good practices and minimizes contingent liability risks to government. - Publish tender documents and list of bidders and successful bidders for all bid windows. - Expectation: combined package of RMs 9, 10, and 11 will yield substantial CO2 emissions reductions and make significant contributions to Pakistan’s NDC. ### Reform Area 5: Aligning Energy Sector Reforms with National Climate Mitigation Commitments - Electricity subsidy reform (RM12, end-January 2027): - Replace existing budgeted tariff differential subsidy and cross-subsidy system with a targeted budgeted subsidy framework for low-income consumers, facilitated via BISP, and a simplified tariff structure in context of FY27 budget and 2026-27 annual rebasing. - Initial rebates to begin by end-January 2027. - Pre-implementation milestones: - Identify and verify consumers to be targeted under the new subsidy framework with IMF and World Bank by end-January 2026. - Define eligibility criteria by end-July 2026. - Have a rebate mechanism in place with financial institutions by end-July 2026. - Begin communications campaign rollout by end-June 2025. - Gas subsidy reform: undertake analysis to assess viability of a scheme similar to the power sector; decide on a path forward by end-June 2026. - Energy efficiency measures (RM13, end-June 2027 and end-December 2025): - Implement MEPS compliance for all new appliances by end-June 2027: - Fans: 40 percent - LEDs: 30 percent - Refrigerators: 35 percent - Air conditioners: 30 percent - Motors: 25 percent - Public Procurement Regulatory Agency to adopt regulations by end-December 2025 mandating federal and provincial procurement of the same five appliances be MEPS-compliant. - National Energy Efficiency and Conservation Authority to provide quarterly tracking data on progress toward consumer appliance adoption, beginning in December 2025. - Institutionalize anti-theft procedures in the power sector: - Submitted legislation to National Assembly to amend Pakistan Penal Code, 1860, Section 462 (O) in line with Criminal Law (Amendment) Ordinance, 2023 to institutionalize enhanced collection efforts and reduce power sector losses. *Italic: Source — 1pakea2025001-print-pdf - 29. Our efforts to improve the timeliness, reliability and coverage of macroeconomic data* --- ### 42. Financing and Program Monitoring under the EFF and RSF ### Financing commitments and external support - Adequate financing secured from international partners to support the economic reform program and durably increase external buffers. - Substantial progress in securing financing committed ahead of program approval. - To close the remaining gap for the next 12 months of the arrangement, financing commitments secured from bilateral and multilateral partners, including China, Saudi Arabia, the Asian Development Bank and the Islamic Development Bank. - Bilateral partners will continue rolling over short-term claims (including loans, swaps and deposits) for the duration of the program, and authorities are seeking to lengthen maturities as rollovers occur. *Italic: Source — 1pakea2025001-print-pdf - 29. Our efforts to improve the timeliness, reliability and coverage of macroeconomic data* ### 43. Implementation of policies under the program will be monitored through semiannual ### 43. Implementation of policies under the program will be monitored through semiannual reviews ### Monitoring framework and reviews - Implementation will be monitored through semiannual reviews, with semiannual performance criteria (PCs) and continuous performance criteria (continuous PCs), as set out in the MEFP dated September 11, 2024, along with this MEFP. - The attached Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria, continuous performance criteria, indicative targets (ITs), and structural benchmarks under the program. - Completion of the second review scheduled for September 2025 will require observance of the quantitative performance criteria for end-June 2025, as set out in Table 1, along with continuous PCs and ITs. - Structural benchmarks are set out in Table 2. - Progress in implementation of policies under the RSF will be monitored through Reform Measures (RMs) detailed in Table 3; RSF monitoring reviews are to occur concurrently with EFF reviews. ### Quantitative performance criteria and indicative targets (Table 1) — representative figures and requirements - Table 1 presents quantitative PCs and ITs in "Billions of Pakistani rupees, at program exchange rates, unless otherwise indicated." - Net international reserves of the SBP (floor, millions of U.S. dollars) — representative entries: - end-Mar 2025: Prog. (IT) -12,150; Adjusted Actual -12,709; -11,316; Status: Met. - end-Sep 2025: Prog. (PC) -12,050; Adjusted Actual -12,793; -9,716; Status: Met. - end-Dec 2025: IT Prog. -10,200; Proposed (PC) -8,650; -7,450; -7,000; -6,500. - Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees) — representative entries: - 15,044; 15,200; 14,387; Status: Met. - 15,211; 15,418; 14,283; Status: Met. - 15,179; 15,820; 15,024; 14,971; 15,146. - Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): - initial entries include -3,250; later values include -3,050; -3,000; -2,990; -2,750; -2,500; -2,250; -2,000. - Ceiling on the general government primary budget deficit (cumulative, excl. grants, billions of Pakistani rupees) 2/ — representative entries: - -198; -2,672; -3,202; Status: Met. - -2,877; -2,808; -3,604; Status: Met. - -2,707; -2,435; -2,397; -460; -2,095. - Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees) 3/: - 5,100; ...; 4,470; Status: Met. - 5,200; ...; 4,419; Status: Met. - 5,400; 5,600; 5,600; 5,700; 5,800. - Cumulative floor on targeted cash transfers spending (BISP) (billions of Pakistani rupees): - 101; ...; 102; Status: Met. - 235; ...; 236; Status: Met. - 415; 599; 599; 103; 262. - Cumulative floor on the number of new tax returns (thousands) 4/: - 75; ...; 621; Status: Met. - 225; ...; 941; Status: Met. - 300; 450; 850; 450; 900. - Continuous PCs (examples): - Zero new flow of SBP's credit to general government: 0; ...; 0; Status: Met. - Zero ceiling on accumulation of external public payment arrears by the general government: 0; ...; 0; Status: Met. - Indicative targets (examples): - Floor on the weighted average time-to-maturity of local currency domestic debt securities stock (years): 2.8; ...; 2.66; Not met; subsequent entries include 2.8; ...; 3.32; Met; target levels 3.0; 3.0; 3.0; 3.4; 3.4. - Cumulative floor on general government budgetary health and education spending (billions of Pakistani rupees): 685; ...; 535; Not met; 1,405; ...; 1,172; Not met; targets 2,150; 2,863; 2,863; 600; 1,200. - Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees): 2,652; ...; 2,564; Not met; 6,009; ...; 5,625; Not met; 9,168; 12,913; 12,332; 3,023; 6,695. - Ceiling on net accumulation of tax refund arrears (cumulative, billions of Pakistani rupees): 32; ...; -40; Met; 43; ...; -9; Met; 56; -24; -24; 34; 43. - Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees): 255; ...; 77; Met; 461; ...; 11; Met; 554; 417; 337; 200; 300. - Footnotes and definitions: - 1/ Fiscal year runs from July 1 to June 30. All definitions as per the attached Technical Memorandum of Understanding. - 2/ Cumulative from the start of each fiscal year. "-" means surplus. - 3/ Including guarantees for commodity operations by SOEs. - 4/ Modified at the time of the First Review to narrow the definition of new tax returns. - 5/ Indicative Target on tax revenues from retailers under the Tajir Dost scheme discontinued at the time of the First Review, and substituted by new target on income tax revenue from retailers. ### Structural conditionality (Table 2) — summary of structural benchmarks, rationale, dates, and status - Fiscal benchmarks (selected): - Do not grant tax amnesties or new preferential tax treatment — Continuous — Met. - Seek ex-ante parliamentary approval for non-budgeted or excess expenditures — Continuous — Met. - Approve a National Fiscal Pact devolving some spending functions to the provinces — end-September 2024 — Met. - Share with IMF staff a report detailing actions to reduce the federal government's footprint — end-September 2024 — Met. - Provinces amend Agriculture Income Tax legislation to align with federal regimes so taxation can commence January 1, 2025 — end-October 2024 — Not met; Implemented with delay in February 2025. - Fully implement compliance risk management measures in Large Taxpayer Units in Islamabad, Karachi, and Lahore — end-December 2024 — Met. - Develop and publish Ministry of Planning criteria for project selection and annual limit for new PSDP projects — end-January 2025 — Met. - Introduce a 5 percent FED on fertilizer and pesticide — end-June 2025 — In progress. - Governance benchmarks (selected): - Amend the Civil Servants Act for digital, publicly accessible asset declarations of high-level public officials — end-February 2025 — Not met; Reset to end-June 2025. - Publish the full Governance and Corruption Diagnostic Assessment report — end-July 2025 — Reset to end-August 2025. - Social benchmark: - Annual inflation adjustment of the unconditional cash transfer (Kafaalat) — end-January 2025 — Met. - Monetary and financial benchmarks (selected): - Average premium between interbank and open market rate no more than 1.25 percent during any consecutive 5 business day period — Continuous — Met. - Parliamentary approval of amendments to bank resolution and deposit insurance legislation — end-October 2024 — Met. - Place undercapitalized private banks under resolution unless recapitalized by end-October 2024 or legally binding recapitalization merger agreement in place by end-October 2024 (with recapitalization by April 2025) — end-November 2024 — Not met. - Revise regulations and methodologies on risk mitigating measures, including enhanced collateral policy — end-December 2024 — Met; implement revised regulations — end-September 2025 — In progress. - Energy sector benchmarks (selected): - Prepare two DISCOs for privatization and concession transactions — end-January 2025 — Met. - Eliminate captive power usage in the gas sector — end-January 2025 — Not met. - Public notification of December 2024 semiannual gas tariff adjustment determination — February 15, 2025 — Met. - State-Owned Enterprises and Investment Policy (selected): - Amend the SWF Act and other legislation to adopt governance mechanisms and safeguards, bringing SOEs under the SOE legal framework — end-December 2024 — Not met; Reset to end-March 2026. - Amend laws for 10 additional statutory SOEs to align with the SOE Act — end-June 2025 — In progress. - Prepare a plan to fully phase out all current Special Economic Zone incentives by 2035 — end-June 2025 — In progress. - New structural benchmarks (selected) with deadlines: - Parliamentary approval of a FY26 budget in line with IMF staff agreement — end-June 2025. - Implement new AIT laws through a comprehensive plan (operational platform, taxpayer identification, communication, compliance) — end-June 2025. - Publish governance action plan based on Governance Diagnostic Assessment — end-October 2025. - Annual inflation adjustment of Kafaalat program — end-January 2026. - Prepare and publish a post-2027 financial sector strategy plan — end-June 2026. - Notifications of annual electricity tariff rebasing and gas tariff adjustment — July 1, 2025. - Notification of semi-annual gas tariff adjustment — February 15, 2026. - Adopt legislation to make captive power levy ordinance permanent — end-May 2025. - Adopt legislation to remove the cap on the debt service surcharge — end-June 2025. - Prepare plan to phase out incentives for Special Technology Zones and industrial parks by 2035 — end-December 2025. - Submit to parliament legislation for lifting quantitative restrictions on used motor vehicle imports (initially only vehicles less than five years old) — end-July 2025. ### RSF Reform Measures (Table 3) — selected measures, timing, expected outcomes, and IMF/CD inputs - RM1. Increase climate change weighting in Public Investment Procedures to at least 30 percent for infrastructure projects; develop scoring protocols and publish selection process and scores for new PSDP projects. - Timing: end-August 2026; Review: 4th EFF Review. - Expected outcome: Comprehensive system identifying climate-relevant spending; detailed budgeting; ongoing monitoring. - IMF input: FAD advising; FAD to consult with the World Bank on climate finance element. - RM2. Require climate vulnerability/adaptation/mitigation screening for new major infrastructure projects (> PRs 7.5 bn) and publish consolidated screening report. - Timing: end-August 2027; Review: 6th EFF Review. - Expected outcome: Enforcement of project selection requirements; enhanced climate-sensitivity of PSDP. - IMF input: FAD advising; ADB and World Bank support noted. - RM3. Expand federal climate budget-tagging framework to include grants/subsidies and provincial expenditure; publish annual climate budget statement and quarterly execution reports. - Timing: end-August 2027; Review: 6th EFF Review. - Expected outcome: Stronger evidence base on mitigation and adaptation impacts; enhanced scrutiny of project preparation. - IMF input: FAD advising; European Commission, FCDO provincial coordination. - RM4–RM6. Measures to improve water revenue collection (e-Abiana), irrigation tariff adjustment mechanisms, and disaster risk financing coordination across federal and provincial authorities. - Timings: end-August 2027 (RM4); end-February 2027 (RM5); end-August 2026 (RM6). - Expected outcomes: Increased water revenue, efficient water use, improved coordination of disaster risk financing. - IMF input and partners: World Bank technical support; FAD advising; TA as needed. - RM7–RM8. Financial sector measures on climate-related financial risk management and a green finance taxonomy with SECP disclosure guidelines. - Timings: end-December 2025 (RM7 and RM8); Review: 3rd EFF Review. - Expected outcomes: Incorporation of climate risk into bank risk management and supervision; fuller incorporation of climate considerations into financial/private sector architecture. - IMF input: MCM advising as needed; World Bank collaboration on taxonomy. - RM9–RM11. Measures to promote green mobility and EV uptake: supplementary carbon levy of Rs 5 per liter phased over two years; revenue-neutral FY26 scheme with EV subsidy and tax on ICE vehicles; PPP viability-gap funding framework for EV charging stations. - RM9 timing: end-June 2025; Review: 2nd EFF Review. - RM10 timing: end-June 2025; Review: 2nd EFF Review. - RM11 timing: end-February 2027; Review: 5th EFF Review. - Expected outcomes: Significant reduction of CO2 emissions; support authorities' goals of 30% penetration of new passenger EV sales and 50% for electric 2-3 wheelers by 2030. - IMF input: FAD advising, including CPAT modeling and subsidy/tax modeling. - RM12. Replace budgeted electricity tariff differential subsidy and cross-subsidy system with targeted subsidy framework for low-income consumers; BISP disbursements through new system by end-January 2027. - Timing: end-January 2027; Review: 5th EFF Review. - Expected outcome: Better-targeted, more progressive subsidies; reduced overconsumption and energy losses. - Partners: World Bank support on consumer identification, subsidy design, and implementation. - RM13. PPRA adoption of new procurement regulation mandating MEPS-compliant appliances for certain federal and provincial procurements and achieve specified market shares of MEPS-compliant new appliances by end-June 2027. - Timing: end-June 2027; Review: 6th EFF Review. - Expected outcome: New appliances entering the market carry labels or comply with MEPS. - Partners: World Bank support on tracking methodology. ### Review sequencing and attachments - Semiannual EFF reviews will coincide with monitoring of RSF reform measures. - Attachment II contains the Technical Memorandum of Understanding (TMU) specifying definitions and modalities for the quantitative and continuous PCs, ITs, and structural benchmarks. *Source: Excerpt from the MEFP and accompanying Tables 1–3 and Attachment II as provided in the source content.* ### 1. This Technical Memorandum of Understanding (TMU) sets out the understanding ### Technical Memorandum of Understanding (TMU) — Pakistan (program under the Extended Fund Facility) ### Overview - Purpose: Sets out the understanding between the Pakistani authorities and the IMF staff regarding (i) definitions of quantitative performance criteria (and their adjustment mechanisms), indicative targets, and—if needed—prior actions and structural benchmarks (Section A); and (ii) respective reporting requirements used to monitor developments for the economic program under the Extended Fund Facility (EFF) as described in the authorities’ Letter of Intent dated April 24, 2025, and attached MEFP (Section B). - Data provision: The authorities will provide the necessary data to the IMF as soon as it becomes available. - Adjustments: Definitions in this TMU will be adjusted to reflect any changes in program design and accounting classifications introduced during the program period. - Program exchange rate: Pakistani rupee to the U.S. dollar is set at 278.3412 rupee per one U.S. dollar. All assets, liabilities, and debt contracted/denominated in SDRs or currencies other than the U.S. dollar are converted into U.S. dollars at the program exchange rates (Text Table 1 provides cross exchange rates). ### Program exchange rates (Text Table 1) - EUR: 0.935016 - JPY: 160.909469 - CNY: 7.266408 - GBP: 0.790920 - AUD: 1.507727 - CAD: 1.371050 - THB: 36.800095 - MYR: 4.717496 - SGD: 1.357050 - INR: 83.448119 - SAR: 3.751497 - SDR: 0.760260 - Note: Rates are "Units of currency per U.S. dollar" and are stated "As of June 28, 2024." ### A. Definitions of Performance Criteria and Indicative Targets — overview of targets Performance Criteria (defined test dates and continuous): - Floor on the net international reserves (NIR) of the State Bank of Pakistan (SBP) (millions of U.S. dollars); - Ceiling on the net domestic assets (NDA) of the SBP (stock, billions of Pakistani rupees); - Ceiling on SBP’s stock of net foreign currency swap/forward position (millions of U.S. dollars); - Ceiling on the general government primary budget deficit excluding grants (cumulative flows, billions of Pakistani rupees); - Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees); - Floor on targeted cash transfers spending (BISP) (cumulative, billions of Pakistani rupees); - Floor on the number of new tax returns (cumulative, thousands). Continuous Performance Criteria: - No new flow of SBP’s credit to general government. - Zero ceiling on the accumulation of external public payment arrears by the general government. - Other continuous criteria (see ¶25). Indicative Targets: - Floor on general government budgetary health and education spending (cumulative, billions of Pakistani rupees); - Floor on net tax revenues collected by the Federal Board of Revenue (FBR) (cumulative, billions of Pakistani rupees); - Ceiling on net accumulation of tax refund arrears (flow, billions of Pakistani rupees); - Ceiling on power sector payment arrears (flow, billions of Pakistani rupees); - Floor on the weighted average time-to-maturity of the domestic debt securities stock in local currency, including T-bills, PIBs, and Sukuks (years); - Ceiling on the aggregate provincial governments’ primary budget (cumulative, billions of Pakistani rupees); - Floor on the consolidated net tax revenues collected by provincial revenue authorities (cumulative, billions of Pakistani rupees); - Floor on the income tax revenue collected by the FBR from retailers (cumulative, billions of Pakistani rupees). ### B. Performance Criteria — definitions and adjustment mechanisms B.1. Floor on the Net International Reserves (NIR) of the SBP - General government definition: central (federal) government and local (provincial) governments, excluding state-owned enterprises; includes any new funds or special budgetary or extra-budgetary entities of a fiscal nature per IMF’s Manual on Government Finance Statistics 2014. - NIR (stock) definition: U.S. dollar value of the difference between usable gross international reserve assets and reserve-related liabilities, evaluated at program exchange rates. - Usable gross international reserves include: (i) holdings of foreign currencies; (ii) holdings of SDRs; (iii) the reserve position in the IMF; and (iv) holdings of fixed and variable income instruments. - Exclusions from usable reserves include (inter alia): (i) claims on residents; (ii) assets in nonconvertible currencies; (iii) precious metals; (iv) illiquid assets; (v) assets pledged or collateralized; (vi) reserve assets not readily available for intervention due to lack of quality or liquidity; (vii) balances held at foreign branches of non-investment rated domestic banks. - Reserve-related liabilities include: (i) foreign currency liabilities (excluding liabilities to the general government) with remaining maturity of one year or less; (ii) foreign exchange liabilities of SBP and general government arising from derivatives positions (net outstanding basis); (iii) outstanding IMF credits to Pakistan; (iv) foreign exchange deposits with the SBP of foreign governments, foreign central banks, foreign deposit money banks (excluding regulatory capital deposits of foreign banks with the SBP), international organizations, foreign nonbank financial institutions, and domestic financial institutions (excluding regulatory capital deposits of domestic financial institutions with the SBP). - Reserve-related liabilities exclude SDR allocations and accrued interest on reserve-related liabilities. - Aggregate net position in foreign exchange derivatives: aggregate net positions in forwards and futures in foreign currencies of the SBP and general government vis-à-vis the domestic currency (including the forward leg of currency swaps). - Gross sale of foreign exchange: outright and swap sales by the SBP to banks in the foreign exchange interbank market via intervention; swap sale and maturities measured net daily. - Net purchase of foreign exchange: outright and swap purchases minus outright and swap sales by the SBP from/to banks; measured net daily. Adjustment mechanism for NIR floor (¶11): - The floor on NIR will be adjusted upward (downward) by the cumulative excess (shortfall) in: a. cash inflows usable for the financing of the government budget from multilateral and bilateral creditors, commercial borrowing, and bond issuance relative to the projected inflows (Table 1). - Cumulative cash inflows usable for financing the government budget are defined as external disbursements (including grants) from official multilateral creditors (including, but not limited to the Asian Development Bank (ADB), Islamic Development Bank, and World Bank), official bilateral creditors (including, but not limited to bilateral oil facilities, China, Saudi Arabia, UAE, DFID-UK, and USAID), external bond placements and other commercial borrowings usable for financing the central government budget (including foreign currency financing extended by local branches of foreign banks), plus proceeds from sales of state-owned assets to official bilateral partners, sovereign wealth funds. - Downward adjustment limit: Downward adjustment of the floor on NIR will be limited to a maximum of US$2,000 million for both the December 2024 and June 2025 test dates. B.2. Ceiling on the Net Domestic Assets (NDA) of the SBP - NDA definition: difference between reserve money (RM) minus the NIR of the SBP (NIR valued at the program exchange rate and expressed in Pakistani rupee for NDA computation). - Reserve money (RM) definition: sum of (i) currency outside schedule banks (deposit money banks); (ii) schedule banks’ domestic cash in vaults; (iii) schedule banks’ required and excess rupee and foreign exchange deposits with the SBP; and (iv) deposits of the rest of the economy with the SBP, excluding those held by the federal and provincial governments and the SBP staff retirement accounts. Adjustment mechanism for NDA ceiling (¶14): - NDA ceiling adjusted downward (upward) by the cumulative excess (shortfall) in: a. cash inflows from multilateral and bilateral creditors, and commercial borrowings and bond issuances relative to the projected inflows (Table 1) and evaluated at the program exchange rate. - Upward adjustment limit: same maximum adjustor limit set for NIR evaluated at the program exchange rate. B.3. Ceiling on SBP’s Stock of Net Foreign Currency Swap/Forward Position - Definition: aggregate net positions in forwards and futures in foreign currencies of the SBP vis-à-vis the domestic currency (including the forward leg of currency swaps), evaluated at the program exchange rate. B.4. Ceiling on the General Government Primary Budget Deficit Excluding Grants - Monitoring: general government primary budget deficit (excluding grants) is monitored quarterly as the general government’s overall budget deficit (excluding grants) minus the consolidated interest bill of the federal and provincial budgets. - Overall budget deficit (excluding grants) measured as the cash deficit from below the line, defined as the sum of: a. net external budget financing, excluding valuation changes, with foreign currency disbursements/payments converted into PRs at the actual exchange rates applied to each transaction; b. change in net domestic credit from the banking system (cash basis), excluding valuation changes from deposits denominated in foreign currency and government securities bought by non-residents (notably T-bills, Pakistan Investment bonds (PIBs), Naya Pakistan Certificates, and Banao Certificates); c. change in the net domestic nonbank financing, excluding valuation changes, comprising (i) privatization receipts; (ii) change in stock of issued government securities held outside the general government and the banking system, net of valuation changes; (iii) change in net deposits and reserves received by the general government (public accounts deposits); (iv) any other government borrowing from domestic nonbank sources net of repayments; minus (v) change in general government deposits with nonbank financial institutions; d. total external grants to the federal and provincial governments (project grants, cash external grants for budgetary support, capital grants reflecting principal amounts of external debt cancellation or swaps, and other grants). External grants in foreign currencies are converted into PRs at actual exchange rates applied to each transaction. - Net external budget financing (excluding valuation changes and external financing counted as reserve liabilities of the SBP) defined as the sum of: a. external budget loans to the general government, including those on-lent to financial institutions and companies and external emergency relief lending; comprises medium- and long-term maturity from official multilateral sources (including IMF budget support), official bilateral sources, and private sector sources (e.g., bonds and non-residents’ purchases of PIBs, Naya Pakistan Certificates, and Banao Certificates); and short-term maturity, net of foreign portfolio investment excluding non-residents’ purchases of Naya Pakistan Certificates and Banao Certificates but including non-residents’ purchases of domestic T-bills; b. net external debt amortization flow of the general government, which is the change in its stock of external debt service arrears net of the debt amortization due on its external budget loans (accounting for rescheduled, relieved, or accelerated amortization, including related debt swaps or debt cancellation recorded as capital grants). Adjustment mechanism for general government primary deficit ceiling (¶19): - The ceiling will be adjusted cumulatively since the beginning of the fiscal year: a. downward (upward) by any shortfall (excess) in external project financing relative to program projections evaluated in Pakistani rupee terms at actual average quarterly exchange rates (Table 1). External project financing = disbursements from bilateral and multilateral creditors to the general government for specific project expenditure. b. downward by any under execution in the targeted cash transfers (BISP) relative to the indicative program target. c. downward by any excess in the flow of power sector payment arrears, excluding non-recoveries and excess line losses, above the respective indicative program targets. d. downward by any excess in the flow of tax refund arrears relative to their respective indicative program targets. e. downward (upward) by any excess (shortfall) in the flow of SBP profit transfer relative to their respective projections (Text Table 1). B.5. Ceiling on the Amount of Government Guarantees - Scope: applies to the stock of publicly guaranteed debt for which guarantees have been issued by the central government, includes domestic guarantees (including guarantees to SOEs for commodity operations) and external government guarantees (converted into Pakistani rupees at the program exchange rate). - Treatment of interest arrears: if an entity incurs interest arrears on borrowings backed by the guarantee, for QPC purposes the guarantee is evaluated as the higher of the value of the guarantee issued or the total amount owed. - Exclusion: guarantees issued by the Ministry of Finance for the SBP borrowing from the IMF are excluded. B.6. Floor on Targeted Cash Transfers Spending (BISP) - Scope: applies to the cumulative targeted cash transfers spending by the Benazir Income Support Program (BISP), i.e., all spending on BISP programs. - SBP profit transfer projections (Text Table 1: Cumulative flows from start of fiscal year; billions of Pakistani Rupees): - end-Mar 2025: 2,500 - end-Jun 2025: 2,500 - end-Sep 2025: 0 - end-Dec 25: 1,309 B.7. Floor on the Number of New Tax Returns - Measurement: additional non-nil-tax returns beyond the existing stock of non-nil-tax filers. Non-nil-tax filer returns = filers presenting a tax return with a liability greater than zero. - Starting stock: 2,546,167 as of end-June 2024; the floor on the number of new tax returns will be counted from the starting point of 2,546,167. - For targets set for September and December 2025, the number of new tax returns will be counted from the stock of non-nil-tax filers as of end-June 2025. ### C. Continuous Performance Criteria C.1. No New Flow of SBP’s Credit to General Government - Requirement: No new flow of SBP’s direct credit to the general government, including purchases of public debt securities on the primary market. Applies continuously throughout the program period. C.2. Zero Ceiling on the Accumulation of External Payment Arrears by the General Government and SOEs - Definition: external payment arrears = all unpaid debt-service obligations (payments of principal and interest) of the general government (federal and provincial government, and SBP), and state-owned enterprises to nonresidents arising in respect of public sector loans, debt contracted or guaranteed (including unpaid penalties or interest charges associated with these obligations that are beyond 30 days after the due date). - Reference: definition of debt for EFF purposes set out in ¶8 of 2020 Guidelines on Public Debt Conditionality in Fund Arrangements. - Ceiling: set at zero. Applies continuously. C.3. Other Continuous Performance Criteria (¶25) During the program period, Pakistan will not: - impose or intensify restrictions on the making of payments and transfers for current international transactions. - introduce or modify multiple currency practices (MCPs). - conclude bilateral payment agreements that are inconsistent with Article VIII of IMF Articles of Agreement. - impose or intensify import restrictions for balance of payments purposes. ### D. Indicative Targets — definitions (selected) D.1. Floor on the Weighted Average Time-To-Maturity (ATM) of the Domestic Debt Securities Stock - Calculation: ATM calculated using exact remaining time to maturity (in years) of each instrument in the portfolio (T-bills, PIBs, Sukuks). - Weighting: remaining time to maturity of each instrument as of the relevant test date will be weighted by (i) realized value at issuance for short-term instruments (original maturities of one year or less), including T-bills and short-term Sukuks; and (ii) face value for longer-term instruments (original maturities greater than one year), including PIBs and longer-term Sukuks. D.2. Floor on General Government Budgetary Health and Education Spending - Indicative target category included (definition and operationalization described in MEFP Tables and related sections). *Source: Technical Memorandum of Understanding between the Pakistani authorities and IMF staff (TMU) as provided in the cited program documents.* ### 27. The floor on the general government budgetary health and education spending will ### 27. The floor on the general government budgetary health and education spending will ### D.3. Ceiling on the Aggregate Provincial Primary Budget Deficit - The aggregate provincial primary budget deficit is monitored quarterly as: - the aggregate overall budget deficit of the four provincial governments (Punjab, Sindh, Khyber Pakhtunkhaw, Balochistan), minus the aggregate interest bill of the four provincial budgets. - The aggregate provincial overall budget deficit is measured as the cash deficit from below the line. ### D.4. Floor on Net Tax Revenues Collected by the Federal Board of Revenue (FBR) - Net tax revenues collected by the FBR are defined as the sum of revenues collected from: - (i) general sales tax (GST) on goods (including GST on services collected in Islamabad Capital Territory); - (ii) customs duties, customs registration fees and levies; - (iii) excise duties on imported products; - (iv) excise duties on domestic products; - (v) levies (toll) on oil derivatives; - (vi) other proceeds and fees; - (vii) sales tax; and - (viii) unclassified revenues (including income tax) - minus the tax refunds. - Net revenue collection is defined, for each test date, as the cumulative sum of net revenues collected since the beginning of the respective fiscal year. - The floor on the collection of net revenues by the FBR is measured quarterly based on cumulative end-of-quarter data. ### D.5. Floor on the Consolidated Net Tax Revenues Collected by Provinces - Net tax revenues collected by the provinces are defined as the sum of revenues collected from: - (i) general sales tax (GST) on services (excluding GST on services collected in Islamabad Capital Territory); - (ii) stamp duties; - (iii) property tax; - (iv) agriculture income tax; - (v) registration fees; and - (vi) unclassified revenues - minus the tax refunds. - Net revenue collection is defined, for each test date, as the cumulative sum of net revenues collected since the beginning of the respective fiscal year. - The floor on the collection of net revenues by the provinces is measured quarterly based on cumulative end-of-quarter data. ### D.6. Ceiling on Net Accumulation of Tax Refund Arrears - The ceiling on the net accumulation of tax refund arrears applies to the cumulative flow of tax refund arrears. - The stock of tax refund arrears is defined as the amount of tax refund claims that have not been settled (through a cash refund, netting out against obligations of taxpayers, payment with a government bond/promissory note or an official decision to reject the claim) within a specified time period after the tax refund claim has been submitted to the FBR. - Stocks and counting rules as of end-May 2024 and end-June 2025: - The stock of income tax refund arrears is PRs 230.9 billion as of end-May 2024, and the net accumulation of income tax refund arrears will be counted from the starting point of PRs 230.9 billion. - The stock of sales tax arrears at end-May 2024 is PRs 183.8 billion, and the net accumulation of sales tax refund arrears will be counted from the starting point of PRs 183.8 billion. - For the targets set for September and December 2025, the net accumulation of income and sales tax refund arrears will be counted from the stock of income and sales tax refund arrears as of end-June 2025. ### D.7. Floor on the Income Tax Revenue collected by the FBR from Retailers - The floor on the income tax revenue from retailers is defined as the sum of revenues from: - (i) income tax return filings; - (ii) withholding income taxes; and - (iii) advance income taxes, - paid by (i) retailers; (ii) wholesalers; and (iii) traders. - Income tax revenue is defined, for each test date, as the cumulative sum of revenues collected since the beginning of the respective fiscal year. ### D.8. Ceiling on Power Sector Payment Arrears - Power sector payment arrears are defined as power sector payables in arrears that arise from: - (i) line losses and non-recoveries that are not recognized by NEPRA; - (ii) non-recoveries from supply to Azad Jammu and Kashmir (AJ&K), other federal and provincial governments including FATA, private consumers, and Baluchistan Tube Wells; - (iii) accrued markup from the servicing of PHPL; - (iv) late payment surcharges; - (v) delays in subsidy payments; - (vi) delays in tariff determinations resulting in pending generation cost; - (vii) non-payments by K-Electric; and - (viii) other adjustments (including prior year recoveries, spillovers etc.). ### Program Reporting Requirements - Authorities will provide all needed data to the IMF in line with Article VIII, Section 5 of the IMF Articles of Agreement as deemed necessary. - Performance under the program is monitored from data supplied by the SBP, Ministry of Finance, FBR, Pakistan Bureau of Statistics, Ministry of Energy (Power and Petroleum Division), and other agencies as outlined in Table 2. - The authorities will report on an ongoing/continuous basis any non-observance of continuous PCs and will transmit promptly to IMF staff any data revisions as well as other information necessary to monitor the arrangement. ### Table 1. Pakistan: Projected External Disbursements (Millions of U.S. dollars) — selected figures by quarter - Jan-Mar 2025 (Proj.): - Multilateral and bilateral disbursements: 3,396 - in cash 1/: 3,142 - Saudi oil facility and IDB commodity loans: 386 - project support: 724 - Commercial borrowing 3/: 1,400 - Gross inflows: 4,796 - of which: in cash: 4,542 - Apr-Jun 2025 (Proj.): - Multilateral and bilateral disbursements: 5,042 - in cash 1/: 4,670 - Saudi oil facility and IDB commodity loans: 514 - project support: 1,224 - Commercial borrowing 3/: 3,778 - Gross inflows: 8,820 - of which: in cash: 8,448 - Jul-Sep 2025 (Proj.): - Multilateral and bilateral disbursements: 2,636 - in cash 1/: 2,397 - Saudi oil facility and IDB commodity loans: 450 - project support: 652 - International bond issuance 2/: 200 - Commercial borrowing 3/: 200 - Gross inflows: 3,036 - of which: in cash: 2,797 - Oct-Dec 2025 (Proj.): - Multilateral and bilateral disbursements: 4,678 - in cash 1/: 4,411 - Saudi oil facility and IDB commodity loans: 550 - project support: 807 - Commercial borrowing 3/: 300 - Gross inflows: 4,978 - of which: in cash: 4,711 - Notes in table: - 1/ Assumes that 65 percent of project loans and 50 percent of project grants are received in cash. - 2/ Includes Naya Pakistan Certificates (NPC). NPC flows are recorded on a net basis. - 3/ Includes foreign currency denominated loans from local branches of foreign banks. - 4/ Not included in multilateral and bilateral disbursements for the purposes of the adjustor. - Note: Cumulative excess/shortfall of flows cumulates from January 1, 2025 onwards. ### Table 2. Pakistan: Monitoring and Reporting Requirements — selected reporting lines and timings - State Bank of Pakistan (SBP) key reporting items and timing: - SBP balance sheet Summary: Weekly — First Thursday of the following week. - SBP balance sheet by program and official exchange rates: Monthly — Within 15 days of the end of each month. - Monetary survey: Monthly — Within the first 30 days of each month. - International reserves: Daily — The following working day. - International reserves (infl ows/outflows into/out of Naya Pakistan Certificates): Daily — The following working day. - Foreign exchange market rates and volumes: Daily/Monthly — Within one day/monthly within five working day. - Net International Reserves at program exchange rates including breakdown: Quarterly — Seventh working day after quarter end. - External financing (foreign assistance received and projections for the coming four quarters): Quarterly — Within 15 days of the end of each quarter. - Ministry of Finance (MOF) selected reporting items and timing: - External debt disbursements and stock: Monthly — Within 25 days of the following month. - External financing received and projections (cash and in kind): Quarterly — Within 15 days of the end of each quarter. - Domestic financing: Gross disbursements and amortization of Naya Pakistan Certificates by residents and non-residents (in PRs and US$): Quarterly — Within 25 days of the end of each quarter. - Federal and provincial governments fiscal operations (including fiscal outcomes broken down by province): Monthly — Within 30 days of the end of each month. - General government total budgetary spending on health and education broken down by federal and provincial governments: Monthly — Within 15 days of the end of each month. - Federal Board of Revenue (FBR) selected reporting items and timing: - Total revenue collected separately by the tax administration and customs administration, including revenue by individual tax, and social contributions: Monthly — Within seven days of the end of each month. - All tax refund claims in arrears itemized by tax category (GST, income, customs duties, etc.): Monthly — Within seven days of the end of each month. - Automated GST refunds: Monthly — Within seven days of the end of each month. - New taxpayers and new taxpayers (retailers) data: Monthly — Within seven days of the end of each month. - Ministries and agencies reporting electricity, petroleum, BISP, and SOE financials: - Ministry of Water and Power: Monthly — Within 25 days from the end of the month. - Ministry of Petroleum and Natural Resources: Monthly — Within 30 days from the end of the month. - BISP targeted cash transfers: Monthly — Within 30 days from the end of the month. - Ministry of Finance financial statements for Pakistan Railways, Pakistan Steel Mills and Pakistan International Airline: Quarterly — Within 30 days from the end of the quarter. ### Supplementary information (update since April 28, 2025) - Recent developments do not alter the thrust of the staff appraisal. - Key recent developments: - 1. Tensions between Pakistan and India have risen significantly over the past two weeks after the April 22, 2025 attacks. Market reaction to date: - the stock market retained most of its recent gains and spreads widened moderately. - 2. CPI Inflation fell to a historic low of 0.3 percent (yoy) in April, below expectations. - Food and energy prices surprised to the downside, driven by declines in the price of wheat and key perishable food items, and lower global oil prices. - Core inflation fell 1 ppt to 8 percent (yoy) in April, in line with expectations. - 3. The Monetary Policy Committee reduced the policy rate by 100 bps in their May 5 meeting. - The committee noted additional downside surprises to inflation since their last meeting, and views that with the latest cut the real policy rate remains adequately positive to stabilize inflation in the target range. - 4. Progress continued toward recapitalizing the second private bank, but with some aspects of the process in the midst of court processes, its full recapitalization was delayed. - The SBP expects completion of the court cases and other steps within a month. - 5. Power sector CD flow continued to overperform through end-March. *Source: Pakistan — FIRST REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, REQUEST FOR MODIFICATION OF PERFORMANCE CRITERIA, AND REQUEST FOR AN ARRANGEMENT UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY—SUPPLEMENTARY INFORMATION (excerpts).* ### 2025. Gross circular debt (CD) flow of PRs 154 billion strongly outperformed the March ### 1pakea2025001-print-pdf - 2025. Gross circular debt (CD) flow of PRs 154 billion strongly outperformed the March ### Gross circular debt and power-sector dynamics - Gross circular debt (CD) flow: PRs 154 billion, compared with the indicative target ceiling of PRs 554 billion. - Outperformance drivers: - Continued strong distribution company recoveries. - Timely monthly and quarterly tariff adjustments. - Lower than expected interest charges to power producers. ### Enterprise, reputational, and program risks - Geopolitical risk: Rising tensions between India and Pakistan could heighten enterprise risks to fiscal, external, and reform goals if sustained or deteriorate further. - Reputational risk: Potential perceptions of uneven Fund treatment or perceived misuse of Fund disbursements. - Mitigants cited by authorities: - Strong commitment to the program designed to restore stability and build reserves. - EFF disbursements dedicated to build reserves; EFF ambitious fiscal and reserve goals (including floors on social spending) limit space for non-priority spending and the use of reserves to finance imports. - RSF disbursements are available for fiscal financing but cannot be disbursed outside of an EFF review and not before completion of the second review. - Need for careful Fund communication to underscore the Fund’s neutral role and avoid misperceptions. ### IMF staff position on program progression - Staff supports the authorities’ request for modification of performance criteria. - Staff continues to recommend completion of the review and a request for a Resilience and Sustainability Facility (RSF) as set forth in the main staff report, the authorities’ April 2025 Letter of Intent (LOI), and attached MEFP and TMU. ### World Bank assessment — country vulnerability and recent disaster impacts - Pakistan is among the top 10 countries worldwide most affected by climate change and natural disasters. - Projected increases in annual days with heat index > 35°C by end of 21st century: - SSP1-1.9: 9–13 days - SSP2-4.5: 16–30 days - SSP3-7.0: 21–39 days - Climate impacts noted: reduced water availability, intensified droughts, faster glacier melt (including anthropogenic black carbon effects), more variable monsoon, more intense storms and cyclones, floods, landslides, and sea-level rise with coastal encroachment and ecosystem submergence. - 2022 floods: - One-third of the country submerged. - 33 million people affected. - Nearly 8 million people reportedly displaced. - More than 1,700 people killed (one-third children). - Total damage: US$14.9 billion. - Total loss: US$15.2 billion. - Total needs: US$16.3 billion. - Sectoral damages: Housing US$5.6 billion; Agriculture and Livestock US$3.7 billion; Transport and Communications US$3.3 billion. - Sindh accounted for close to 70 percent of total damages and losses. - Historical climate-related losses (1992–2021): US$29.3 billion (inflation-adjusted to 2021 US dollars), equivalent to 11.1 percent of 2020 GDP. - 2010 flood adjusted economic loss: 4.5 percent of 2020 GDP. - Broader impacts: threats to food production, human health from pollution, reduced labor productivity from extreme heat, impaired hydropower, soil salinization, coastal erosion, fisheries and aquaculture damage, and risk of partial collapse in natural systems underpinning the economy. ### Government policies, commitments, and plans - Institutional steps: - Ministry of Climate Change and Environmental Coordination (MoCC&EC) established August 2017. - Pakistan Climate Change Act 2017 mandated Climate Change Council, Climate Change Authority, and Climate Change Fund; Authority established in 2024 but largely non-functional; Fund not yet established. - NDCs and targets: - Updated 2021 NDC commits to a 50% reduction in GHG emissions by 2030 (35% contingent upon international financial support and 15% through domestic financing). - Commitment to produce 60% of all energy from renewable energy resources, including hydropower, by 2030. - National Climate Change Policy (NCCP) updated 2021 to support NDC implementation and mainstream climate action with economic growth objectives. - National Adaptation Plan (NAP) launched 2023; six priority areas: - Agriculture-Water nexus - Natural Capital - Urban Resilience - Human Capital - Disaster Risk Management - Gender, Youth, and Social Inclusion - High-priority adaptation actions per updated NDC: - Recharge Pakistan Program: reduce flood risk, enhance water recharge at six sites in the Indus Basin, build resilience of 10 million people, and strengthen vulnerable ecosystems. - Expand protected areas from 12 percent of geographical area to 15 percent by 2023. - NDC adaptation/mitigation commitments: - Unconditional emissions reduction: 15 percent by 2030 relative to projected emissions. - Additional conditional reduction: 35 percent subject to climate finance availability. - Continued investments in nature-based solutions (e.g., Ten Billion Tree Tsunami Program). ### Mitigation policies and sectoral measures - Key policies and plans: - Alternative Renewable Energy (ARE) Policy, 2019. - Strategic Plan for Energy Efficiency & Conservation (2020–2023). - National Electric Vehicle Policy (NEVP) 2019 for 2020–2025. - National Clean Air Policy (NCAP), introduced 2023. - Specific mitigation targets and measures: - Global Methane Pledge (2021): curb methane emissions by 30 percent from 2020 level (141 million MtCO2e) to about 99 million MtCO2e by 2030. - EV target: 30 percent of all new vehicles sold in Pakistan in various categories must be EVs by 2030. - Coal policy: moratorium on new coal power plants from 2020 onward; ban on imported coal; shelving of plans for two new coal-fired plants in favor of hydro-electric power; focus on coal gasification and liquefaction for indigenous coal. - Ongoing development of NDC 3.0 with consultative provincial workshops. ### Challenges, financing needs, and national strategy - Policy consistency and institutional fragmentation issues: - Past lack of policy continuity, fragmented ownership across institutions, weak accountability, and challenges in devolved provincial implementation. - Provincial capacity constraints and required cross-departmental coordination shortfalls. - Climate finance needs and estimates: - NDC (2021) total implementation cost by 2030: nearly US$200 billion. - Clean energy transition estimated cost: US$101 billion. - MoCC top-down adaptation estimate: about US$10.7 billion a year; total US$85.6 billion for 2022–2030. - Pakistan CCDR total investment needs 2023–2030: around US$348 billion. - National Climate Finance Strategy launched November 2024 at COP in Baku: - Focus on domestic resource mobilization by removing inefficiencies and inequities in spending and revenue collection. - Mobilize additional domestic finance by widening the tax base and recovering service delivery costs. - Create policy environment to encourage private investment and strengthen capacity to access international climate finance. ### World Bank Group engagement and financing - Country Partnership Framework (CPF) priorities include increased resilience to floods and other climate-related disasters and better food and nutrition security. - Climate screening: since FY2014, all IDA/IBRD projects approved in Pakistan have been screened for climate and disaster risks. - FY2014–FY2024 IDA/IBRD commitments: - Total commitments: US$23.51 billion. - Commitments with climate co-benefits: approximately US$9.16 billion (39 percent of total). - Of the climate co-benefit commitments: US$3.59 billion (39 percent) supported adaptation; US$5.57 billion (61 percent) supported mitigation. - Pakistan Country Climate and Development Report (CCDR) launched 2022: - Informed Pakistan's Resilient Recovery, Rehabilitation, and Reconstruction Framework (4RF, 2022) after the 2022 floods. - Informed Pakistan's first National Adaptation Plan. - Aligned projects: Sindh Water and Agriculture Transformation (SWAT) Project; Sindh Flood Emergency Housing Reconstruction Project (SFEHRP); Sindh Flood Emergency Rehabilitation Project (SFERP); Integrated Flood Resilience and Adaptation Project (IFRAP); Khyber Pakhtunkhwa Rural Investment and Institutional Support Project (KP-RIISP). - Technical assistance areas: Climate and Disaster Risk Finance Strategy, Partnership for Market Implementation (PMI) engagement, Crisis Preparedness Gap Analysis (CPGA). ### Authorities’ statement and international support - Statement by Mr. Bahador Bijani and Mr. Saif Ullah Dogar on behalf of Pakistani authorities dated May 9, 2025: - Appreciation to IMF mission and Executive Board for support under the EFF arrangement (approved September 2024). - Reaffirmation of full commitment to program objectives and steady reform trajectory. - Appreciation extended to bilateral and multilateral partners, notably the People’s Republic of China, the Kingdom of Saudi Arabia, and the United Arab Emirates, for external financing support. ### Macroeconomic performance and outlook - Growth: - Year-on-year (YoY) growth: 1.5 percent in H1 FY25, compared to 2.1 percent in H1 FY24. - Current account: - July–March FY25 current account surplus: 0.5 percent of GDP, against a deficit of an equal proportion in the corresponding period last fiscal year. - Surplus driven primarily by resurgence in remittances and exchange rate normalization. - Sovereign risk and external confidence: - Sovereign credit rating upgrade and compression of international borrowing spreads cited. - Inflation and monetary policy: - Headline inflation: peak nearly 40 percent in mid-2023, reduced to 0.7 percent by March 2025. - Policy rate: reduced by 10 percentage points since June 2024 to 12 percent by January 2025. - Outlook: - Growth expected to accelerate in FY25 and FY26, reflecting ongoing reforms and institutional improvements. ### Program performance and fiscal consolidation - EFF performance characterized as robust with strong implementation fidelity despite challenging macro backdrop. - Missed indicative targets attributed to a sharper-than-anticipated disinflation trajectory; short-term delays in some structural benchmarks addressed with remedial actions. - Structural reform progress highlighted in: - Public financial management. - SOE oversight. - Climate-informed fiscal policy. - Revenue mobilization. - Fiscal consolidation recognized as a critical pillar to safeguard macro stability while preserving space for pro-poor and growth-enhancing expenditure. - Underlying primary balance targeted: 1.0 percent (text cuts off before completion of the target path). *Prepared by the Middle East and Central Asia Department; May 7, 2025; statement dated May 9, 2025.* ### 2.1 percent of GDP in FY25—up from 0.9 percent in FY24—representing a significant fiscal ### 1pakea2025001-print-pdf - 2.1 percent of GDP in FY25—up from 0.9 percent in FY24—representing a significant fiscal ### Fiscal outcomes and trajectory - Fiscal adjustment: primary surplus of 2.1 percent of GDP in FY25—up from 0.9 percent in FY24. - Overall fiscal deficit projected to narrow to 5.7 percent of GDP in FY25, down from 6.8 percent in the previous fiscal year. - First eight months of FY25: fiscal deficit declined to 2.2 percent of GDP from 3.1 percent in the same period last year. - Primary surplus in the first eight months of FY25 improved to 3.0 percent from 1.7 percent. - Strategy emphasizes calibrated consolidation—eschewing abrupt expenditure cuts and balancing fiscal consolidation with development priorities and social protection. ### Revenue mobilization: broadening the base and enhancing equity - Medium-term objective: raise the tax to-GDP ratio from below 10 percent to 13–14 percent via base-broadening, removal of distortive exemptions, and improved compliance. - FBR tax collections rose by 26.3 percent in FY25 despite lower-than-expected nominal GDP growth. - Key measures: - Integration of taxpayer data across FBR, NADRA, and provincial entities. - Phasing out of tax exemptions amounting to 1.5 percent of GDP. - Expansion of the tax net to retail, real estate, and agriculture. - Accelerated digitalization of tax administration systems. - National Fiscal Pact (NFP) commitments: provinces to enhance own-source revenue, harmonize key taxes, and align spending responsibilities. - Transformation Plan priorities: digitization, transparency, equity; use of consultative sessions to refine risk-based audit systems, streamline dispute resolution, and improve taxpayer services. - Governance enhancements: performance-linked budgeting, merit-based appointments, greater transparency in procurement and expenditure tracking. ### Expenditure rationalization: efficiency with equity - Federal current expenditure capped; targeted spending on pro-poor programs expanded. - Benazir Income Support Programme (BISP) supports over 9 million families. - From July to February FY25: PRs 347 billion disbursed under BISP, representing an 82.6 percent increase over the previous year; full-year allocation of PRs 592.5 billion. - Pakistan Poverty Alleviation Fund provided over 18,000 interest-free loans. - Energy subsidies restructured to target the bottom 40 percent of the population. - Public administration rationalization: streamlining of over 43 ministries and 400 departments. - Pension reform direction: shift toward defined-contribution schemes to manage long-term liabilities. - Governance reforms in SOEs and public investment management to reduce contingent fiscal risks. - URAAN Pakistan and Transformation Plan (articulated November 2024) with five pillars: productivity enhancement, digitalization, climate resilience, equity, and infrastructure modernization. ### Monetary policy management: re-anchoring stability through credibility and precision - Monetary stance: appropriately contractionary, then cautiously transitioned to data-driven easing. - Policy rate reduced by a cumulative 10 percentage points since June 2024. - Headline inflation: peaked at nearly 40 percent in mid-2023; declined to 0.7 percent by March 2025. - Policy rate: recalibrated to 12 percent as of January 2025; medium-term inflation target range of 5–7 percent. - MPC guidance emphasizes preserving real interest rate buffers and macro-financial stability. - Institutional and operational reforms: - Revisions to SBP’s collateral eligibility and counterparty frameworks. - Enhancements to monetary policy transmission and greater pass-through to market instruments and lending rates. - Ongoing reforms to the domestic government securities market to bolster liquidity and support public debt management. - Net International Reserves (NIR): SBP has exceeded the floor through proactive market purchases, improved balance-of-payments dynamics, and stable remittance inflows; authorities committed to continued accumulation. - Exchange rate regime: market-determined with two-way flexibility; interventions confined to addressing excessive volatility and disorderly market conditions. - Foreign exchange regulatory reforms: liberalizing current account transactions, streamlining foreign currency payments, and enhancing documentation and monitoring of capital flows. ### Climate resilience and fiscal risk management - Pakistan identified among the top 15 countries in the world with the highest climate risk (Global Climate Risk Index). - Climate shocks impose high costs, disrupt public investment plans, and force deviations from a sustainable economic path. - Staff assessment: Pakistan’s climate vulnerabilities are among the highest, readiness among the lowest. - Post-2022 floods: over 33 million Pakistanis affected and losses of over USD 30 billion. - Progress with multilateral and bilateral partners: Country Climate Development Report (CCDR), National Adaptation Plan (NAP), Climate Prosperity Plan (CPP), C-PIMA, and Climate-Informed Fiscal Risk Framework. - National Climate Change Policy (NCCP): dedicated legislation to create an Authority and a Fund for adaptation and mitigation finance. - Integration of climate risk into public financial management: - Tools include green budget tagging and disaster risk budgeting. - Over 5,000 cost centers categorized under climate-responsive classifications with allocations and contingency funds prepositioned. ### Resilience and Sustainability Facility (RSF) - RSF objectives: strengthen capacity to absorb climate-related shocks to growth and the balance of payments; implement NCCP legal and institutional frameworks including promotion of renewable energy and electric vehicles (EVs). - Access request approaches the upper limit but remains below the standard normative threshold of 75 percent of quota. - Adequacy of the request’s magnitude is pivotal as a signaling mechanism to international markets and institutional investors. - Pakistan commitments under the 2015 Paris Climate Accord: reduce greenhouse gas emissions by 15 percent by 2030. - National targets: increase renewable energy share, expand EV adoption, curb development of coal-fired power plants, implement a ten-year afforestation initiative. - Urgent need to translate climate strategies into concrete investments and create additional fiscal space. ### Structural reforms - Implementation of State-Owned Enterprises (Governance and Operations) Act, 2023 and SOEs (Ownership and Management) Policy, 2023 to strengthen SOE performance, transparency, and governance. - Board restructuring: boards reconstituted to ensure most directors are independent and possess requisite professional qualifications and sectoral expertise. - SOE categorization and rightsizing: Cabinet Committee on SOEs (CCoSOEs) and Committee on Rightsizing completed categorization; rightsizing and rationalization underway. - Central Monitoring Unit (CMU) operational guidelines cover business plans, senior management appointment criteria, director nomination and performance evaluation, costing of Public Service Obligations, audit committee regulations, and internal controls and risk management frameworks. - Legal alignment: governing laws of four major statutory bodies aligned with SOE framework; alignment of nine more statutory SOEs targeted by June 2025. - Institutional restructuring: restructuring, transformation, and merger plans for selected SOEs under active consideration. - Digital SOE database: CMU and National Information Technology Board developing a centralized digital database. ### Privatization update - Significant progress in removing obstacles to privatization of PIA, including resolution of investor concerns regarding negative equity and tax liabilities, lifting of the European Union ban on PIA operations, and sustained investor outreach efforts. ### International support and collaborative engagement - Strong international cooperation: multilateral development partners and initiatives aligned with C-PIMA recommendations to help access concessional financing, technical assistance, and global climate finance mechanisms including the Green Climate Fund. - Pakistan entered a 10-year Country Partnership Framework with the World Bank, focusing USD 20 billion starting 2026 on clean energy and climate resilience. - Strategic partnerships through RISE and PRRIs initiatives to enhance institutional resilience and fiscal transparency. ### Conclusion - Pakistan’s outlook evolving constructively through disciplined fiscal management, pragmatic monetary policy, and structural reforms. - Reforms, political commitment, and international support provide a foundation for sustainable, inclusive, and climate-resilient growth. *Source: 1pakea2025001-print-pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1pakea2025001-print-pdf.pdf_