## IMF Pakistan staff report (1pakea2025002-source-pdf) — Executive chapter and supporting boxes

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### Recent developments and macro outcomes
- Growth and inflation:
  - GDP growth of 3.0 percent in FY25.
  - Inflation increased to 6.2 percent (yoy) in October; core inflation was 7.8 percent.
  - FY25H2 momentum driven by stronger industrial activity; industrial power consumption growth rose 35 percent (yoy) over April–August 2025.
- External sector and reserves:
  - Current account surplus of US$2.1 billion in FY25 (0.5 percent of GDP) — Pakistan’s first surplus in 14 years.
  - Gross reserves reached US$14.5 billion at end-June 2025 (54.3 percent of the ARA metric).
  - Sovereign spreads declined to around 420 basis points following upgrades to B- and Caa1.
- Monetary policy and credit:
  - Policy rate held at 11 percent in the last four MPC meetings.
  - Private sector credit grew 13.7 percent (yoy) in September.
- Fiscal outcomes:
  - FY25 primary surplus target was met (general government underlying primary surplus PRs 1.5 trillion or 1.3 percent of GDP).
  - FBR revenues increased by 26 percent (yoy) to 10.3 percent of GDP; overall tax revenue fell short of target by 0.3 percent of GDP.
  - Lower-than-budgeted federal subsidies and grants (0.2 percent of GDP).
- Energy sector:
  - Power sector circular debt (CD) stock fell by PRs 779 billion to PRs 1,614 billion (1.4 percent of GDP) at end-June.
  - Gas sector: principal gas CD fell by PRs 86 billion, but estimated LPS raised overall gas CD by PRs 227 billion to PRs 3,183 billion (3.0 percent of GDP).

### Program performance (EFF and RSF)
- EFF and RSF status:
  - 37‑month EFF approved on September 25, 2024 — on track.
    - Six of seven QPCs and four of eight ITs met at end-June 2025.
    - Completion of the second EFF review would make available SDR 760 million (about US$1 billion), bringing total disbursements under the EFF to SDR 2,280 million.
  - 29‑month RSF approved on May 9, 2025 — on track.
    - Both RMs due at the first RSF review have been met.
    - Completion of the first RSF review would make available SDR 153.8 million (about US$200 million).
- Quantitative performance and targets:
  - End-June 2025 PCs met (6 of 7).
  - End‑June 2025 QPC floor on total BISP spending missed by PRs 463 million (0.1 percent, 0.0004 percent of GDP).
  - Four ITs met at end-June 2025; several ITs and SBs were missed and some proposed for reset (publication/action plan based on GCD, phase-out plan for SEZs, amendments to statutory SOEs laws, excise on fertilizer/pesticides).
- RSF reform measures:
  - RM9 and RM10 implemented via FY26 finance bill: carbon levy and EV subsidy / ICE vehicle tax.

### Outlook and key projections (exact figures preserved)
- Macroeconomic baseline and flood impact:
  - Growth projected to increase slightly to 3.2 percent in FY26; floods weigh on activity.
  - Inflation expected to spike temporarily, peaking at around 8-10 percent before returning durably to target in FY27.
  - Current account projected to revert to a small deficit in FY26; medium-term deficit at or below 1 percent of GDP.
  - FY26 primary balance target of 1.6 percent of GDP projected within reach.
  - Sustained primary surpluses around 2 percent will support public debt decline to around 60 percent of GDP by FY30.
- Selected projection series (exact values):
  - Real GDP growth (%): 2.6 (2023/24 est.), 3.0 (2024/25 est.), 3.6 (2025/26 prog.), 3.2 (2026/27 proj.), 4.1 (2027/28), 4.5 (2028/29), 4.5 (2029/30).
  - Consumer prices (period average, % change): 23.4 (2023/24), 4.5 (2024/25), 7.7 (2025/26 prog.), 6.3 (2026/27 proj.), 7.0 (2027/28), 6.5 (2028/29), 6.5 (2029/30).
  - Gen. gov. overall balance (incl. grants, % of GDP): -6.8 (2023/24), -5.4 (2024/25), -5.1 (2025/26 prog.), -4.0 (2026/27 proj.), -3.8 (2027/28), -3.2 (2028/29), -3.0 (2029/30), -2.8 (2030).
  - Gen gov. primary balance (underlying, excl. grants, % of GDP): 0.9 (2023/24), 1.3 (2024/25), 1.6 (2025/26 prog.), 1.6 (2026/27 proj.), 2.0 (2027/28), 2.0 (2028/29), 2.0 (2029/30), 2.0 (2030).
  - Gen. gov. debt (incl. IMF obligations, % of GDP): 70.4 (2023/24), 72.9 (2024/25), 71.9 (2025/26 prog.), 72.4 (2026/27 proj.), 69.9 (2027/28), 66.8 (2028/29), 63.6 (2029/30), 60.7 (2030).
  - Current account balance (% of GDP): -0.6 (2023/24), 0.5 (2024/25), -0.4 (2025/26 prog.), -0.6 (2026/27 proj.), -0.4 (2027/28), -0.8 (2028/29), -1.0 (2029/30), -1.0 (2030).
  - Gross official reserves (billions of US$): 9.4 (2023/24), 14.5 (2024/25), 17.7 (2025/26 prog.), 17.8 (2026/27 proj.), 23.3 (2027/28), 25.4 (2028/29), 28.1 (2029/30), 31.3 (2030).
  - Gross official reserves (months of next year's G&S imports): 1.6 (2023/24), 2.3 (2024/25), 2.8 (2025/26 prog.), 2.7 (2026/27 proj.), 3.2 (2027/28), 3.3 (2028/29), 3.4 (2029/30), 3.5 (2030).
  - Gross official reserves (% of IMF ARA metric): 35.9 (2023/24), 54.3 (2024/25), 63.1 (2025/26 prog.), 64.9 (2026/27 proj.), 78.9 (2027/28), 84.3 (2028/29), 90.0 (2029/30), 99.8 (2030).

### Box: Impact of the 2025 Monsoon Floods — overview and immediate assessment
- Humanitarian and damage summary:
  - Almost 7 million people estimated impacted; over 1,000 fatalities; over 4 million displaced/rescued (most severe in Punjab and KP).
  - Authorities’ initial estimate of damages: around PRs 800 billion (about 0.6 percent of GDP).
- 2022 vs 2025 flood statistics (as of Sep 30):
  - People Affected: 33 million (2022); 6.9 million (2025).
  - Lives Lost: Over 1,700 (2022); 1,037 (2025).
  - People Displaced: Nearly 8 million (2022); Over 4 million (2025).
  - Houses damaged: 2.05 million (2022); 0.23 million (2025).
  - Crops Inundated: 4.4 million acres (2022); 2.2 million acres (2025).
  - Livestock Deaths: 0.8 million (2022); 0.02 million (2025).
- Macro-fiscal and external initial impacts:
  - GDP Growth expected to be around ½ percentage point lower in FY26.
  - Inflation expected to increase by around ½ percentage point on average in FY26 relative to a no-flood scenario.
  - Fiscal Revenues expected to decline by around PRs 110 billion.
  - Current account expected to deteriorate by around US$1 billion.
- Authorities’ fiscal response and cost:
  - Total expenditure cost estimated at around PR400 billion (0.3 percent of GDP), to be covered by contingency reserve and redirecting provincial funds.
  - Over two-thirds of response spending related to Punjab.
- Contingency revenue measures (if revenue falls short by end-December 2025):
  - Increase excises on fertilizers and pesticides by 5 percentage points.
  - Introduce excises on high-value sugary items.
  - Broaden the sales tax base by moving select items to the standard rate.

### Fiscal policy, revenue mobilization, and FBR analysis
- FY25 FBR outcomes:
  - FBR tax revenue collection increased by PRs 2,433 billion (26 percent) in FY25.
  - Decomposition: macroeconomic drivers PRs 757 billion; administrative and tax policy measures PRs 1,678 billion.
  - Tax revenue shortfalls:
    - PRs 1,224 billion shortfall relative to budget.
    - PRs 524 billion shortfall relative to first review target.
    - Of PRs 1,224 billion shortfall: PRs 850 billion due to lower inflation and GDP growth; PRs 380 billion linked to administrative/enforcement challenges.
- Legislated and new tax measures (percent GDP):
  - Legislated in FY25:
    - Higher tax rates on individuals and AOPs, surcharge above PRs 10M: 0.12
    - Reducing GST exemptions and removing DISCO subsidies: 0.03
    - PDL increase (legislated in March 2025): 0.09
  - New in FY26:
    - Withholding & Income Taxes: 0.07
    - Sector-Specific & Indirect Taxes and Withdrawal of Exemptions: 0.09
  - Gains from Revenue Administration: 0.31 (of which enforcement 0.11; dispute resolution 0.08)
  - Total (percent GDP): 0.71

### Monetary, FX, and financial sector guidance and safeguards
- Monetary policy stance:
  - Keep policy appropriately tight and data-dependent; SBP policy rate held at 11 percent.
  - SBP to strengthen communication and analytical underpinnings of the framework, including MPC reaction function.
- FX and reserves:
  - Continue building reserves through FX purchases and deepen FX market; SBP to assess remittance costs (new end-May 2026 SB).
  - Revised FX exposure limits for banks; unwind January 2022 repatriation shortening once stability restored.
- Financial sector stability:
  - Firm enforcement of regulatory framework; recapitalization/resolution of undercapitalized banks required (Prior Action).
  - Microfinance bank sector review planned; five of 11 MFBs remain undercapitalized.
- TMU and monitoring:
  - Program exchange rate: 278.3412 rupee per US$.
  - Quantitative PCs include NIR floor, NDA ceiling, ceiling on SBP swaps/forwards, general government primary deficit ceiling, ceiling on government guarantees, floor on BISP spending, floor on number of new tax returns.
  - Continuous PCs: no new SBP credit to government; zero accumulation of external public payment arrears.

### Energy sector reform and circular debt management
- Power sector:
  - Power CD stock reduced to PRs 1,614 billion at end-June 2025.
  - FY26 targets: end-March and end-June 2026 CD flow ITs set at PRs 400 billion each.
  - Stock clearance subsidies of PRs 400 billion would keep net CD accumulation to zero in FY26.
  - Shift annual rebasing from June to January beginning in 2026.
  - Privatization: bidding for first round of three DISCOs expected early in 2026; preconditions for HESCO and SEPCO (new end-December 2026 SB).
- Gas sector:
  - Semiannual tariff adjustments to continue; preserve progressivity and full reflect cost of imported RLNG.
  - Comprehensive gas CD dashboard compiled; quarterly gas CD flow reporting initiated; gas CDMP to be published end-March 2026.

### Structural reforms, governance, SOEs, and commodity markets
- Governance and anti-corruption:
  - Governance and Corruption Diagnostic (GCD) published November 2025 (Prior Action); action plan reset proposed to end-December 2025.
  - Amendments to Civil Servants Act enacted; asset declaration publication steps scheduled.
- SOE governance and privatization:
  - Amendments to most of nine statutory SOE laws expected before end-2025 but reset proposed to end-August 2026.
  - CMU producing reports; electronic database nearing operationalization.
  - Privatization pipeline includes DISCOs, GENCOs, PIA, First Women Bank Limited.
- Commodity markets:
  - Reforms in wheat and sugar to remove distortions; national sugar policy (new end-June 2026 SB) to liberalize trade and remove price controls.
- Business and regulatory reforms:
  - National Tariff Policy 2025–2030 introduced; plan to phase out SEZ/EPZ incentives by 2035; Asaan Karobar Bill to modernize regulatory environment.

### RSF climate resilience measures and RMs status
- RM9 and RM10 (carbon levy and EV subsidy/ICE tax) implemented via FY26 Finance Act:
  - PRs 2.5/liter increase in FY26 and further PRs 2.5/liter scheduled in FY27 added to PDL; PRs 9 billion EV subsidy focused on 2- and 3-wheelers; ICE tax 1–3 percent.
- Progress on other RMs:
  - RM7 and RM8 (climate-related financial disclosures and SECP guidelines) on track for end-December 2025.
  - RM12 (targeted electricity subsidy framework using BISP) progress in matching consumers with BISP databases; communications rollout required.

### Financing, program resources, and selected financing table (exact figures preserved)
- Program financing:
  - Program fully financed with firm commitments for next 12 months; progress with Saudi Development Fund and China EXIM.
- Selected figures (Millions of U.S. Dollars) from Text Table 4:
  - A. Financing gap (without RSF): 3,503; 4,103; 2,961; 1,046; 11,613.
  - Underlying BoP Gap: -1,674; 1,215; -1,949; -625; -3,032.
  - Gross international reserves (+= accumulation, without RSF): 5,177; 2,888; 4,909; 1,671; 14,645.
  - B. IMF EFF: 2,051; 2,083; 2,089; 1,046; 7,269.
  - C. Other program financing (A-B): 1,452; 2,020; 872; 0; 4,344.
  - D. RSF Disbursement: 0; 422; 528; 424; 1,374.
  - Memorandum items — IFI Budget Support: 1,224; 500; 500; 1,000; 3,224.
  - External Bond Issuance 4/: 0; 250; 1,000; 1,500; 2,750.
  - (Net) Commercial Bank borrowing 5/: 678; 215; 614; 1,378; 2,884.
  - Proj. columns correspond to: 2024/25; 2025/26; 2026/27; 2027/28; Total (FY25-28).

### Debt, repayment capacity, and safeguards
- Public debt and structure (selected, Jun-25):
  - Total public debt (US$ million; Jun-25): 307,467 (100.0 percent of total; 76.7 percent of nominal GDP).
  - External debt (US$ million; Jun-25): 106,965 (34.8 percent of total; 26.7 percent of nominal GDP).
    - IMF: 9,268 (3.0 percent of total; 2.3 percent of GDP).
    - World Bank: 22,006 (7.2 percent of total; 5.5 percent of GDP).
    - China: 23,499 (7.6 percent of total; 5.9 percent of GDP).
  - Domestic debt (US$ million; Jun-25): 200,503 (65.2 percent of total; 50.0 percent of GDP).
    - PIBs: 145,783 (47.4 percent of total; 36.4 percent of GDP).
- Capacity to repay:
  - Fund exposure projected to peak at SDR 9,467 million in September 2027 (466 percent of quota; about 51 percent of projected gross reserves).
  - Outstanding debt to the Fund as a share of GIR exceeds the 75th percentile of comparator countries; three flow indicators (debt service as share of government revenue, exports, and reserves) are above the 75th percentile.
  - Risks: resistance to reforms, underperformance of tax revenue, elevated gross financing needs, low gross reserves, SBP’s sizeable net FX derivative position, sociopolitical tensions.
- Safeguards:
  - 2023 Safeguards Assessment found broadly sound framework; outstanding recommendations include timely filling of Board and deputy governor vacancies and amending SBP Act to clarify prohibition on quasi-fiscal activities.

### Key risks (Risk Assessment Matrix summary)
- Global/high-probability risks: Geopolitical tensions; Escalating trade measures; Commodity price volatility; Financial market volatility; Fiscal vulnerabilities and higher long-term interest rates; Decline in international aid. (Relative Likelihood: High; Time Horizon: Short to Medium Term.)
- Country-specific high-probability risk: Slippages in policy implementation — risks to fiscal discipline, reserves, structural reform agenda, and growth.
- Climate change: Relative Likelihood: Medium; Time Horizon: Medium to Long Term — effects include fiscal pressures from recovery/reconstruction and migration.
- Bottom line assessment: The balance of risks is tilted to the downside.

### Program conditionality and monitoring highlights
- Structural conditionality (selected resets and new SBs):
  - Reset proposed for publication of GCD action plan to end-December 2025.
  - Reset proposed for amendment of laws on remaining statutory SOEs to end-August 2026.
  - New SBs include: FBR and tax policy reform, SOE governance, capital market development, power sector efficiency, commodity market liberalization, Companies Act amendments.
- Monitoring and reporting:
  - Extensive reporting schedule across SBP, MOF, FBR, PBS, Ministries of Water & Power and Petroleum, BISP, and other agencies with specified frequencies and deadlines.
  - Program exchange rate: 278.3412 rupee per US$; SBP profit transfer projections published (end-Dec 2025 projection PRs 2,428 billion).

### Policy recommendations and priorities (EFF and RSF implications, exact phrasing preserved where given)
- Maintain timely program implementation to build resilience and support sustainable growth, particularly in light of the recent floods.
- Fiscal policy:
  - FY26 primary surplus target remains achievable while accommodating flood-related spending needs.
  - Continue progress on fiscal reforms to boost revenue mobilization, reduce debt, and create fiscal space for social, health, and education spending.
- Monetary and exchange rate policy:
  - Monetary policy has helped contain inflationary pressures and should remain appropriately tight and data-dependent to keep inflation within the SBP’s target range.
  - Allow exchange rate flexibility to absorb shocks and support continued rebuilding of reserves.
- Energy sector and structural reforms:
  - Continue timely energy tariff adjustments and broader structural reforms to reduce high costs and strengthen sectoral viability.
  - Further steps on structural reforms – including SOE governance and the trade and investment environment – to support sustainable and inclusive growth.
- RSF implementation:
  - Continued implementation of RSF policies will boost Pakistan’s resilience to climate shocks via improved disaster risk and water management and reforms to prioritize adaptation-friendly projects.

*International Monetary Fund. EXECUTIVE SUMMARY, Pakistan 2025.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent Developments
- Continued strong policy implementation helped Pakistan weather several shocks in FY25; growth was stronger than anticipated in FY25, but the recent floods moderately dampen the outlook for FY26.
- Growth and inflation:
  - GDP growth of 3.0 percent in FY25 exceeded the first review projections; FY25H2 momentum was driven by stronger industrial activity.
  - Following the floods, inflation increased to 6.2 percent (yoy) in October, driven mostly by higher wheat and perishable food prices; core inflation was 7.8 percent.
- External sector and reserves:
  - The current account recorded a surplus of US$2.1 billion in FY25 (0.5 percent of GDP), Pakistan’s first surplus in 14 years.
  - Gross reserves reached US$14.5 billion at end-June 2025 (54.3 percent of the ARA metric).
  - Sovereign spreads declined to around 420 basis points following rating upgrades from S&P and Moody’s (to B- and Caa1, respectively).
- Monetary policy and credit:
  - The Monetary Policy Committee held the policy rate at 11 percent in its last four meetings.
  - Private sector credit grew 13.7 percent (yoy) in September, with notable pick-up to manufacturing and car financing.
- Fiscal outcomes:
  - The FY25 primary surplus target was met.
  - FBR revenues increased by 26 percent (yoy) to 10.3 percent of GDP; overall tax revenue fell short of target by 0.3 percent of GDP.
  - Lower-than-budgeted federal subsidies and grants (0.2 percent of GDP) helped offset the revenue shortfall.
- Energy sector:
  - Power sector circular debt (CD) stock fell by PRs 779 billion to PRs 1,614 billion (1.4 percent of GDP) at end-June, aided by lower international hydrocarbon prices, improved recoveries, and lower technical losses.
  - Industrial power consumption growth rose 35 percent (yoy) over April–August 2025.
  - Gas sector: principal gas CD fell by PRs 86 billion, but estimated late payment surcharges (LPS) raised overall gas CD by PRs 227 billion to PRs 3,183 billion (3.0 percent of GDP).

### Program Performance
- EFF and RSF status:
  - The 37-month Extended Arrangement under the Extended Fund Facility (EFF), approved on September 25, 2024, is on track.
    - Six of seven QPCs and four of eight ITs were met at end-June 2025.
    - Completion of the second EFF review would make available SDR 760 million (about US$1 billion), bringing total disbursements under the EFF to SDR 2,280 million.
  - The 29-month Resilience and Sustainability Facility (RSF), approved on May 9, 2025, is on track.
    - Both RMs due at the first RSF review have been met.
    - Completion of the first RSF review would make available SDR 153.8 million (about US$200 million).
- Quantitative performance:
  - End-June 2025 PCs met (6 of 7): floors on net international reserves of the SBP and number of new tax returns; ceilings on net domestic assets of the SBP, SBP’s stock of net foreign currency swaps/forward position, the general government primary budget deficit, and the amount of government guarantees.
  - The end-June 2025 QPC floor on total BISP spending was narrowly missed by PRs 463 million (0.1 percent, 0.0004 percent of GDP).
- Indicative targets and structural benchmarks:
  - Four ITs were met at end-June 2025: floors on weighted average time-to-maturity of local currency domestic debt securities stock; consolidated net tax revenues collected by provincial revenue authorities; income tax revenues collected by the FBR from retailers; and the ceiling on power sector payment arrears.
  - Missed end-June ITs included floors on general government budgetary health and education spending; net tax revenues collected by the FBR; ceilings on aggregate provincial primary budget deficit; and net accumulation of tax refund arrears.
  - Eight of 13 SBs were met, including approval of the FY26 budget in line with program targets, implementation of the new agricultural income tax, and amendment of the Civil Servants Act to enhance public officials’ asset declarations.
  - Missed SBs and resets:
    - Publication of the Governance and Corruption Diagnostic (GCD) was not met but completed as a Prior Action; publication of the action plan based on the GCD recommendations was not met and is proposed to be reset for end-December 2025.
    - Preparation of a plan to phase out SEZs was missed but implemented in October 2025.
    - Amendment of laws on remaining statutory SOEs was not met and is proposed to be reset for end-August 2026.
    - Continuous SB on avoidance of tax exemptions was missed due to exemptions applied to sugar imports; addressed by authorities’ commitment to deregulate the sugar sector (new end-June 2026 SB).
    - End-June SB on introduction of an excise duty on fertilizer and pesticides was missed; will be implemented as a contingency measure in the event of a revenue shortfall.
- RSF reform measures:
  - Both RMs due under the first RSF review were met: adoption, with the FY26 finance bill, of a carbon levy and the introduction of an electric vehicle subsidy and internal combustion engine vehicle tax.

### Outlook and Risks
- Macroeconomic projections reflecting the impact of the monsoon floods:
  - GDP and inflation:
    - Growth projected to increase slightly to 3.2 percent in FY26, despite flood-related weighing on activity.
    - Inflation expected to spike temporarily, peaking at around 8-10 percent due to higher food prices and adverse base effects, before returning durably to target in FY27.
  - Balance of payments:
    - The current account is projected to revert to a small deficit in FY26.
    - Imports are expected to rise following tariff cuts under the new National Tariff Policy (NTP); remittances projected to remain resilient and largely offset the increase in the trade deficit.
    - Over the medium term, the current account is projected to remain in a modest deficit at or below 1 percent of GDP.
    - Access to external commercial financing is expected to gradually improve, including through a modest Panda bond issuance in FY26 and expected market re-entry in FY27.
  - Fiscal stance and public debt:
    - The FY26 primary balance target of 1.6 percent of GDP is projected to be within reach while accommodating emergency flood relief.
    - Over the medium term, sustained primary surpluses of around 2 percent will support gradual public debt decline to around 60 percent of GDP by FY30.
    - Interest costs are expected to remain sizeable but the interest bill is projected to fall below 5 percent of GDP over the medium term.
- Key projections (selected, exact figures preserved):
  - Real GDP growth (%): 2.6 (2023/24 est.), 3.0 (2024/25 est.), 3.6 (2025/26 prog.), 3.2 (2026/27 proj.), 4.1 (2027/28), 4.5 (2028/29), 4.5 (2029/30).
  - Consumer prices (period average, % change): 23.4 (2023/24), 4.5 (2024/25), 7.7 (2025/26 prog.), 6.3 (2026/27 proj.), 7.0 (2027/28), 6.5 (2028/29), 6.5 (2029/30).
  - Gen. gov. overall balance (incl. grants, % of GDP): -6.8 (2023/24), -5.4 (2024/25), -5.1 (2025/26 prog.), -4.0 (2026/27 proj.), -3.8 (2027/28), -3.2 (2028/29), -3.0 (2029/30), -2.8 (2030).
  - Gen gov. primary balance (underlying, excl. grants, % of GDP): 0.9 (2023/24), 1.3 (2024/25), 1.6 (2025/26 prog.), 1.6 (2026/27 proj.), 2.0 (2027/28), 2.0 (2028/29), 2.0 (2029/30), 2.0 (2030).
  - Gen. gov. debt (incl. IMF obligations, % of GDP): 70.4 (2023/24), 72.9 (2024/25), 71.9 (2025/26 prog.), 72.4 (2026/27 proj.), 69.9 (2027/28), 66.8 (2028/29), 63.6 (2029/30), 60.7 (2030).
  - Current account balance (% of GDP): -0.6 (2023/24), 0.5 (2024/25), -0.4 (2025/26 prog.), -0.6 (2026/27 proj.), -0.4 (2027/28), -0.8 (2028/29), -1.0 (2029/30), -1.0 (2030).
  - Gross official reserves (billions of US$): 9.4 (2023/24), 14.5 (2024/25), 17.7 (2025/26 prog.), 17.8 (2026/27 proj.), 23.3 (2027/28), 25.4 (2028/29), 28.1 (2029/30), 31.3 (2030).
  - Gross official reserves (months of next year's G&S imports): 1.6 (2023/24), 2.3 (2024/25), 2.8 (2025/26 prog.), 2.7 (2026/27 proj.), 3.2 (2027/28), 3.3 (2028/29), 3.4 (2029/30), 3.5 (2030).
  - Gross official reserves (% of IMF ARA metric): 35.9 (2023/24), 54.3 (2024/25), 63.1 (2025/26 prog.), 64.9 (2026/27 proj.), 78.9 (2027/28), 84.3 (2028/29), 90.0 (2029/30), 99.8 (2030).

### EFF and RSF Policy Implications and Recommendations
- Maintain timely program implementation to build resilience and support sustainable growth, particularly in light of the recent floods.
- Fiscal policy:
  - The FY26 primary surplus target remains achievable while accommodating flood-related spending needs.
  - Fiscal effort should continue via progress on fiscal reforms to boost revenue mobilization, reduce debt, and create fiscal space for social, health, and education spending.
- Monetary and exchange rate policy:
  - Monetary policy has helped contain inflationary pressures and should remain appropriately tight and data-dependent to keep inflation within the SBP’s target range.
  - Allow exchange rate flexibility to absorb shocks and support continued rebuilding of reserves.
- Energy sector and structural reforms:
  - Timely energy tariff adjustments have improved the energy sector and should continue, alongside broader structural reforms to reduce high costs and strengthen sectoral viability.
  - Further steps on structural reforms – including on SOE governance and the trade and investment environment – aim to support sustainable and inclusive growth.
- RSF implementation:
  - Continued implementation of policies under the RSF will help boost Pakistan’s resilience to climate shocks via improved disaster risk and water management and reforms to prioritize adaptation-friendly projects.

*International Monetary Fund. EXECUTIVE SUMMARY, Pakistan 2025.*

### Box 1. Impact of the 2025 Monsoon Floods

### Box 1. Impact of the 2025 Monsoon Floods

### Overview and Humanitarian Impact
- During August––September 2025, northern and central Pakistan were affected by severe floods following heavier than usual monsoon rains.
- Almost 7 million people are estimated to have been impacted nationwide, including over 1,000 fatalities and 4 million displaced/rescued, with the most severe impact in Punjab and KP.
- The authorities’ initial estimate of damages is around PRs 800 billion (about 0.6 percent of GDP), mostly due to damages to housing, infrastructure, cropland, and livestock.
- These initial damages are substantially lower than the damage of the 2022 floods, though the final cost may be revised as a more comprehensive damage assessment is completed.

### Key Disaster Statistics (2022 Monsoon Floods vs 2025 Floods as of Sep 30)
- People Affected:
  - 2022 Monsoon Floods: 33 million
  - 2025 Floods (As of Sep 30): 6.9 million
- Lives Lost:
  - 2022 Monsoon Floods: Over 1,700
  - 2025 Floods (As of Sep 30): 1,037
- People Displaced:
  - 2022 Monsoon Floods: Nearly 8 million
  - 2025 Floods (As of Sep 30): Over 4 million
- Houses damaged:
  - 2022 Monsoon Floods: 2.05 million
  - 2025 Floods (As of Sep 30): 0.23 million
- Crops Inundated:
  - 2022 Monsoon Floods: 4.4 million acres
  - 2025 Floods (As of Sep 30): 2.2 million acres
- Livestock Deaths:
  - 2022 Monsoon Floods: 0.8 million
  - 2025 Floods (As of Sep 30): 0.02 million

### Macro-Fiscal and External Impact (Initial Assessment)
- GDP and Inflation:
  - GDP Growth is expected to be around ½ percentage point lower in FY26, mostly reflecting damage to key Kharif crops and direct spillovers to industrial and services activity.
  - Inflation is expected to increase by around ½ percentage point on average in FY26 relative to a scenario with no flood impact—but still lower than projected under the program—with recent increases in the price of flour and perishable food items projected to partially subside.
- Fiscal Revenues:
  - Fiscal Revenues are expected to decline by around PRs 110 billion due to the weaker outlook for activity.
- Current Account:
  - The current account is expected to deteriorate by around US$1 billion due to the floods, reflecting the impact on agricultural exports, import needs to cover supply gaps from flood-damaged crops, and expected higher remittance flows in the post-flood period.

### Authorities’ Response and Estimated Fiscal Cost
- Policy response focus: mix of immediate relief and broader reconstruction efforts.
- Immediate relief: planned fixed amount of compensation for damaged houses, livestock, or acres of land.
- Total expenditure cost of the response is estimated to be around PR400 billion (0.3 percent of GDP), to be covered by a combination of the federal budget’s contingency reserve and redirecting already-budgeted provincial funds.
- Geographic distribution of response spending:
  - Over two-thirds of the total amount would be related to spending in Punjab.
  - The remainder related to KP and Sindh.

### Downside Risks and Broader Vulnerabilities
- Floods highlight Pakistan’s high exposure to natural disasters and substantial climate risks.
- Risks if agricultural damage exceeds initial estimates or spillovers are larger:
  - Deterioration in outlook for activity, revenue, inflation, and the external sector.
  - Larger-than-anticipated costs for recovery and reconstruction could put pressure on government expenditures.
- Other key risks:
  - Escalating geopolitical tensions.
  - Increases in commodity prices.
  - Tightening in global financial conditions (including higher long-term interest rates).
  - Weakening of remittances or international aid.
  - Escalating trade measures in other trading partners.
  - Rising social discontent.
  - Policy slippage in the context of elevated public debt and gross financing needs, with pressures to ease policies and provide fiscal and other concessions.

### Fiscal Policy Context and Safeguards
- FY26 budget targets an underlying primary surplus of 1.6 percent of GDP (end-June 2025 SB).
- FY26 tax revenues expected to be lower due to:
  - Lower projected FBR and provincial revenues reflecting the adverse growth impact of the floods and a downward revision of nominal GDP.
  - Lower revenue from the CPP levy due to a large portion of CPPs transitioning to the grid.
- Authorities’ fiscal response actions:
  - Reprioritizing spending, using the budget’s contingency reserves and curtailing non-essential current spending, particularly at the provincial level, to make room for emergency relief.
  - Expectation that these efforts will allow achievement of the primary deficit target.
- Contingency measures if revenue falls short by end-December 2025:
  - Increase excises on fertilizers and pesticides by 5 percentage points.
  - Introduce excises on high-value sugary items.
  - Broaden the sales tax base by moving select items to the standard rate.
  - Preparedness to reduce or postpone spending in response to lower revenues as a result of the NTP.

### Tax Policy and Revenue Mobilization Measures (Text Table 3 summary)
- Legislated in FY25 (percent GDP):
  - Higher tax rates on individuals and AOPs, and surcharge on income above PRs 10M: 0.12
  - Reducing GST exemptions and removing DISCO subsidies: 0.03
  - PDL increase (legislated in March 2025): 0.09
- New Tax Measures Introduced in FY26 (percent GDP):
  - Withholding & Income Taxes: 0.07
  - Sector-Specific & Indirect Taxes and Withdrawal of Exemptions: 0.09
- Gains from Revenue Administration (percent GDP): 0.31
  - of which Enforcement through audit and monitoring: 0.11
  - of which Better tax dispute resolution: 0.08
- Total (percent GDP): 0.71

### Public Financial Management and Debt Management Actions
- PFM reforms:
  - Content enhancements of regular fiscal reports and budget circulars to improve budget preparation and transparency.
  - 11th National Finance Commission provides an opportunity to review and strengthen federal and provincial fiscal frameworks and accountability.
- Public investment management:
  - Detailed project selection methodology (scorecard) adopted; further steps include developing more robust climate-related scores and training staff.
  - Need to improve coordination between dual budgeting frameworks to ensure current expenditure does not compete with strategic investment projects.
- Public procurement:
  - Continue expansion of digitalized system (e-PADS) to federal and provincial agencies, including publication of beneficial ownership information.
  - Eliminate preferences for state-owned enterprises in awarding procurement contracts.
  - External audit of e-PADS to be completed by the Auditor General and submitted to the President by end-March 2026.
- Cash management:
  - Conduct a sectorization study to define the general government perimeter and require general government institutions to comply with TSA rules.
- Liability management and debt strategy:
  - Implement 2026-28 Debt Management Strategy to extend maturities and reduce exposure to short-term interest rates.
  - Conduct a comprehensive study of bottlenecks for local currency bond market development and publish an action plan (new end-September 2026 SB).
  - Review the retail debt program to assess operational costs and explore digital technologies (MEFP ¶21).

### Poverty Reduction, Social Protection, and Human Capital
- Poverty:
  - After falling by more than a third over 2001-18, Pakistan’s poverty headcount rate increased to 25.3 percent as of FY24.
- BISP and social safety nets:
  - BISP budget strengthened; benefits maintain recipients’ spending power.
  - Proposed modification to focus the QPC only on social spending programs, excluding administrative costs (Technical Memorandum of Understanding ¶21).
  - FY26 Q1 spending was comfortably ahead of the end-September IT.
  - FY26 BISP budget includes a 20 percent increase in spending on UCT and conditional cash transfer (CCT) programs.
  - Kafaalat benefit to be increased from PRs 13,500 to PRs 14,500 (SB end-January 2026) to adjust for inflation.
  - Kafaalat coverage expected to increase by at least 200,000 families to 10.2 million by end-FY26.
  - Upon availability of a new household survey (HIES) expected in 2026, Kafaalat generosity should be further gradually increased toward 15 percent of the bottom income quintile’s consumption basket (while continuing to adjust for inflation).
- CCT programs:
  - Full execution of CCT budget is important; core CCT programs focus on school enrollment and nutrition.
  - Coordination between BISP and provincial authorities is important to avoid overlap and maintain common eligibility standards using the NSER.
- Health and education spending:
  - Aggregate spending on health and education increased from 2.2 to 2.5 percent of GDP in FY25.
  - Sindh and Khyber-Pakhtunkhwa missed their FY25 targets by 16 percent and 3 percent margins, respectively, contributing to a narrowly missed end-June 2025 IT (0.9 percent, 0.02 percent of GDP).
  - Most provinces budgeted substantial increases for FY26, which would bring general government health and education spending up by another 0.3 percent of GDP to 2.8 percent.

### Monetary, Exchange Rate, and Financial Sector Policy Guidance
- Monetary policy:
  - Monetary policy needs to remain appropriately tight and data dependent to durably anchor inflation inside the SBP’s target range.
  - SBP has kept the policy stance positive in real terms on a forward-looking basis and should continue to carefully monitor the floods’ impact on inflation and the external position.
  - SBP should further strengthen communication and analytical underpinnings of the monetary policy framework, including the MPC's reaction function, and provide a clearer assessment of the policy stance.
- FX reserves and remittances:
  - Continue to build reserve buffers through FX purchases and deepen the FX market.
  - SBP plans a comprehensive assessment of remittance costs (new end-May 2026 SB).
  - Further efforts needed to deepen the FX market, including greater reliance on interbank trading and exchange rate flexibility.
  - SBP revised FX exposure limits for banks in early August to bring them closer to international practice.
  - Authorities should unwind the January 2022 shortening of the period for repatriation of export proceeds once macroeconomic and balance of payments stability is restored.
- Financial sector stability:
  - Firm enforcement of the regulatory framework is essential to safeguard financial stability and maintain public trust in the banking system.
  - Merger of one small, undercapitalized bank with another healthy bank has been finalized; efforts to finalize recapitalization of the second undercapitalized small bank are ongoing.
  - SBP committed that any bank remaining undercapitalized as of March 2025 either meets regulatory capital requirements through a completed recapitalization plan or is placed under resolution (Prior Action).
  - Authorities plan to review business models and address capital erosion in the microfinance bank sector, which is highly exposed to the agricultural sector and recurrent floods (MEFP ¶28).

*Source: Box 1. Impact of the 2025 Monsoon Floods, 1pakea2025002-source-pdf.*

### 18. Clarity on the structure and ground rules of the financial system post-2027 will ensure

### 18. Clarity on the structure and ground rules of the financial system post-2027 will ensure

### Financial system transition and regulatory clarity
- Authorities’ financial sector strategy (end-June 2026 SB) aims to clarify legal, regulatory, and strategic implications for:
  - monetary policy, public debt and financial management,
  - bank and NBFI supervision,
  - financial market oversight of the transition to a “riba” (interest) free economy as mandated by the constitution.
- Objective: align expectations and allow sufficient time for orderly implementation.
- Broader needs:
  - comprehensive strategic approach to promote capital market development,
  - address the sovereign-bank nexus,
  - enhance financing options for the private sector.
- Digital assets:
  - Pakistan adopted the Virtual Assets Ordinance in July 2025 (pending parliamentary approval), which regulates digital assets and establishes a new regulatory authority.
  - Integration of virtual assets into Pakistan’s financial system should use a structured approach balancing innovation with regulatory safeguards for investor protection, financial transparency, and compliance with international standards.

### AML/CFT improvements
- Authorities updating national assessment of money laundering and terrorist financing risks for publication by end-March 2026.
- Priorities:
  - improving risk-based AML supervision (including over real estate agents and dealers of precious stones and metals),
  - making the central beneficial ownership register digitally accessible under the SECP by end-January 2026.
- Further work needed to assess macroeconomic impact of trade-based money laundering and implement mitigation measures.

### Energy sector policy — Power
- Timely tariff adjustments have improved power sector finances but structural reforms remain necessary to restore sector viability and reduce fiscal support needs.
- Reducing CD flow:
  - end-March and end-June 2026 CD flow ITs (PRs 400 billion each) set recognizing strong FY25 performance and assuming further improvements on recoveries and technical losses relative to FY25.
  - Supported by regular notification of quarterly tariff adjustments and monthly fuel cost adjustments.
  - CD pressures expected to ease in FY26 due to:
    - continued expected strong industrial demand from the CPP transition,
    - authorities’ planned incremental pricing plan for industrial and agriculture users,
    - lower interest payments following conclusion of the authorities’ CD stock operation (MEFP ¶33).
  - Stock clearance subsidies of PRs 400 billion would keep net CD accumulation to zero in FY26.
  - Authorities plan to shift the annual rebasing period from June to January beginning in 2026 to smooth tariff increases' impact on consumer bills; rebasing planned to be timely, ensure cost recovery, and maintain progressive tariff structure.
- Advancing power sector reforms:
  - Private sector participation in DISCOs to accelerate management and enforcement improvements and stem CD flow.
  - Authorities plan to complete bidding for first round of privatization for three DISCOs, expected early in 2026, and move forward on the rest.
  - Committed to completing preconditions for privatization of two DISCOs (HESCO and SEPCO) (new end-December 2026 SB).
  - Plans to advance privatization of public generation companies, finalize transmission network restructuring, and launch the wholesale electricity market.

### Energy sector policy — Gas
- Priorities:
  - continued timely semiannual gas tariff adjustments in line with cost recovery while maintaining tariff progressivity to protect vulnerable consumers.
  - CD monitoring and coordination on Pakistan’s RLNG surplus.
- Challenges:
  - CPP transition shifts cross-subsidization burden from domestic to remaining industrial consumers.
  - High cost of long-term RLNG contracts amid falling demand requires coordinated government solution to RLNG surplus.
- Progress:
  - Significant progress in developing a reliable dataset to track gas CD.
  - Next steps: initiate quarterly reporting and develop a CD Management Plan to increase transparency and planning for reducing gas CD stock.

### Other structural policies — governance, SOEs, business environment, commodity markets, statistics
- Governance and anti-corruption:
  - Governance and Corruption Diagnostic (GCD) report published on Ministry of Finance website in November 2025 (Prior Action).
  - Action plan development requires additional time (end-October 2025 SB proposed to be reset to end-December 2025).
  - Amendments to asset declaration framework (end-June 2025 SB); preparations underway to publish asset declarations of high-level federal civil servants (new end-December 2026 SB) and expand obligation to high-level provincial civil servants; allow banks full access to asset declarations.
  - National Accountability Bureau to lead action plans for ten agencies identified as highest risk (new end-October 2026 SB).
  - Full UNCAC review report published on Ministry of Law and Justice website in July 2025.
- SOE governance and privatization:
  - Amendments to most of nine statutory SOE laws expected to be submitted before end-2025, but legislative delays likely (proposed resetting of end-June 2025 SB to end-August 2026).
  - Amend Sovereign Wealth Fund law to clarify mandate, ensure transparent procedures, fiscal safeguards, and subject SWF-owned SOEs to SOE Law (end-March 2026 SB); operationalization of SWF on hold until amendments adopted.
  - CMU now fully staffed and producing detailed reports; electronic database nearing operationalization.
  - Authorities plan training for all SOEs to adopt business plans, statements of corporate intent, and IFRS-compliant financial statements this year; identify, cost, and contract public service obligations (PSOs) and phase in PSOs with FY27 budget process (new end-June 2026 SB).
  - Greater progress required to ensure all commercial SOE Boards are majority independent.
  - October 2025 cabinet approval of bid offer for First Women Bank Limited noted; continued need to divest larger assets, including Pakistan International Airlines and first batch of DISCOs.
- Business environment and regulatory reform:
  - National Tariff Policy 2025–2030 introduced.
  - Plan to fully phase out all current SEZ and EPZ incentives by 2035 (end-June 2025 SB); need to advance amendments to the SEZ Act and publish a concept note defining rationale, scope, KPIs, outcomes, and framework for shift from profit- to cost-based incentives (new end-June 2026 SB).
  - Advance Asaan Karobar Bill to modernize regulatory environment; coordinate with provincial governments for national coverage.
  - Legislative amendments to the Companies Act to strengthen corporate governance and transparency to be submitted to parliament (new end-June 2026 SB).
- Commodity markets:
  - Reforms in wheat and sugar markets should remove distortions, encourage private investment along value chain.
  - Governance for strategic wheat reserves should ensure non-distortive procurement and ringfence use; releases guided by emergency declarations.
  - New national policy on sugar (new end-June 2026 SB) to test reform resolve; key reform elements include removal of restrictions and licensing at growing/processing stage, liberalization of trade, cessation of formal and informal price controls along value chain.
- Macroeconomic statistics:
  - Discrepancies identified in source data used for merchandise imports as reported by PBS; comprehensive analysis needed of impact on earlier published statistics and procedures for data collection and aggregation (MEFP ¶42).
  - Ongoing improvements: publication in July of the Agricultural Census (first in 15 years), upcoming release of Labor Force Survey and Household Integrated Economic Survey results, work on Government Financial Statistics roadmap, and data collection for a new PPI index and three further major surveys in FY26.

### RSF arrangement — climate resilience
- Recent severe floods highlight Pakistan’s large exposure to weather events and need to build resilience in line with National Adaptation Plan.
- Progress under RSF:
  - RMs9 and 10 completed with adoption of FY26 finance bill introducing:
    - a carbon levy that added fuel oil to Pakistan’s Petroleum Development Levy (PDL),
    - raised the PDL by PRs 2.5/liter,
    - legislated a further increase of PRs 2.5/liter in FY27;
    - budget-neutral reforms including PRs9 billion electric vehicle (EV) subsidy focused on 2- and 3-wheel vehicles, and an accompanying tax on internal combustion engine vehicles of 1-3 percent (depending on vehicle and engine size).
  - Expected outcomes: reduce CO2 emissions, incentivize EV uptake, reduce balance of payments risks by shifting away from imported fuels.
  - RM7 (SBP climate-related guidelines for commercial banks) and RM8 (SECP guidelines for listed companies) on track for end-December 2025 deadlines; SECP guidelines aligned with finalized green taxonomy.
  - RM12: replace existing electricity subsidy structure with targeted framework for low-income consumers; progress in matching consumers with BISP databases and need to roll out communications strategy immediately.

### Program modalities and conditionality
- Updates to EFF-related conditionality proposed (MEFP Tables 1-2):
  - Modifications to end-December 2025 targets:
    - increase QPC on ceiling on general government primary budget deficit to align with updated macroeconomic projections and FY26 budget implementation profile,
    - increase QPC on floor on BISP cash transfers per revised BISP spending projections,
    - decrease QPC on floor on number of new tax returns in line with FY25 seasonality.
  - New quantitative targets: QPCs for end-June 2026 and ITs for end-March 2026 consistent with EFF objectives (supporting revenue mobilization, fiscal adjustment, containing inflationary pressures, bolstering FX reserves).
  - Structural conditionality: reset test dates for two SBs missed due to delays; new SBs to support FBR and tax policy reform, governance and anti-corruption, capital market development, power sector efficiency, SOE governance framework implementation, commodity market liberalization, and regulatory/investment environment improvements.

### Financing and program resources
- Program fully financed with firm commitments for next 12 months and good prospects for remainder of Fund-supported program.
- Progress in securing financing ahead of EFF request from Saudi Development Fund and China EXIM.
- Major IFIs now expect to provide more financing in FY26 than previously anticipated, aiding absorption of flood impacts on BOP.
- Key bilateral partners committed to rolling over existing short-term liabilities during program period.
- Authorities engaged in discussions on new commercial financing facilities if external financing needs increase.

- Selected figures from Text Table 4 (Millions of U.S. Dollars):
  - A. Financing gap (without RSF): 3,503; 4,103; 2,961; 1,046; 11,613.
  - Underlying BoP Gap: -1,674; 1,215; -1,949; -625; -3,032.
  - Gross international reserves (+= accumulation, without RSF): 5,177; 2,888; 4,909; 1,671; 14,645.
  - B. IMF EFF: 2,051; 2,083; 2,089; 1,046; 7,269.
  - C. Other program financing (A-B): 1,452; 2,020; 872; 0; 4,344.
  - D. RSF Disbursement: 0; 422; 528; 424; 1,374.
  - Memorandum items — IFI Budget Support: 1,224; 500; 500; 1,000; 3,224.
  - External Bond Issuance 4/: 0; 250; 1,000; 1,500; 2,750.
  - (Net) Commercial Bank borrowing 5/: 678; 215; 614; 1,378; 2,884.
  - Proj. columns correspond to: 2024/25; 2025/26; 2026/27; 2027/28; Total (FY25-28).

### Enterprise risks, safeguards, and capacity to repay
- Enterprise risks:
  - Strong ownership and ongoing reforms mitigate business risks, though residual implementation and heightened global risks persist.
  - Tensions with India peaked in May and then waned, reducing certain business and reputational risks.
- Safeguards:
  - 2023 Safeguards Assessment found a broadly sound safeguards framework.
  - SBP progress on recommendations includes filling one deputy governor vacancy at end-October.
  - Remaining recommendations: timely filling of Board and deputy governor vacancies and amending the SBP Act to clarify prohibition on quasi-fiscal and developmental activities.
- Capacity to repay:
  - Pakistan's capacity to repay remains broadly unchanged from time of Board approval and first EFF review; depends on policy implementation and timely external financing.
  - Fund exposure projected to peak at SDR 9,467 million in September 2027 (466 percent of quota; about 51 percent of projected gross reserves).
  - Outstanding debt to the Fund as a share of GIR exceeds the 75th percentile of comparator countries.
  - All three flow indicators—debt service as a share of government revenue, exports, and reserves—are also above the 75th percentile.
  - Risks to repayment capacity include resistance to reforms, underperformance of tax revenue, high gross financing needs, low gross reserves, SBP’s sizeable net FX derivative position, and sociopolitical tensions.
  - Adequate and timely execution of firm and credible financing assurances from official creditors remains essential to mitigate these risks.

*Source: IMF staff report (excerpt).*

### 30. Strong program implementation in the face of shocks has preserved economic

### Strong program implementation in the face of shocks has preserved economic stability.

### Program performance and overall assessment
- The EFF- and RSF-supported programs have helped the authorities weather several shocks this year, including the recent severe floods.
- Progress on strengthening Pakistan's economic and institutional framework continues, despite a number of missed ITs and SBs.
- Gains remain fragile and need to be locked in via sustained reform efforts to:
  - strengthen public finances,
  - continue rebuilding external buffers,
  - improve public service provision,
  - reduce the state’s footprint,
  - set the stage for sustainable, inclusive, private sector-led growth.

### Fiscal policy and budgetary priorities
- Authorities committed to the FY26 primary balance target while managing flood relief, strengthening fiscal policy credibility and sustainability.
- Successful implementation of the FY26 budget will require:
  - careful expenditure control and prioritization,
  - close coordination with the provinces,
  - prompt activation of contingency measures if downside risks to revenues materialize.
- Compliance improvement efforts should focus on broadening the tax net, gradually opening space for tax policy simplification in the medium term.
- Policy priorities to optimize scarce public resources:
  - scaling up social assistance,
  - prioritizing productive public investment,
  - enhancing public financial management.

### Monetary policy and inflation management
- Appropriately calibrated monetary policy has bolstered central bank credibility.
- Recommendation: monetary policy should remain appropriately tight and data-dependent to ensure that inflation remains anchored within the SBP’s target range.
- Monitoring priorities:
  - food inflation in the wake of the floods,
  - still-elevated core inflation.
- The SBP should stand ready to act resolutely to ensure that expectations remain anchored.
- Work to improve central bank communication is critical to implementing monetary policy effectively in a shock-prone world.

### Exchange rate, FX market, and remittances
- The SBP should continue efforts to deepen the interbank FX market, while allowing exchange rate flexibility to act as the main shock absorber in the face of significant uncertainty.
- A deep FX market will enable the SBP to continue building reserve buffers in a sustained and non-distortive manner.
- The growing importance of remittances to support the current account requires accelerated work to remove structural impediments to cross-border payments, including to reduce the need for fiscal incentives.

### Financial sector stability and development
- Maintaining a sound and adequately capitalized financial sector will support intermediation and development, while minimizing risks.
- Required actions:
  - consistent and decisive action to enforce the regulatory framework to safeguard financial stability,
  - reforms to strengthen the microfinance banks sector,
  - provide timely and clear guidance on the post-2027 financial system structure and regulatory framework,
  - actively promote capital market development,
  - reduce the sovereign-bank nexus,
  - diversify the investor base for domestic debt,
  - expand financing options for the private sector.

### Social protection and human capital
- Boosting social protection and human capital programs is critical to making long-term growth inclusive and sustainable.
- Authorities’ commitments:
  - continue to maintain UCT benefit spending power.
- Recommendation: an additional increase in generosity should be sought at the time of the next HIES to bring benefits closer to those of Pakistan’s peers.
- The strong increase in health and education spending over FY25-26 is welcome, but its effectiveness hinges on efforts to improve budget execution and spending quality.

### Energy sector reform
- Reform progress in the energy sector needs to continue to restore its long-term viability.
- Continued power and gas tariff adjustments in line with costs have largely prevented further CD accumulation; maintaining tariff progressivity remains critical to protect vulnerable consumers.
- Priority reforms:
  - improve DISCO collections and losses,
  - implement cost-reducing structural reforms, including DISCO and GENCO private sector participation,
  - advance the wholesale electricity market,
  - address the gas sector’s RLNG surplus and CD stock.

### Structural reforms and governance
- Stronger effort to advance structural reforms is critical to generate sustainable and inclusive growth.
- Required reforms include:
  - complete reforms to ensure sound governance across SOEs, including the SWF,
  - implement the SOE framework for all commercial SOEs, including identifying, costing, and funding public service obligations,
  - enact envisaged legislative amendments to the SEZ Act and review the Companies Act to enhance the business climate and governance standards.
- Sustained momentum and close coordination with provincial governments are needed to ensure consistency across jurisdictions and safeguard against re-emergence of distortionary incentives.
- Enhancing effectiveness of the anti-corruption frameworks will mitigate risks from undue influence in policymaking and implementation and promote the business and investment climate.
- Continue efforts to ensure timely and reliable economic data and statistics, including by promptly assessing and addressing data deficiencies, and disclosing data revisions.

### Climate resilience and RSF-supported measures
- The recent floods underscore the urgent need to build resilience to climate shocks, which the RSF is supporting.
- Completion of the first two RMs under the RSF and progress toward the next two are welcome and important steps in addressing Pakistan’s climate-related macroeconomic vulnerabilities.
- Parallel priorities for longer-gestation RMs:
  - bolster Pakistan’s disaster response capacity and water system resilience,
  - boost climate considerations in budgeting and project selection,
  - increase energy efficiency and rationalize power subsidies.

### Risks and downside scenarios
- Risks remain significant amidst recent floods and elevated global uncertainty.
- Specific risk drivers:
  - uncertainty as to the full impact of recent monsoon floods could weigh more severely on activity and inflation or generate larger fiscal and external pressures,
  - global risks including escalation of geopolitical tensions, tightening of global financial conditions, new trade measures in key partner countries, or weakening remittance or international aid inflows,
  - domestic pressures to ease policies and delay reforms, which would risk undermining the progress achieved under the program.

*IMF staff assessment based on the EFF- and RSF-supported programs and recent developments.*

### 40. On the basis of the authorities’ program implementation and policy commitments,

### 40. On the basis of the authorities’ program implementation and policy commitments

### Program endorsement and program conditions
- Staff supports the authorities’ request for completion of the second review under the EFF and for completion of the first review under the RSF arrangement.
- Staff supports the authorities’ request for a waiver of nonobservance of a performance criterion, and the request for modification of performance criteria under the EFF.

### Growth, output, and inflation (selected indicators)
- Real GDP at factor cost:
  - FY20: 5.8
  - FY21: 6.2
  - FY22: -0.2
  - FY23: 2.6
  - FY24: 2.6
  - FY25 (Prog./Est.): 3.0 / 3.6
  - FY26 (Proj.): 3.2
- GDP deflator at factor cost (annual percent change): 10.4, 14.1, 26.0, 22.1, 5.1, 4.2, 7.7, 6.3 for the years reported in Table 2 series.
- Consumer prices (period average): 8.9, 12.2, 29.2, 23.4, 5.1, 4.5, 7.7, 6.3 (selected series).
- Figure note: “Growth continued to rebound in FY25, supported by stronger industrial activity... with surging remittances supporting a move into Pakistan’s first current account surplus in 14 years.”

### External sector, reserves, and current account
- Current account balance (percent of GDP) series (Table 2): -0.8, -4.7, -1.0, -0.6, -0.1, 0.5, -0.4, -0.6, -0.4, -0.8, -1.0, -1.0 (through projection horizon).
- Gross reserves (end-period, millions of U.S. dollars; Table 3 and 3a):
  - FY20/21: 17,297
  - FY21/22: 9,821
  - FY22/23: 4,455
  - FY23/24: 9,390
  - FY24/25: 13,921
  - FY25/26 (Proj.): 14,506
  - Later projections: 17,682; 17,845; 23,302; 25,420; 28,075; 31,333 (selected years in series).
- Reserves in months of next year's imports: 2.5, 1.9, 0.8, 1.6, 2.3, 2.3, 2.8, 2.7, 3.2, 3.3, 3.4, 3.5 (selected horizon).
- Balance on goods (millions of U.S. dollars; Table 3a): -28,634, -39,050, -24,819, -22,177, -26,330, -26,786, -26,618, -31,337, -30,403, -32,867, -34,361, -36,717 (series).
- Current transfers (net) supporting external position (millions of U.S. dollars; Table 3a): 32,730, 32,657, 28,351, 32,201, 38,257, 40,423, 38,017, 41,440, 41,751, 42,964, 44,354, 46,837 (series).  
  - Workers' remittances (millions of U.S. dollars): 29,450, 31,279, 27,333, 30,251, 36,201, 38,300, 35,761, 39,010, 39,196, 40,113, 41,162, 43,191 (series).

### Balance of payments financing and gross external financing needs
- Gross external financing needs (millions of U.S. dollars; Table 3a / 3b): 22,206; 33,736; 23,859; 21,738; 16,399; 13,655; 19,316; 19,398; 19,123; 29,914; 23,188; 22,446 (selected series).
- Financial account (millions of U.S. dollars; Table 3a): 8,268; 10,207; -1,643; 6,152; 4,272; 2,402; 3,271; 3,490; 5,777; 6,644; 9,206; 9,757 (series).
- Available financing (Table 3b, millions of U.S. dollars): 17,327; 23,668; 18,895; 16,720; 19,239; 20,221; 21,962; 30,563; 25,842; 25,704 (selected series).
- Underlying BOP gap (C=A-B; Table 3b): 6,532; -1,930; -2,496; -3,065; 78; -823; -2,839; -649; -2,655; -3,258 (selected series).

### Fund financing, RSF, and EFF schedules
- Stock of existing and prospective Fund credit (SDR million; Table 7 series):
  - 2023: 5,660; 2024: 6,512; 2025: 7,417; 2026: 8,766; 2027: 9,466; 2028: 7,946; 2029: 6,977; 2030: 6,201; 2031: 5,202; 2032: 4,103; 2033: 3,217; 2034: 2,330; 2035: 1,633; 2036: 1,167; 2037: 919; 2038: 819; 2039: 719; 2040: 619; 2041: 519; 2042: 419; 2043: 319; 2044: 219; 2045: 119; 2046: 42; 2047: 0.
- EFF schedule (Table 8a):
  - Approval of arrangement: September 25, 2024 — 760 (Millions of SDRs; 37.4 percent of Quota).
  - March 15, 2025 — 760 (First review and end-December 2024 performance/continuous criteria).
  - September 15, 2025 — 760 (Second review and end-June 2025 performance/continuous criteria).
  - Subsequent semiannual purchases of 760 SDRs through September 15, 2027, totaling 5,320 SDRs (261.9 percent of Quota).
- RSF schedule (Table 8b):
  - Approval of arrangement: May 2, 2025 — 0.0 (Millions of SDRs; 0.0 percent of Quota).
  - Subsequent disbursements of 76.9 (Millions of SDRs; 3.8 percent of Quota) tied to implementation of RM9, RM10, RM7, RM8, RM1, RM6, RM5, RM11, RM12, RM2, RM3, RM4, RM13, totaling 1,000 SDRs (49.2 percent of Quota).

### Public finances, budget balance, and debt dynamics
- Revenue and grants (percent of GDP, Table 2/Table 4b): 12.4, 12.1, 11.5, 12.7, 15.9, 15.9, 15.2, 16.3 (selected series).
- Expenditure (including statistical discrepancy; percent of GDP): 18.5, 20.0, 19.3, 19.5, 21.6, 21.2, 20.3, 20.2 (selected series).
- Budget balance (including grants; percent of GDP): -6.0, -7.8, -7.8, -6.8, -5.6, -5.4, -5.1, -4.0 (selected series).
- Primary balance (excluding grants; percent of GDP): -1.2, -3.1, -1.0, 0.9, 2.1, 2.4, 1.6, 2.5 (selected series).
- General government and government guaranteed debt (incl. IMF; percent of GDP; Table 2): 79.4, 82.3, 83.5, 74.4, 77.6, 76.6, 75.6, 76.0 (selected series).
- Total general government debt excl. IMF obligations (percent of GDP, Table 1): 72.7, 75.2, 76.1, 68.1, 71.2, 70.6, 69.2, 69.6 (series through FY26).

### Debt structure and debt service by creditor (selected entries, Table 9)
- Total public debt (US$ million; Jun-25): 307,467 (100.0 percent of total; 76.7 percent of nominal GDP).
- External debt (US$ million; Jun-25): 106,965 (34.8 percent of total; 26.7 percent of nominal GDP).
  - Multilateral creditors: 52,301 (17.0 percent of total; 13.0 percent of GDP).
    - IMF: 9,268 (3.0 percent of total; 2.3 percent of GDP).
    - World Bank: 22,006 (7.2 percent of total; 5.5 percent of GDP).
  - Bilateral creditors: 38,836 (12.6 percent of total; 9.7 percent of GDP).
    - Includes China: 23,499 (7.6 percent of total; 5.9 percent of GDP); Saudi Arabia: 5,492 (1.8 percent).
  - Bonds: 7,065 (2.3 percent of total; 1.8 percent of GDP).
- Domestic debt (US$ million; Jun-25): 200,503 (65.2 percent of total; 50.0 percent of GDP).
  - T-Bills: 30,867 (10.0 percent of total; 7.7 percent of GDP).
  - Bonds (PIBs, local currency): 145,783 (47.4 percent of total; 36.4 percent of GDP).
  - National Savings Scheme: 12,082 (3.9 percent of total; 3.0 percent of GDP).
- Contingent liabilities (public guarantees; US$ million): 15,030 (4.9 percent of total; 3.7 percent of GDP).
- Central bank deposit liabilities: 3,700 (1.2 percent of GDP).
- Central bank bilateral swap liabilities: 4,222 (1.4 percent of GDP).

### Monetary and financial sector developments
- SBP policy/market rates and liquidity:
  - SBP kept its policy rate on hold at its last four meetings (Figure 2 commentary).
  - Six-month treasury bill rate (period average, percent): 7.3, 11.0, 18.3, 21.5 (selected series).
  - Open Market Operations (OMOs): continued liquidity injections; end-of-month outstanding net OMOs series in trillions of Pakistani rupees shown through 2025M10.
- Monetary aggregates (Table 5, selected):
  - Broad money (end series, PRs billions): 23,662; 26,768; 30,943; 35,882; 40,793; 40,174; 41,847; 44,233; 46,749.
  - Reserve money (PRs billions): 8,620; 9,275; 11,357; 11,613; 12,971; 13,033; 13,316; 14,001; 14,462.
  - Net foreign assets (NFA; banking system, in percent of broad money): 5.4, -6.0, -6.0, 2.1, 5.3, 5.3, 3.9, 3.4, 1.7 (series).
- Banking system health (Figure 3 and Table 6):
  - NPLs to gross loans (percent): 13.3, 12.3, 11.4, 10.1, 8.4, 8.0, 8.6, 9.2, 7.9, 7.3, 7.6, 6.3 (Dec. 2013–2024).
  - Provisions to NPLs (percent): 78.4, 79.8, 84.9, 85.0, 87.2, 83.8, 81.4, 88.3, 91.2, 89.5, 92.7, 103.9 (Dec. 2013–2024).
  - Return on assets (after tax): 1.1, 1.5, 1.5, 1.3, 0.9, 0.8, 0.8, 1.0, 1.0, 1.0, 1.6, 1.3 (Dec. series).
  - Regulatory capital to risk-weighted assets: 14.9, 17.1, 17.3, 16.2, 15.8, 16.2, 17.0, 18.6, 16.7, 17.0, 19.7, 20.6 (Dec. series).

### Capacity to repay and Fund obligations
- Table 4 (Capacity to Repay indicators compared to GRA-only borrowing countries) included comparisons and notes on Total Fund Credit Outstanding, Total Debt Service to the Fund, and Largest Peaks; peak LBR (2011) is 81.7 percent (chart note).
- Table 7 (Indicators of Fund Credit, 2023–47) stresses projected disbursements, stock of Fund credit, obligations (repayments/repurchases and charges), and ratios of Fund obligations to quota, GDP, exports, gross international reserves, government revenue, and external debt service, with series through 2047 (selected numbers reported in the Fund credit series above).

*Sources: Pakistani authorities; World Bank; IMF World Economic Outlook Database; IMF Finance Department; IMF staff estimates and projections.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Overview and Methodology
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- Relative likelihood definitions (staff’s subjective assessment):
  - “low” is meant to indicate a probability below 10 percent
  - “medium” a probability between 10–30 percent
  - “high” a probability between 30–50 percent
- Timing definitions:
  - “Short term” indicates the risk could materialize within one year
  - “Medium term” indicates the risk could materialize within three years
- Non-mutually exclusive risks may interact and materialize jointly.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.

### GLOBAL: Key Risks, Expected Impacts, and Policy Responses
- Geopolitical Tensions
  - Relative Likelihood: High
  - Time Horizon: Short Term
  - Expected Impact:
    - Financial volatility raises risk aversion, causing financing pressures and capital outflow pressures.
    - Spending pressures and/or lower growth weaken the underlying fiscal position.
    - Weaker confidence and supply/trade disruptions drag on economic growth.
  - Policy Response:
    - Implement strong policies and strengthen institutions as a foundation of resilient and sustainable growth.
    - Scale up targeted social assistance.
    - Resist pressures to weaken fiscal discipline and preserve fiscal and debt sustainability.
    - Build fiscal and external buffers.

- Escalating Trade Measures and Prolonged Uncertainty
  - Relative Likelihood: High
  - Time Horizon: Short to Medium Term
  - Expected Impact:
    - Weaker confidence and supply/trade disruptions drag on economic growth.
    - Spending pressures and/or lower growth weaken the underlying fiscal position.
    - Higher risk aversion and higher risk premia leading to financing pressures and capital outflows.
  - Policy Response:
    - Implement strong policies and strengthen institutions as a foundation of resilient and sustainable growth.
    - Allow exchange rate flexibility to support competitiveness.
    - Resist pressures to weaken fiscal discipline and preserve fiscal and debt sustainability.
    - Build fiscal and external buffers.

- Commodity Price Volatility
  - Relative Likelihood: High
  - Time Horizon: Short Term
  - Expected Impact:
    - Higher energy prices could worsen the energy sector’s already weak financial position, especially if cost increases are not passed through to prices, leading to buildup of more arrears and pressure for greater subsidies.
    - Higher headline inflation.
    - Tighter global financial conditions and capital outflow pressures.
    - Spending pressures and/or lower growth, weakening the fiscal position.
    - Weaker confidence and supply disruptions drag on economic growth.
  - Policy Response:
    - Allow energy price increases to be passed through to end-users.
    - Press ahead with reforms of the energy sector to address efficiency and costs.
    - Scale up targeted social assistance.
    - Maintain financial stability to weather external shocks.
    - Resist pressures to weaken fiscal discipline.
    - Build fiscal and external buffers.
    - Allow exchange rate flexibility to absorb external shocks and facilitate adjustment.

- Financial Market Volatility and Correction
  - Relative Likelihood: High
  - Time Horizon: Short Term / Medium
  - Expected Impact:
    - Worsening sentiment and lower demand for Pakistan’s assets resulting in increased funding costs or reduced capital inflows.
    - Stock market deteriorates.
    - Reduced interest in privatization portfolio.
  - Policy Response:
    - Allow exchange rate flexibility to cushion shocks.
    - Build fiscal and external buffers.
    - Maintain an appropriate medium-term debt strategy.
    - Maintain financial stability to weather external shocks, tighten supervision to monitor banking risks.
  - Additional amplification risk:
    - Elevated leverage among Non-Bank Financial Intermediaries and rapid growth of unregulated crypto markets could further amplify asset price swings, redemption-run risk, and market dislocations.

- Fiscal Vulnerabilities and Higher Long-Term Interest Rates
  - Relative Likelihood: High
  - Time Horizon: Short to Medium Term
  - Expected Impact:
    - Worsening sentiment and lower demand for Pakistan’s assets resulting in increased funding costs or reduced capital inflows.
    - Higher debt service and worse prospects for market access.
    - Weakening global demand decreases commodity prices.
  - Policy Response:
    - Implement strong policies and strengthen institutions as a foundation of resilient and sustainable growth.
    - Build fiscal and external buffers.
    - Maintain financial stability to weather external shocks.
    - Maintain an appropriate medium-term debt strategy.
    - Allow exchange rate flexibility to absorb shocks and facilitate adjustment.

- Decline in International Aid
  - Relative Likelihood: High
  - Time Horizon: Short to Medium Term
  - Expected Impact:
    - Spending pressures and/or lower revenues weaken the underlying fiscal position.
    - Lower capital/current inflows leading to external and public financing pressures.
  - Policy Response:
    - Implement strong policies and strengthen institutions as a foundation of strong and sustainable growth.
    - Allow exchange rate flexibility to absorb shocks and facilitate adjustment.
    - Build fiscal and external buffers.

- Rising Social Discontent
  - Relative Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Expected Impact:
    - Spending pressures and/or lower growth weaken the underlying fiscal position.
    - Weaker confidence and supply disruptions drag on economic growth.
  - Policy Response:
    - Scale up targeted social assistance.
    - Resist pressures to weaken fiscal discipline and preserve fiscal and debt sustainability.
    - Build fiscal and external buffers.

- Climate Change
  - Relative Likelihood: Medium
  - Time Horizon: Medium to Long Term
  - Expected Impact:
    - Weaker confidence and supply disruptions drag on economic growth.
    - Fiscal pressures associated with recovery spending and reconstruction needs.
    - Higher risk aversion, and higher risk premia leading to financing pressures and capital outflows.
    - Trade disruptions leading to higher commodity price levels and volatility, heightening external imbalances.
    - Disorderly migration.
  - Policy Response:
    - Implement strong policies and strengthen institutions as a foundation of resilient and sustainable growth.
    - Allow exchange rate flexibility to absorb shocks and facilitate adjustment.
    - Maintain financial stability.
    - Advance policies and reforms aiming at climate risk mitigation, adaptation, and transition to a low-carbon economy.
    - Build fiscal and external buffers.

- New Trade Agreements (Upside Risk)
  - Relative Likelihood: Low
  - Time Horizon: Short to Medium Term
  - Expected Impact:
    - Stronger outlook for economic growth and exports.
    - Improved confidence and lower risk aversion ease financing pressures.
  - Policy Response:
    - Advance structural reform agenda to boost productivity and take advantage of trade opportunities.
    - Allow exchange rate flexibility to support competitiveness and facilitate adjustment.
    - Build fiscal and external buffers.

### COUNTRY-SPECIFIC (Pakistan): Key Risks, Expected Impacts, and Policy Responses
- Slippages in Policy Implementation
  - Relative Likelihood: High
  - Time Horizon: Short to Medium Term
  - Expected Impact:
    - Weaker fiscal discipline could compromise the quality and durability of fiscal adjustment; expose debt sustainability risks.
    - Deviating from exchange rate flexibility, putting pressure on reserves and/or leading to FX shortages, and undermining competitiveness.
    - Unfinished structural reform agenda would reduce medium-term growth prospects, preserve over-reliance on the public sector and large informal economy and leave unaddressed contingent liabilities.
    - Subdued economic growth.
  - Policy Response:
    - Implement strong policies and strengthen institutions (including anti-corruption agencies) as a foundation of strong and sustainable growth.
    - Resist pressures to weaken fiscal discipline and preserve fiscal sustainability.
    - Allow exchange rate flexibility to absorb shocks and facilitate adjustment.
    - Build external buffers.
    - Foster more inclusive growth through scaling up targeted social assistance.
    - Improve external competitiveness and advance reforms to enhance the private sector business environment.

### Bottom Line Assessment
- The balance of risks is tilted to the downside.

*Annex I. Risk Assessment Matrix — IMF staff summary as presented in the source document.*

### Annex III. Understanding FBR’s Tax Revenue Collection in FY25

### Annex III. Understanding FBR’s Tax Revenue Collection in FY25

### Overview
- FBR’s tax revenue collection increased by PRs 2,433 billion (26 percent) in FY25.
- The increase is decomposed into effects of macroeconomic developments and a residual capturing tax policy and revenue administration measures, assuming unitary elasticity of tax revenues with respect to macroeconomic variables (nominal GDP, GDP growth, inflation, and import growth).
- The residual combines factors including compliance and enforcement measures, timing effects, and the impact of policy measures and should be interpreted with caution.

### Decomposition of the FY25 Revenue Increase
- Macroeconomic drivers contributed PRs 757 billion to the increase in tax revenues in FY25.
- Administrative and tax policy measures contributed PRs 1,678 billion (the bulk of the increase).
- Direct taxes (including personal income tax and advance taxes) were the largest contributor to growth; administrative and policy measures yielded around PRs 891 billion for direct taxes.
- Direct taxes showed a negative residual, interpreted as administrative efforts—improved compliance and continued enforcement—boosting collections beyond expectations and significantly mitigating the overall tax revenue shortfall.

### Shortfalls Relative to Budget and First Review Target
- Tax revenue collection in FY25 fell short by PRs 1,224 billion relative to budget projections.
- Tax revenue collection in FY25 fell short by PRs 524 billion relative to the first review target.
- Of the PRs 1,224 billion shortfall relative to budget:
  - About PRs 850 billion reflects faster than expected inflation deceleration and lower than expected GDP growth in FY25.
  - The inflation deceleration at end-FY25 led to a revenue shortfall of PRs 157 billion relative to the first review target (this PRs 157 billion is included within the total shortfall).
  - About PRs 380 billion appears broadly linked to administrative and enforcement challenges that remained unaddressed throughout FY25 — for example, prolonged settlement of tax court cases delayed recovery of significant revenue amounts.

### Tax-Type Patterns and Explanations
- Sales and trade taxes:
  - Account for the largest revenue shortfalls relative to the budget.
  - Are most sensitive to macroeconomic conditions but continue to show large unexplained shortfalls even after adjusting for macroeconomic effects.
  - This may reflect overestimation of yields from new policy measures, especially where assumptions on taxpayer behavior or implementation capacity proved too optimistic.
- Direct taxes mitigated overall shortfall due to stronger-than-expected administrative/compliance outcomes (see negative residual note above).

### Key Macroeconomic Assumptions (Budget vs. Outturn) — Annex III Table 1
- Real GDP at factor cost: Budget 3.2; Outturn 3.0
- Consumer prices (period average): Budget 12.3; Outturn 4.5
- Imports value: Budget 17.9; Outturn 8.1
- GDP (nominal, billions of PRs): Budget 125,103; Outturn 113,748
- Note: Annual percentage change, unless otherwise indicated.

### Implications and Policy Messages
- Revenue outcomes are sensitive to macroeconomic realizations (inflation deceleration and lower GDP growth materially reduced collections).
- Administrative and enforcement capacity remain critical: unresolved tax disputes and enforcement gaps contributed an estimated PRs 380 billion to the shortfall.
- Caution is warranted in budgeting yields from new policy measures; realistic assumptions on taxpayer behavior and implementation capacity are essential.
- Continued focus on strengthening revenue administration, dispute resolution efficiency, and enforcement is needed to reduce unexplained shortfalls and to recover delayed revenues.

*Source: Annex III. Understanding FBR’s Tax Revenue Collection in FY25 (1pakea2025002-source-pdf).*

### 4. We remain firmly committed to continuing with sound and prudent macroeconomic policies

### 4. We remain firmly committed to continuing with sound and prudent macroeconomic policies

### Commitment and near-term policy actions
- Continue with:
  - (i) the prudent execution of the FY26 budget, and introducing new tax policy measures, if needed to offset revenue shortfalls;
  - (ii) appropriate monetary policy to ensure that inflation stays durably within the target range and a flexible exchange rate to buffer shocks;
  - (iii) regular tariff adjustments and cost-reducing reforms in the energy sector; and
  - (iv) reforms to reduce the footprint of the state, remove market distortions and excessive regulatory burdens, and strengthen governance.
- Request approval by the IMF Executive Board for:
  - (i) a waiver of nonobservance for the missed end-June QPC on BISP spending;
  - (ii) a modification of three end-December QPCs: the ceiling on the general government primary budget deficit; the floor on the number of new tax returns to account for seasonality in line with the agreed FY26 primary surplus; and the floor on targeted cash transfer spending (BISP) to reflect a revised spending execution path and narrower definition of BISP spending;
  - (iii) the completion of the second review under the Extended Arrangement and the related purchase in the amount of SDR 760 million; and
  - (iv) the completion of the first review under the Resilience and Sustainability Facility and the disbursement linked to implementation of RM9 and RM10 (SDR 153.8 million in total), to be provided as budget support to create fiscal space to address our economic vulnerabilities and increase economic resilience, including by adapting our economy to withstand the impact of climate change.
- Provinces commit not to introduce any policy or action undermining the commitments in this letter or the attached MEFP; consult with the IMF through the federal Ministry of Finance before modifying or adopting measures that could affect the program; and supply timely and accurate data for program monitoring.

### Recent economic developments and outlook — key statistics and scenarios
- FY25 developments:
  - GDP growth accelerated to 4.2 percent (yoy) in H2.
  - The current account recorded a surplus of 0.5 percent of GDP—the first in 14 years.
  - Gross reserves increased to US$14.5 billion at end-June and remained broadly stable thereafter.
- Floods (August-September) impacts:
  - An estimated 7 million people were impacted, and more than 1,000 lives were lost.
  - Headline inflation reached 5.6 percent in September 2025 due to higher food prices in some categories.
- Baseline macroeconomic scenario:
  - Real GDP growth is now expected in the range of 3¼-3½ percent in FY26.
  - Medium-term growth expected to pick up to 4½ percent, bolstered by increased investment and exports.
  - Headline CPI inflation expected to remain within the SBP’s 5–7 percent target range in the coming months, before temporarily rising above the target toward the end of FY26 due to adverse food and energy price base effects; core inflation expected to remain contained with appropriately tight monetary policy supporting a durable return of headline CPI inflation to the target range early in FY27.
  - The current account is projected to return to a modest deficit over the medium term, reflecting normalization of import demand, moderation in remittances, and impact of the new tariff policy.
- Risk assessment:
  - Risks have eased somewhat but remain high.
  - Recurring natural disasters pose significant risks to domestic and external stability.
  - Global uncertainty and potential escalation of regional tensions could adversely impact external stability via higher commodity prices, lower growth, and diminished foreign investor risk appetite.
  - Enhanced cooperation with key bilateral partners provides upside risk to foreign investment flows and external support.
  - Commitment to consistent implementation of policy and structural reforms to avoid jeopardizing recovery and sustainability.

### Fiscal policy outcomes, priorities, and contingency measures
- FY25 fiscal outcomes:
  - FY25 general government underlying primary surplus reached PRs 1.5 trillion (1.3 percent of GDP, 0.3 percent of GDP above the target).
  - FBR’s net tax revenues collection reached PRs 11.7 trillion (FBR target PRs 12.3 trillion).
  - FBR net tax revenues increased 26 percent (yoy).
- Flood-related fiscal measures and costs:
  - Waived August electricity bills for all affected households and deferred payments for non-residential consumers for three months.
  - A reallocation within the Ministry of Energy should accommodate these costs (PRs 17 billion); if insufficient, the contingency reserve will be utilized.
  - Flood-related fiscal costs and revenue losses will be accommodated within the general government—federal and provincial—budget envelope of FY26 by cutting or delaying non-priority spending and utilizing the contingency reserve.
- FY26 fiscal stance:
  - FY26 underlying primary surplus target of 1.6 percent of GDP remains achievable.
  - Power subsidies will be contained at PRs 893 billion, 0.7 percent of GDP, reflecting the reduction in the target on CD accumulation.
  - Commitment to safeguard BISP and health and education spending (see ¶22-23).
- Planned/implemented revenue measures:
  - Introduced GST on solar panels.
  - Raised withholding tax rates on income from bank deposits, dividends, and mutual funds.
  - Removed tax exemptions for venture capital funds and cinema operations.
  - Increased withholding tax rates on services to better reflect final tax liabilities under the income tax regime and reduce under-taxation.
- Contingency steps to offset revenue shortfalls:
  - Continued monitoring of income and sales taxes, and Federal Excise Duty (FED), expansion of taxpayer base, and implementation of new revenue measures legislated for FY26.
  - Estimated shortfall from underperformance of the CPP levy of PRs 104 billion, to be covered by a reduction in power subsidies through lower CD accumulation (relative to FY26 budget assumptions, ¶33).
  - If FBR revenues fall short in Q2 FY26 and other revenues insufficient, in consultation with IMF staff, the government will:
    - increase FED on fertilizers and pesticides by 5 percentage points,
    - introduce FED on high-value sugary items, and
    - move items from the 8th GST schedule to the general GST regime.
  - If by end-Q2 FY26 there is a revenue shortfall due to implementation of the National Tariff Policy (¶40.a), the government will postpone an equivalent amount of expenditure until the last quarter of FY26.

### Fiscal institutions, tax administration, and revenue mobilization measures
- Strengthening revenue mobilization focus areas: strengthening revenue mobilization, enhancing burden-sharing between federal and provincial governments, and improving public financial management.
- FBR compliance and administration measures:
  - Ex-post enforcement through audits: compliance risk management system applied for corporate taxpayers, training for non-corporate taxpayers; system identified around 840 priority cases.
  - Deployed more than 250 auditors as of October 1, 2025, to bolster enforcement and reduce tax evasion.
  - Improving collection of sales and withholding taxes: POS terminal connections currently cover 38 percent of the largest registered retailers; aim to cover all largest retailers (around 40,000) in two years.
  - Aim to include around three quarters of volume of invoices from taxpayers with annual sales over PRs 500 million into a digital invoicing system by end-FY26.
  - Encouraging tax filing: number of tax returns filed increased to over 7 million in FY25 compared to 5.2 million in FY24; enforcement focus on taxpayers declaring no tax liability while declaring significant assets.
  - Production monitoring: sector-specific approach in priority sectors (cement and sugar) with remote monitoring complemented by physical inspections.
- FBR roadmap and milestones:
  - FBR will develop a comprehensive roadmap for compliance improvement with FAD CD support; roadmap to be finalized by end-December 2025 and will include at least: (i) prioritization of key reform areas; (ii) staffing requirements and roles; (iii) specific timelines and milestones; (iv) revenue impact estimates; and (v) KPIs (e.g., number of audits, number of transactions covered by digital invoicing).
  - Based on the roadmap, FBR will complete all actions necessary to fully implement at least three priority areas agreed with IMF staff, including subordinate legislation, staff hiring and allocation, and initial KPI reporting (new end-March 2026 SB).
- Tax Policy Office (TPO) and tax policy design:
  - TPO became operational in October 2025 with appointment of senior management.
  - TPO will be responsible for all tax policy functions, including developing and publishing a medium-term tax reform strategy to reduce reliance on ad-hoc revenue measures (new end-December 2026 SB).
  - Strategy aims to significantly simplify the tax code.

### Federal-provincial fiscal cooperation and public financial management reforms
- Provincial revenue measures and data sharing:
  - Provinces developed implementation plans for new agricultural income tax (AIT) regimes, including measures to strengthen compliance, address underreporting, and improve communication (end-June 2025 SB).
  - All services are subject to GST except for a limited “negative list”; working toward harmonizing coding across provinces; any changes to the “negative list” and harmonization to be decided at the National Tax Council (NTC).
  - Aim to complete legal procedures and operationalize information sharing with provinces by May 2026 after NTC agreement.
- Devolution and fiscal frameworks:
  - Continue advancing devolution of expenditure to provinces as agreed under the National Fiscal Pact; committee on federal government rightsizing working with provinces.
  - National Finance Commission provides opportunity to review and strengthen federal and provincial fiscal frameworks and accountability.
- Budget preparation and PSDP reforms:
  - Improve budget preparation: provide additional information in quarterly fiscal operation reports comparing actual outcomes with projections; more detailed analysis of key drivers behind spending deviations in mid-year and year-end budget execution reports; align timeline of macro projections with budget circular.
  - PSDP pipeline streamlined by PRs 2.5 trillion (around 25 percent of the total); cap new project allocations to 10 percent of the total in FY27 budget.
  - Improve scorecard-based project selection: reduce overlapping criteria; introduce negative marking for projects with negative externalities; increase weight on climate-related criteria.
- Public procurement and PPPs:
  - Ensure transparency through electronic Pakistan Acquisition and Disposal System (e-PADS); PPRA expanding e-PADS to federal agencies and provincial governments and will ensure publication of beneficial ownership information of awarded contracts.
  - Federal Government will amend PPRA Rules to eliminate preferences for state-owned enterprises in awarding without competition, subject to limited exceptions.
  - Auditor General of Pakistan undertaking external audit of e-PADS; final report expected by end-March 2026.
  - Improve PPP risk monitoring: Risk Management Unit (RMU) in the Ministry of Finance, with ADB support, establishing a risk monitoring framework for quantifying contingent liabilities related to PPPs and will publish estimates by end-December 2025.
- Cash management and Treasury Single Account:
  - Plan to conduct a sectorization study to define institutions classified as part of the government and require those institutions that are part of the federal government to comply with Treasury Single Account rules.

*Memorandum of Economic and Financial Policies (attachment to the letter).*

### 20.      We are committed to addressing debt vulnerabilities arising from elevated gross

### 1pakea2025002-source-pdf - 20.      We are committed to addressing debt vulnerabilities arising from elevated gross

### Debt management and financing strategy
- Updated debt management strategy for FY26–28 aims to rebalance the domestic debt portfolio toward longer-term, fixed-rate instruments.
- Publish semi-annual reports providing updates on the outlook and the strategy’s implementation.
- Provinces have begun submitting non-competitive bids in auctions using cash surpluses; arrangements to be formalized including disclosure of expected bids and auction outcomes.
- Used SBP dividend windfalls to retire domestic debt, including PRs 1,133 billion of PIBs held by the SBP.
- Outstanding debt held by the SBP: PRs 3.8 trillion, due 2029.
- Agreement with SBP to retire early around PRs 1 trillion per fiscal year (FYs26-29) from outstanding SBP-held debt to mitigate financing risk, reflecting additional market financing in the annual borrowing plan.

### Government securities market development
- By end-September 2026, conduct a comprehensive study to assess key pillars of the government securities market and develop a strategic action plan to address identified bottlenecks (new end-September 2026 SB).
- Completed a preliminary assessment of the Central Directorate for National Savings (CDNS) in September 2025 and are undertaking additional analysis including operational costs.
- By end-March 2026 finalize an action plan to ensure CDNS operations are consistent with debt management objectives and financial market development strategy, leveraging digital technologies.

### Poverty Reduction and Benazir Income Support (BISP)
- FY25 BISP spending slightly below target due to savings on administrative costs of cash transfers.
- Unconditional cash transfers (UCT):
  - FY26 budget increases quarterly UCT Kafaalat benefits from PRs 13,500 to PRs 14,500 beginning in January 2026 (end-January 2026 SB).
  - Target to expand enrolled families from 10 million to 10.2 million in FY26 within existing budget envelope.
- Conditional cash transfers (CCT):
  - Education CCT enrollment increased by 300,000 this year to 10.7 million.
  - Nutrition CCT enrollment is at 2 million.
  - Continue coordination with World Bank and provinces to avoid overlap between BISP and provincial CCT programs.
- BISP administration:
  - Improve payment mechanism with World Bank advice to increase interoperability via biometric verification and shift toward e-wallets, with both targeted by end-June 2026.

### Health and education spending
- Total health and education spending increased by 0.3 percent of GDP in FY25.
- Target a similar magnitude increase in FY26 to reach 2.8 percent of GDP (PRs 3,470 billion).
- Working with development partners to assess and improve provincial execution capacity and quality of spending.

### Monetary policy, exchange rate, and monetary operations
- Maintain an appropriately tight monetary policy stance, guided by incoming data related to floods and the economic recovery.
- SBP’s inflation target range: 5-7 percent over the medium-term.
- If price pressures broaden beyond food items or inflation expectations exceed the range, a tighter policy stance would be prudent.
- Started publishing:
  - A revised consumer inflation expectations survey.
  - A dedicated semi-annual Monetary Policy Report explaining MPC considerations.
- Plan to review, by end-June 2026, how MPC statements and minutes could more clearly convey committee assessment and the monetary policy reaction function.
- New collateral framework and counterparty eligibility policy in force as of July 2, 2025 (end-September 2025 SB).
- Established internal procedures for Banking Supervision Department to furnish information for a quarterly ‘watch list’ compiled by Domestic Markets & Monetary Management Department.

### Exchange rate, reserves, and remittances
- Maintain a flexible exchange rate underpinned by an active foreign exchange market; exchange rate will adjust to match supply and demand if pressures arise.
- Publish semi-annual reserve targets and FX interventions to improve communication and transparency.
- Revision of Foreign Exchange Exposure Limits (FEEL) as of August to enable greater bank flexibility.
- To mobilize remittances sustainably without fiscal support:
  - Complete and publish a comprehensive assessment of impediments and costs and an action plan to address them, alongside substantially reducing fiscal support for remittance incentives (new end-May 2026 SB).
  - MoF and SBP to develop a mechanism ensuring claims during any fiscal year do not exceed the budgetary allocation while incentive schemes remain operational.

### Financial sector stability and reforms
- Commit to closely monitoring the financial sector and taking decisive actions to preserve public trust and resilience.
- Addressing undercapitalized institutions:
  - Banking sector: Ensure all banks are capital compliant. If any undercapitalized bank as of March 2025 fails to become capital compliant to SBP’s satisfaction, exercise authority under the Banking Companies Ordinance to place the bank under resolution and implement a resolution plan (Prior Action). Prompt supervisory action for future undercapitalization.
  - Microfinance sector: 5 of 11 microfinance banks remain undercapitalized. Working with owners and potential investors to resolve capital shortfalls. Deposit insurance will not be extended to this sector until supervisory concerns and preconditions are addressed.
- Crisis management and resolution:
  - Financial Institutions Resolution Department within SBP established following October 2024 legislative amendments to oversee resolution of distressed entities.
  - Developing tools to implement the new framework with World Bank technical support.
- Non-Performing Loans (NPLs):
  - In line with July 2024 guidelines, all banks submitted comprehensive plans to deal with existing NPL stocks; implementation will be closely monitored.
- AML/CFT:
  - Update on national risk assessment to be shared by end-March 2026.
  - Strengthening AML/CFT supervision of designated non-financial businesses and professions.
  - SECP established a centralized beneficial ownership registry in July 2025; digital access to financial institutions and law enforcement via online filing portal by end-January 2026.
  - SBP rolled out a standalone supervisory framework on TBML in July and issued a revised regulatory framework on TBML in August.
  - National AML/CFT authority, SBP, and Financial Monitoring Unit coordinating strategies (including with FBR) to assess TBML’s macroeconomic impact and implement mitigation measures.

### Financial sector development, inclusion, and digitalization
- Ministry of Finance preparing a plan outlining post-2027 financial sector strategy with clear expectations for financial institutions from 2028 onwards (end-June 2026 SB); a high-level inter-agency committee established to oversee the plan.
- SBP 2023–28 Strategy prioritizes inclusive and sustainable financial access and digital innovation.
- National Financial Inclusion Strategy (2024–28) aims to increase adult bank account ownership and reduce the gender gap.
- Progress on digitalization:
  - Digitalization of government payments and public records ongoing.
  - Completed rollout of instant payment system RAAST.
  - Aim to advance integration of payment systems with other countries and modernize RTGS and integrate it with the Central Securities Depository (CDS).
- SECP five-year strategic plan to develop the insurance sector; insurance penetration rate remains below 1 percent.

### Role of SBP and public sector in credit allocation
- SBP refraining from involvement or influence in credit allocation decisions, including sectoral disbursement targets.
- All Export Finance Scheme (EFS) refinancing via SBP will cease by end-June 2027.
- SBP discontinued all other refinancing schemes as of July 1, 2025.
- Changes to Exim Bank’s main refinancing scheme (E-EFS) aim to support non-traditional exports and new markets beyond traditional beneficiaries.
- SBP developed reform options for Development Finance Institutions (DFIs) to be considered by government with stakeholders.
- SBP transferred its stake in one financial institution to the government; work continues to transfer stake in another institution.

### Energy sector policies and reforms
- Restoring energy sector viability requires preventing circular debt (CD) flow via timely tariff increases at cost recovery with targeted and limited subsidies, and implementing cost-reducing structural reforms.
- Initiated work on an integrated energy plan to support the entire energy policy framework across sectors and stakeholders.
- Commit to reducing power CD flow and achieving net zero power CD flow in FY26.
- FY26 CD Management Plan (CDMP) to be adopted by cabinet by end-November; maintain a progressive tariff structure at cost recovery level.
- Move annual rebasing period from July to January beginning in January 2026 to smooth tariff impacts.
- Measures to reduce CD stock and accumulation pressures:
  - Budgeted FY25 subsidies, savings from overperforming DISCOs, and LPI waivers of PRs 259 billion reduced the CD stock by PRs 779 billion to PRs 1,614 billion (1.4 percent of GDP) over FY25.
  - A commercial bank loan facility of PRs 1,225 billion, to be finalized by end-January 2026, will convert PRs 660 billion PHL and other debt to lower-interest CPPA bank debt.
  - Pursue waivers on interest for remaining IPPs of PRs 128 billion.
- Facilitated captive power plant (CPP) transition (¶35) boosting grid demand, lowering electricity bills, and easing CD pressures.
- Cabinet-approved three-year incremental pricing package for industrial and agricultural users:
  - Lower tariff of PRs 22.98/kWh for consumption above a baseline threshold.
  - Scheme disallows differentiated treatment to specific industries or sectors.
  - Automatic review triggered if incremental consumption growth of industry and agriculture exceeds 25 percent above baseline in a given month.
  - Semi-annual reviews to ensure cost-revenue alignment.
  - Any losses due to scheme will be borne fully by higher tariffs on industry and agriculture.
  - Only positive FCAs applicable to incremental consumption.
  - Scheme expires three years from inception with no rollover and will be terminated immediately if it requires upward tariff adjustment in two consecutive reviews.
- CD flow targets for FY26 set lower and aim to reduce CD flow to zero by FY31 (the end of the loan operation).
- Power sector reform agenda:
  - Distribution: DISCO privatization to improve performance; anticipate finalizing privatization of IESCO, GEPCO, and FESCO in early 2026; advance private participation for HESCO and SEPCO with preconditions finalized by end-December 2026 (new end-December 2026 SB); also for PESCO and HAZECO by end-December 2026.
  - Transmission: Reform of NTDC near completion; ISMO fully operational with Board; EIDMC to be operational by end-January 2026 with independent board; National Grid Company (NGC) established and further alignment effective by end-December 2025.
  - Generation: Most conditions precedent for privatization of Nandipur and Guddu operational power plants completed; complete remaining CPs before hiring a financial advisor in January 2026.
  - Competitive market: With ISMO operational, trading enabled under Competitive Trading and Bilateral Contract Market (CTBCM); NEPRA approved rules and market code; NEPRA-determined wheeling charge set to allow 800 MW in the market until 2031; first wheeling auction expected in January 2026.
  - Renewable energy and capacity rationalization:
    - Submitted 2025-35 Integrated System Plan aims to remove 7,000 MW from previous committed capacity portfolio.
    - Expected to lower electricity tariffs by an estimated PRs 4.96 per unit and save US$17 billion over 10 years.
    - Plan mandates a significant increase in clean energy share and will be published by end-December 2025.
  - PPMC strengthened as technical arm of Power Division to support policy, regulatory and tariff affairs, sector reforms, privatization, CD management, and integrated planning; further strengthening of human resource and financial sustainability planned.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1pakea2025002-source-pdf.pdf*

### 35.      Our gas sector strategy hinges on continued timely tariff adjustment, improving CD

### 1pakea2025002-source-pdf - 35.      Our gas sector strategy hinges on continued timely tariff adjustment, improving CD

### Gas sector strategy, tariff adjustments, and CD management
- Semiannual gas tariff adjustments will continue to be notified as determined by OGRA (SB February 15, 2026), preserving tariff structure progressivity and protecting vulnerable household consumers, and fully reflecting the cost of imported RLNG diverted to domestic sector.
- Work to address RLNG surplus issues will continue, including through the integrated energy planning framework as it becomes operational.
- Semiannual captive power levy (CPL) adjustment occurred on time in August 2025; the premium will continue increasing by 5 percentage points every six months until the premium reaches 20 percent in August 2026.
- Any levy proceeds transferred to the electricity grid on a monthly basis would aim to reduce prices evenly across the electricity tariff structure.
- Detailed and verified gas CD stock statistics have been compiled, including a comprehensive dashboard featuring sub-components and drivers of CD.
- A quarterly gas CD flow reporting system has been initiated and improved data management and projection capacity are being developed.
- Quarterly provision of gas CD data to the Fund and other development partners will be initiated by end-December 2025.
- A gas CDMP will be devised; salient elements to be published by end-March 2026 will include:
  - Regular adjustments of end-user gas prices as per established formulas (and in line with the OGRA Amendments Ordinance effective since March 2022).
  - Tangible cost-reducing reforms, including measures to reduce unaccounted for gas (UFG) losses through infrastructure improvements, rehabilitation of networks, and theft controls.

### SOE governance, monitoring, and privatization
- Ensure coverage of all SOEs under the SOE governance framework; progress made on amending SOE-dedicated laws for the remaining 9 statutory SOEs to align with the SOE Act (end-June 2025 SB, reset for end-August 2026).
- Submit legislation on at least six of the nine remaining SOEs to parliament by end-December 2025.
- Amendments to the 2023 SWF Law to align with international standards for public asset management and SOE holding companies are under consultation with Fund staff (end-March 2026 SB).
- Federal rightsizing committee to complete review of purposes and rationale of various SOEs by end-March 2026 to achieve compliance with the 2023 SOE Act and SOE Policy.
- Training for SOEs following finalization of manuals and guidelines to ensure another 40 SOEs:
  - adopt effective business plans,
  - publish statements of corporate intent,
  - adopt and publish externally audited, IFRS-compliant financial statements and annual reports by end-December 2025.
- SOEs to identify and cost public service obligations (PSOs) per the new PSO framework; the seven commercial SOEs with the largest PSO claims will contract agreements with government and have these PSOs explicitly incorporated into the FY27 budget (new end-June 2026 SB).
- Ensure all commercial SOE Boards are majority independent per section 12(2) of the SOE Act; identify suitable directors for the remaining 19 SOEs without majority-independent boards and complete by end-December 2025.
- Detailed plan for comprehensive restructuring of the selected SOE will be published by end-December 2025.
- CMU operationalization:
  - Operationalize electronic database for CMU reporting requirements under the SOE Act; currently in beta and to be fully operational by end-December 2025.
  - Continue to publish aggregate and mid-year interim SOE reports regularly.
- Privatization agenda progress:
  - Initiated privatization process for 15 SOEs in 2024-29 program—including DISCOs and GENCOs.
  - Liquidation processes initiated for three SOEs and another to begin by end-December 2025, subject to cabinet approval.
  - Advanced stage on privatization of PIA; expect completion of PIA privatization by end-December 2025.
  - Joint venture structure with multiple exit options chosen for privatization of the Roosevelt Hotel; finalizing hiring of replacement Financial Advisor.
  - Final stages of privatization process for First Women Bank; anticipate completion in Q4 CY2025.

### Commodity market reforms: wheat and sugar
- Review of legislation underpinning government interventions in commodity markets due by end-December 2025; final report with comprehensive recommendations to advance competition policies and dismantle trade barriers.
- Wheat:
  - Developing a National Wheat Policy to modernize market framework while safeguarding food security.
  - Interim policy to be finalized by end-November 2025 to set expectations for the wheat sowing season.
  - Federal and provincial governments to prepare long-term wheat policy by end-May 2026.
- Sugar:
  - 2024/25 crop season: substantially lower-than-normal yield and drop in sucrose content resulted in projected supply shortfall for FY26Q2, necessitating emergency import of 300,000 metric tons of sugar via the public sector.
  - High-level committee developing recommendations towards full liberalization of the sugar market; draft national policy in consultation with provinces by end-March 2026.
  - National policy with key recommendations on licensing, price controls, import/export permissions, and zoning, with timelines, to be agreed by federal and provincial governments and adopted by federal cabinet by end-June 2026 (new end-June 2026 SB).
  - Guiding principles:
    - Growing and processing: remove (i) regulations restricting sugarcane growing to particular zones; (ii) government restrictions on use and sale of sugarcane; and (iii) licensing requirement for new sugar mills.
    - Trade: reduce import duties and liberalize exports.
    - Price controls: remove price controls and refrain from or prevent formal or informal arrangements by industry groups to influence ex-mill prices.

### Anti-corruption and governance measures
- Governance and Corruption Diagnostic (GCD) completed with IMF capacity development support; full GCD report published (Prior Action). Develop and publish action plan with timelines, milestones and monitoring mechanisms (end-October 2025 SB, reset to end-December 2025).
- UNCAC Review Report published in July on the Ministry of Law and Justice website; Ministry to communicate publication to the UNODC Secretariat after Federal Cabinet discussion.
- Corruption Risk Assessment:
  - National Accountability Bureau to conduct institutional-level risk assessment and develop an action plan for top ten departments with highest corruption risks (new end-October 2026 SB).
- Provincial Anti-Corruption Establishments (PACEs):
  - Engage providers to enhance PACEs' capacities for financial investigations related to provincial-level corruption.
  - Federal notification process by the Financial Monitoring Unit to be issued by end-December 2026 designating PACEs to investigate money laundering related to corruption and to request and receive financial intelligence from the FMU.
- Asset Declaration of High-Level Public Officials:
  - Amendment of the Civil Servants Act of 1973 for digitized filing and publication of asset declarations of high-level federal civil servants (end-June 2025 SB).
  - Establishment Division and FBR to issue regulations by end-December 2025 to:
    - centralize digital submission and collection of asset declarations (including domestic and foreign assets beneficially owned by high-level federal civil servants or a member of their family),
    - publish information subject to safeguards over data protection and privacy,
    - establish procedures for risk-based verification.
  - After publication of regulations, asset declarations of high-level federal civil servants will be made publicly accessible on a government website (new end-December 2026 SB).
  - Amend regulatory framework to expand digitization and publication requirement to any high-level person (BPS17-22 or equivalent) in federal and provincial governments.
- Banks’ Access to Asset Declarations for AML/CFT Purposes:
  - SBP, FBR and FMU to support banks’ access to asset declarations of high-level federal public officials (BPS17-22).
  - By end-December 2025, FBR to issue notification expanding banks’ access to cover asset declarations of high-level (BPS17-22) public servants, including any officer of federal or provincial governments or autonomous bodies, corporations and companies owned by such governments.

### Trade policy, tariffs, and non-tariff barriers
- National Tariff Policy (NTP) 2025-30 took effect on July 1, 2025; first year’s tariff adjustments incorporated into FY26 Finance Act.
- NTP measures include:
  - Consolidation of customs duties into four slabs: 0, 5,10 and 15 percent.
  - Phased reduction of custom duty (CD) rates to a maximum of 15 percent (for the highest category) by FY30.
  - Phased reduction of Additional Customs Duties (ACDs), Regulatory Duties (RDs), and special duties from the Fifth Schedule, with full elimination by FY29, FY30 and FY30, respectively.
  - These measures are consistent with agreed reductions in the weighted average tariff (Table 3).
- Auto sector liberalization:
  - New auto sector policy to be implemented from July 1, 2026, will progressively eliminate all ACDs and RDs, and substantially reduce CD rates by FY30.
  - Removal of all quantitative restrictions on commercial importation of used motor vehicles less than five years old via amendment SRO 1895(I)/2025 on September 30, 2025.
  - Legislation submitted to parliament for new regime of environmental and safety standards (end-July 2025 SB).
  - Commercial imports of used vehicles initially subject to additional regulatory duty of 40 percent, which will be reduced by 10 percentage points per year, to reach zero by 2030.
  - Streamline and revise personal baggage, gift, and transfer of residence schemes for used vehicle imports to avoid misuse and tighten eligibility criteria.
- Non-tariff barriers (NTBs):
  - Ongoing stock-take of Export Policy Order and Import Policy Order identified 2,662 NTBs for review.
  - Prepare an action plan by end-December 2025 to eliminate and simplify a substantial share of existing NTBs.

### Fiscal incentives, zones, and regulatory reforms
- Government will refrain from providing any new fiscal incentives such as tax breaks or subsidies (including on bank credit).
- Special Economic Zones (SEZs), Export Processing Zones (EPZs), and other zones/parks:
  - Initial study prepared and to be published assessing fiscal costs and effectiveness of incentives for all existing SEZs and EPZs.
  - Comprehensive plan to fully phase out all current SEZ and EPZ incentives by 2035 (end-June 2025 SB).
  - SEZ actions: prepare and publish (new end-June 2026 SB) a concept note defining scope, objectives, expected outcomes of legislative amendments to the SEZ Act, including proposed KPIs and shift from profit to cost-based incentives.
  - EPZ actions: phase out all domestic sales from EPZs to ensure operation strictly as bonded re-export zones and eliminate additional tax incentives identified in fiscal impact analysis, subject to pre-existing international contractual obligations, as of end-September 2025.
  - Report on fiscal costs and effectiveness of Special Technology Zones (STZs) and other industrial parks and zones, and comprehensive plan to phase out incentives by 2035 is under preparation (end-December 2025 SB).
- Eliminating Preferential Treatment of Local Production:
  - Phase out all additional duties currently charged for “localized” items/inputs in the auto sector and remove regime of special duties applied to imports used for auto sector (including Fifth Schedule and SRO 655(I)/2006).
  - Extend principle of removing preferential treatment of local production to other industries; commitments implemented gradually from July 2026 to June 2030.
- Regulatory reforms to enhance business climate:
  - Asaan Karobar Bill expected to be enacted by late 2025 to establish Pakistan Business Portal and Regulatory Registry.
  - Establish a technical unit within 90 days and conduct comprehensive review of existing regulations by June 2026 after enactment; implement reform actions through omnibus packages over two-year horizon.
  - Coordinate with provinces to align business regulations; Khyber Pakhtunkhwa has enacted complementary law.
  - SECP to prepare and submit to parliament amendments to the Companies Act (new end-June 2026 SB) to improve corporate governance and transparency.

### Macroeconomic data improvements and major surveys
- Three major surveys planned for FY25 progressed:
  - PBS published results of the Agricultural Census in August 2025.
  - Final reports on the Labor Force Survey and Household Integrated Economic Survey to be published by end-December 2025 (posted to the National Summary Data Page).
- Preparation for initiation survey for the new PPI index underway; collection of monthly price data expected to commence before end-December 2025.
- Data collection for three major FY26 surveys scheduled to begin January 2026:
  - Census of Manufacturing Industries,
  - Survey of Small and Household Manufacturing Industries,
  - Family Budget Survey.
- GFS central unit is meeting regularly to collect and classify fiscal operations data; GFS mappings introduced into SAP, enabling GFSM 2014-based reports once system upgrades are completed.
- Following identification of a discrepancy in source data used for import statistics published by PBS for FY18-25, the government will assess import data quality and procedures and prepare a full set of revised statistics and explanations for public dissemination after approval of the appropriate technical committee.

### Building climate resilience
- Climate resilience is an existential priority; policies supported by the Resilience and Stability Facility (RSF) align with the National Adaptation Plan and Nationally Determined Contributions.
- RSF focus areas:
  - Mainstreaming climate issues into budget and investment planning.
  - Improving water system resilience and disaster response financing coordination.
  - Enhancing enabling environment for green investments by strengthening climate information architecture.
  - Promoting green mobility and transport decarbonization.
  - Aligning energy sector reforms with national climate change commitments.

*Source: 1pakea2025002-source-pdf - 35.      Our gas sector strategy hinges on continued timely tariff adjustment, improving CD*

### 44.      Both RMs due under the first RSF review have been implemented. The FY26 Finance Act

### 44.      Both RMs due under the first RSF review have been implemented. The FY26 Finance Act

### Implementation of RMs under first RSF review
- The FY26 Finance Act provided for a new carbon levy (RM9): a PRs 2.5/liter increase in FY26 and a scheduled additional PRs 2.5/liter increase in FY27.
- The Law added fuel oil to the Petroleum Development Levy (PDL).
- The Law established a PRs 9 billion EV subsidy, focused on 2- and 3-wheelers, and a tax on internal combustion engine (ICE) vehicles of 1 to 3 percent (RM10).
- Modalities of the EV subsidy and ICE tax will be reviewed at each budget cycle to ensure incentives align with the medium-term EV adoption plan.
- A future planned reform to promote EV charging station infrastructure is identified as RM11. These measures aim to promote green mobility and transport decarbonization in Pakistan.

### Progress toward future RMs and climate/sectoral reforms
- Climate-related disclosures and finance:
  - Climate-related risk disclosure guidelines for financial institutions and listed companies to be issued (RMs 7, 8, end-December 2025).
- Water system resilience:
  - Digital e-Abiana irrigation service charge system is being rolled out in Khyber Pakhtunkhwa and is on track for Sindh and Balochistan (RM4, end-August 2027).
  - Plan to establish irrigation water tariff adjustment mechanisms consistent with operations and maintenance cost recovery in Punjab and Sindh (RM5, end-February 2027).
- Disaster risk financing:
  - Establishing framework to coordinate federal and provincial disaster risk financing needs under the National Disaster Risk Financing Strategy (RM6, end-August 2026).
  - An initial draft of the framework will be shared with Fund staff by end-March 2026.
- Electricity and social protection reform:
  - Planned electricity subsidy reform to replace the budgeted tariff differential subsidy and cross-subsidy system with a targeted budgeted subsidy framework for low-income consumers via BISP (RM12, end-January 2027).
  - Linkage of electricity consumers with the NSER database to be completed by end-December 2025; eligibility criteria to be defined by end-July 2026.
  - National communications campaign to build awareness of the subsidy reform to be launched after identification work completion at end-December 2025.
  - Parallel work to link gas consumer data with the NSER database.
- Energy efficiency and procurement:
  - Implement minimum energy performance standards (MEPS) across a variety of consumer appliances (RM13, end-June 2027).
  - PPRA on track to adopt new regulations mandating MEPS-compliant procurement and a tracking system for monitoring will be in place by end-December 2025.

### Financing and program monitoring under the EFF and RSF
- Financing:
  - Adequate financing secured from international partners to support the economic reform program and rebuild external buffers.
  - Further progress in securing financing committed ahead of program approval, including from the Saudi Development Fund, and China EXIM.
  - With these and other financing commitments from bilateral and multilateral partners, the program is fully financed for the next 12 months.
  - Bilateral partners will continue rolling over short-term claims (including loans, swaps and deposits) for the duration of the program, as committed at the outset of the EFF.
- Monitoring and conditionality:
  - Implementation of policies under the program will be monitored through semiannual reviews, with semiannual performance criteria and continuous performance criteria, as set out in the MEFPs dated September 11, 2024, and April 24, 2025, along with this MEFP.
  - The attached Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria, continuous performance criteria, indicative targets, and structural benchmarks under the program.
  - Completion of the third review scheduled for March 2026 will require observance of the quantitative performance criteria for end-December 2025, as set out in Table 1, along with continuous PCs and ITs.
  - Prior actions and structural benchmarks are set out in Table 2; standing commitments are listed in Table 3; progress under the RSF will be monitored through RMs detailed in Table 4; semiannual reviews for the RSF will occur concurrently with EFF reviews.
- Key monitoring dates and references:
  - Third review scheduled for March 2026.
  - MEFPs dated September 11, 2024, and April 24, 2025.
  - TMU defines the quantitative and structural monitoring framework.

### Structural conditionality highlights (selected)
- Prior actions and status examples:
  - For any bank identified as undercapitalized as of March 2025, the SBP will develop a resolution plan and, if undercapitalized banks fail to restore capital by end-October 2025, the SBP will issue orders to place the bank under resolution or verify restoration of compliance.
  - Publish the full Governance and Corruption Diagnostic Assessment report and publicly identify critical governance vulnerabilities — status: Met (for one instance) and Not met / reset dates for others as specified in Table 2.
- Selected structural benchmarks, rationale, and status (dates preserved as in source):
  - Do not grant tax amnesties, and do not issue any new preferential tax treatment — Rationale: Protect tax revenue — Date: Continuous — Status: Not met.
  - Seek ex-ante parliamentary approval for any expenditures that are non-budgeted or that exceed the budgetary appropriation — Rationale: Improved parliamentary oversight of budget execution — Date: Continuous — Status: Met.
  - Approve a National Fiscal Pact devolving some spending functions to the provinces — Rationale: Address mismatch of federal and provincial revenues and expenditures — Date: end-September 2024 — Status: Met.
  - Share with the IMF staff a report detailing actions to reduce the federal government's footprint — Rationale: Reduce the footprint of the state — Date: end-September 2024 — Status: Met.
  - Provinces to amend Agriculture Income Tax legislation to align with federal regimes so taxation can commence from January 1, 2025 — Rationale: Protect tax revenue — Date: end-October 2024 — Status: Not met. Implemented with delay in February 2025.
  - Fully implement compliance risk management measures in Large Taxpayer Units in Islamabad, Karachi, and Lahore Regional Offices — Rationale: Improve tax compliance — Date: end-December 2024 — Status: Met.
  - Develop and publish criteria for project selection and annual limit on new projects entering the PSDP portfolio — Rationale: Better public investment management — Date: end-January 2025 — Status: Met.
  - Introduce a 5 percent FED on fertilizer and pesticide — Rationale: Protect tax revenue — Date: end-June 2025 — Status: Not Met.
  - Parliamentary approval of a FY26 budget in line with IMF staff agreement — Rationale: Ensure achievement of fiscal objectives — Date: end-June 2025 — Status: Met.
  - Implement new AIT laws through a comprehensive plan including operational platform and compliance plans — Rationale: Protect tax revenue — Date: end-June 2025 — Status: Met.
  - Amend the Civil Servants Act to ensure digital, publicly accessible asset declarations for high-level public officials — Rationale: Enhance anti-corruption framework — Date: end-June 2025 — Status: Met.
  - Publish governance action plan based on Governance Diagnostic Assessment — Date: end-October 2025 — Status: Not met. Reset to end-December 2025.
  - Annual inflation adjustment of the unconditional cash transfer (Kafaalat) — Date: end-January 2025 — Status: Met; next adjustment by end-January 2026 — Status: In progress.

*Source: Pakistani authorities; Fund staff estimates.*

### 1.25 percent during any consecutive 5 business day period.

### 1pakea2025002-source-pdf - 1.25 percent during any consecutive 5 business day period.

### Structural Conditionality: Financial Sector, Energy, SOEs, Trade
- Maintain FX market functioning. Continuous. Met.
- Parliamentary approval of amendments to the bank resolution and deposit insurance legislation, in a manner that preserves the integrity of the draft legal amendments. Strengthen crisis management toolkit. end-October 2024. Met.
- Place undercapitalized private banks under resolution unless (i) these banks are fully recapitalized by end-October 2024; or (ii) a legally binding agreement is in place by end-October 2024 towards a merger with other banks or with a new sponsor that would achieve full recapitalization by April 2025. Enforce regulatory standards. end-November 2024. Not met.
- In consultation with Fund staff, revise regulations and underlying methodologies on risk mitigating measures, including enhanced collateral policy and by requiring counterparties to be financially sound. Improve safeguards in monetary policy operations. end-December 2024. Met.
- Implement revised regulations on risk mitigating measures. Improve safeguards in monetary policy operations. end-September 2025. Met.
- Prepare and publish a plan outlining the government’s post-2027 financial sector strategy, outlining the institutional and regulatory environment from 2028 onwards. Safeguard financial stability. end-June 2026. In progress.

- Energy sector actions:
  - Complete all policy actions needed to prepare two DISCOs for privatization and concession transactions. Improve DISCO management and efficiency. end-January 2025. Met.
  - Eliminate captive power usage in the gas sector. Push captive gas users on to the electricity grid and channel gas to the most efficient generators. end-January 2025. Not met.
  - Public notification by the government of the December 2024 semiannual gas tariff adjustment determination. Maintain tariffs at cost recovery levels. February 15, 2025. Met.
  - Notifications of the annual electricity tariff rebasing and gas tariff adjustment. Maintain energy tariffs at cost recovery levels. July 1, 2025. Met.
  - Notification of the semi-annual gas tariff adjustment. Maintain energy tariffs at cost recovery levels. February 15, 2026. In progress.
  - Adopt legislation to make captive power levy ordinance permanent. Promote uptake of electricity grid usage and incentivize more efficient use of energy sources. end-May 2025. Met.
  - Adopt legislation to remove the cap on the debt service surcharge. Ensure adequate financing is available for CD conversion operation. end-June 2025. Met.

- State-Owned Enterprises:
  - Amend the SWF Act and other legislation, in consultation with Fund staff and in line with MEFP ¶25.b, to adopt appropriate governance mechanisms and safeguards following international standards and good practices to (i) ensure that SOEs under the ownership of the SWF revert to the SOE Act’s governance structures, (ii) that the SWF itself comes under governance mechanisms and safeguards in line with its principal nature as a holding company, and appropriate fiscal safeguards are in place for the SWF’s operations. Improve SOE governance by bringing all SOEs into line with the SOE legal framework approved in 2023 and strenghten SWF governance and accountability. end-March 2026. In progress.
  - Amend the laws for 10 additional statutory SOEs, in consultation with Fund staff and in line with MEFP ¶25.a., to bring them in line with the SOE Act. Improve SOE governance by bringing all SOEs into line with the SOE legal framework approved in 2023. end-June 2025. Not met. Reset to end-August 2026.

- Trade, Investment Policy, and Deregulation:
  - Prepare a plan based on the assessment conducted to fully phase out all current Special Economic Zone (including Export Processing Zone) incentives by 2035. Improve efficiency and provide a level playing field for investment. end-June 2025. Not met. Implemented with delay in October 2025.
  - Prepare a plan based on the assessment conducted to fully phase out all incentives in relation to Special Technology Zones and other industrial parks and zones by 2035. Improve efficiency and provide a level playing field for investment. end-December 2025. In progress.
  - Submit to parliament all required legislation for lifting all quantitative restrictions on the commercial importation of used motor vehicles (initially only for vehicles less than five years old, subject to meeting minimum environmental and safety standards). Liberalize trade and increase vehicle affordability. end-July 2025. Met.

### New Structural Benchmarks (selected)
- Fiscal:
  - Finalize a roadmap by end-December 2025 that includes at least: (i) prioritization of key reform areas; (ii) staffing requirements and roles; (iii) specific timelines and milestones; (iv) revenue impact estimates; and (v) key performance indicators (KPIs) to monitor progress and outcomes (e.g. the number of audits, number of transactions covered by digital invoicing, etc.). Based on the roadmap, complete all actions necessary to fully implement at least three priority areas agreed with IMF staff, including any required subordinate legislation, staff hiring and allocation, and initial KPI reporting. Enhance the effectiveness of the FBR. end-March 2026.
  - Develop and publish a comprehensive medium-term (3 to 5 years) tax reform strategy that includes at least: (i) a sequenced roadmap of tax policy, administration, and legal reforms; (ii) clear governance arrangements; and (iii) a resource plan for implementation. Strenghten the predictability and sustainability of tax revenue. end-December 2026.

- Governance:
  - Publish in a government website the asset declarations of high-level federal civil sevant in line with the June 2025 legislative amendments. Enhance transparency and accountability. end-December 2026.
  - Publish an action plan to mitigate corruption vulnerabilities in identified departments based on an institutional-level risk assessment. Identify and mitigate severe corruption vulnerabilities. end-October 2026.

- Monetary and Financial:
  - Complete a comprehensive assessment of remittance costs and structural impediments to cross-border payments, complemented by an action plan. Boost FX inflows sustainably. end-May 2026.
  - Conduct a comprehensive study of the bottlenecks for local currency bond market development and publish a strategic action plan to address areas of improvement. Develop financial markets and diversify the investor base. end-September 2026.

- Energy Sector:
  - Finalize preconditions for the private sector participation processes for HESCO and SEPCO. Improve DISCO management and efficiency. end-December 2026.

- State-Owned Enterprises:
  - The government will sign public service obligations (PSO) agreements with each of the 7 largest PSOs before submission to Palriament of the FY27 budget, in line with updated manuals and guidelines in accordance with the SOE Act and Policy. Improve transparency and costing of public obligations. end-June 2026.

- Trade, Investment Policy, and Deregulation:
  - Federal and provincial governments will agree and the federal cabinet will adopt a national policy for sugar market liberalization containing key recommendations on licensing, price controls, import/export permissions, and zoning, and clear timelines for implementation. Liberalize commodity markets. end-June 2026.
  - Prepare and submit to parliament legislative amendments to the Companies Act, 2017 to strengthen compliance for unlisted firms, modernize corporate governance structures, and align corporate regulations with international best practices. Reduce regulatory uncertainty, enhance transparancy, and support capital market development. end-June 2026.
  - Prepare and publish a concept note defining the scope, objectives, and expected outcomes of legislative amendments to the SEZ Act, including the rationale for reform, proposed KPIs, and the shift from profit to cost-based incentives. Improve efficiency and provide a level playing field for investment. end-June 2026.

### Standing Commitments (selected thematic commitments and numeric targets)
- Fiscal and public finance:
  - Use any windfall from SBP dividends exceeding 1 percent of GDP to reduce borrowing and retire debt. (MEFP ¶1)
  - Refrain from introducing any fuel subsidy or cross-subsidy scheme. (MEFP ¶5.c)
  - Refrain from offering any new fiscal incentive or guaranteed returns (in any currency) to firms or any investment project. (MEFP ¶7.i)

- Social protection:
  - Implement annual inflation adjustments for UCT benefits to ensure that the most vulnerable households’ purchasing power remains, at a minimum, constant in real terms. (BISP ¶8)
  - Implement readjustment of UCT benefits upon the release of any new household surveys to continue transfers equivalent to 15 percent of the bottom quintile’s consumption once this threshold is reached. (BISP ¶8)
  - Keep the NSER live, keep BISP enrolment open; administer the regular re-declartion of BISP beneficiaries' status on the intended three-year cycle. (BISP ¶9)

- Monetary, FX, and financial:
  - Refrain from involvement in credit allocation decisions, sectoral lending targets. (Monetary Policy Transmission ¶13)
  - Refrain from outright secondary‑market purchases or maturity extensions on government securities held by SBP. (Safeguards ¶13)
  - Do not introduce new SBP refinancing schemes during transition or thereafter. (Monetary Policy Transmission ¶14)
  - Maintain flexible exchange‑rate regime with unrestricted interbank price discovery. (Foreign Exchange Market ¶15.a)
  - Limit SBP's net FX sales to at most balancing net purchases each quarter; consult IMF if gross sales exceed US$200 million in any rolling 30-day period. (Foreign Exchange Market ¶15.b)
  - Continue to publish SBP’s monthly FX interventions with a three month lag, and to announce (semiannually) our six month-ahead gross reserve target and FX debt service of the government over the corresponding period. (Foreign Exchange Market ¶15.c)
  - Refrain from extending deposit insurance system to MFBs unless capital shortfalls addressed and other preconditions met. (Financial sector ¶16.c)

- Energy and trade:
  - All provinces agree not to grant new electricity or gas subsidies. (Power/Electricity Subsidies ¶20.a)
  - Refrain from netting out cross-arrears (unless they are independently audited); using “non-cash” settlements; and issuing government guarantees except where there is a need to substitute an existing government guarantee on maturity. (Power/Arrears ¶20.d(viii))
  - Refrain from signing additional external RLNG contracts given current surplus. (Gas ¶21.b)
  - Provide OGRA advice within 40 days of tariff determination to enable automatic notification under 2022 amendment. (Gas ¶21.d)
  - Refrain from federal/provincial support pricing & procurement operations for wheat. (Deregulation ¶24)

- Trade policy:
  - Implement duty reductions under the new NTP to reduce the weighted average applied tariff from 10.6 percent in FY25 to 7.4 percent by FY30. Duty reductions for the auto sector, when added to those under the NTP, will bring the weighted average tariff to below 6 percent by FY30. (Trade Policy ¶26)
  - Refrain from introducing any new Regulatory Duties on imports. (Trade Policy ¶26)
  - Ensure that the SIFC does not propose, nor that the government provide, regulatory, spending, or tax-based incentives of any sort, or any guaranteed returns, or take any other action that could distort the investment landscape. Ensure that all investment made under the SIFC results from the standard Public Investment Management framework. (Investment Policy ¶27)
  - Refrain from: (i) creating new SEZs (or other zones); (ii) providing new fiscal or other incentives related to zones; and (iii) renewing any existing incentives. (Investment Policy ¶28.a)

### RSF Reform Measures: Climate, Water, Energy, and Financial Sector Actions (selected RM entries and timings)
- RM1. Increase the climate change (adaptation and mitigation) weighting in the Public Investment Procedures and Parameters methodology to at least 30 percent for infrastructure projects; develop explicit protocols for scoring projects against criteria; and publish the selection process and distribution of scores for new projects entering the PSDP. end-August 2026 (4th EFF Review). Expected outcome: Comprehensive system for identifying climate-relevant spending across federal and provincial government, detailed budgeting in line with National Climate Change Policy, ongoing system for monitoring execution against planned climate spending. FAD advising. FAD to consult with the World Bank on the climate finance element of the selection process.

- RM2. Revise PSDP call circular such that, for all new major infrastructure projects (greater than PRs 7.5 bn), only projects that have undertaken climate vulnerability, adaptation, and mitigation screening will be included in the budget; and publish a consolidated report summarizing the screening assessments for these projects. end-August 2027 (6th EFF Review). Expected outcome: Enforcement of requirements for project selection; enhanced climate-sensitivity of PSDP over time. FAD advising. Supplemental support from the ADB, along with new budget preparation TA from the World Bank.

- RM3. Expand the federal climate budget-tagging framework to include expenditure on grants and subsidies and extend budget-tagging to expenditure by the provinces. Publish an annual climate budget statement and quarterly execution reports, tracking climate expenditure across each category and explaining any deviations from targets. end-August 2027 (6th EFF Review). Expected outcome: Stronger evidence base on climate mitigation impacts and adaptation aspects of public investment projects. FAD advising. European Commission developing new PFM TA support. FCDO coordinating provincial green budget integration.

- RM4. Adoption and implementation of the e-Abiana irrigation service charge collection system by the irrigation authorities of Sindh, Khyber-Pakhtunkhwa, and Balochistan. end-August 2027 (6th EFF Review). Expected outcome: Increased water revenue collections among the three provinces. World Bank to provide technical support.

- RM5. Introduce an irrigation water tariff adjustment mechanism in Punjab and Sindh with the aim to recover the operational and maintenance costs of irrigation infrastructure. end-February 2027 (5th EFF Review). Expected outcome: Incentivize more efficient use of water resources in a supply-constrained environment. World Bank to provide technical support.

- RM6. In the context of the National Disaster Risk Financing Strategy, adopt an implementation framework that encompasses federal and provincial disaster risk financing needs as part of the national risk layering approach and establishes a coordination mechanism for disaster risk financing across the federal and provincial authorities. end-August 2026 (4th EFF Review). Expected outcome: Improve the coordination of DRF across the federal and provincial governments. FAD advising, TA as needed.

- RM7. SBP issuance and adoption of guidelines for the implementation of climate related financial risk management by supervised commercial banks in line with the 2022 BCBS principles for the effective management and supervision. end-December 2025 (3rd EFF Review). Expected outcome: Incorporation of climate related financial risk considerations into risk management of banks and bank supervision.

- RM8. Ministry of Finance to adopt by way of decree a green finance taxonomy adapted to Pakistan’s updated NDC. Based on the adopted taxonomy, the SECP will issue disclosure guidelines to enable listed companies to disclose climate-related risk and opportunities information, including taxonomy-aligned data. end-December 2025 (3rd EFF Review). Expected outcome: Fuller incorporation of climate considerations into Pakistan's financial and private sector architecture. MCM to advise as needed. World Bank working with the authorities on developing a green taxonomy.

- RM9. Adopt a supplementary carbon levy via the PDL on gasoline and diesel of Rs 5 per liter, phased in over two years; and add fuel oil to the PDL, with the base and supplementary rate applicable. end-June 2025 (2nd EFF Review) (MET). Expected outcome: Significant reduction of CO2 emission. Incentivize the uptake of EVs, contributing to the authorities' goal of 30% penetration of new passenger EV sales and 50% for electric 2-3 wheelers by 2030. FAD advising, including via CPAT modeling.

- RM10. Adopt, as part of the FY26 budget law, a revenue-neutral scheme including a subsidy for EVs and a supplementary tax on internal combustion engine vehicles, in line with the New Energy Vehicle Policy 2025-2030 and Fund recommendations. end-June 2025 (2nd EFF Review) (MET). Expected outcome: Significant reduction of CO2 emission. FAD providing modeling and advice on subsidy and tax modalities and magnitude.

- RM11. Adopt a PPP-viability gap funding framework that provides one-off subsidies to incentivize private sector investment in EV charging stations; ensure an open bidding process and include clear criteria to evaluate the eligibility of projects for gap funding; and implement the first bid window, in line with Fund recommendations. end-February 2027. Expected outcome: Create efficient incentives for the uptake and use of EVs, contributing to the authorities' goal of 30% penetration of new passenger EV sales and 50% for electric 2-3 wheelers by 2030. FAD providing modeling and advice on the framework.

- RM12. Budgeted electricity tariff differential subsidy and cross-subsidy system replaced with targeted subsidy framework for low-income consumers, with BISP disbursements through new system by end-January 2027. end-January 2027 (5th EFF Review). Expected outcome: Better-targeted and more progressive subsidies; reduced incentive to overconsume electricity among higher-income consumers. World Bank to provide support on consumer identification and verification, subsidy design, and implementation.

- RM13. PPRA adoption of new regulation by end-December 2025 mandating certain new electric appliances (fans, LEDs, refrigerators, air conditioners, and motors) procured at the federal and provincial level are MEPS-compliant; and achievement of new appliances entering the market for sale as MEPS-compliant (40 percent fans; 30 percent LEDs; 35 percent refrigerators; 30 percent air conditioners; 25 percent motors) by end-June 2027. end-June 2027 (6th EFF Review). Expected outcome: New appliances entering the market carry labels or comply with MEPS. World Bank to provide support.

- Cross-cutting expected outcomes: Improved fiscal and external sustainability via more efficient/lower expenditure on and import demand for climate-related infrastructure and disaster relief; improved water system resilience and disaster response financing; enhanced financial sector resilience via lower financial sector losses in the context of climate shocks; alignment of energy sector reforms with national mitigation commitments.

*Source: 1pakea2025002-source-pdf - 1.25 percent during any consecutive 5 business day period.*

### 1. This Technical Memorandum of Understanding (TMU) sets out the understanding

### This Technical Memorandum of Understanding (TMU) sets out the understanding

### Overview
- Establishes understanding between the Pakistani authorities and 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) 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 November 20, 2025, and the attached Memorandum of Economic and Financial Policies (MEFP), notably its Tables 1 and 2 (Section B).
- Authorities will provide necessary data to the IMF as soon as it becomes available.
- Definitions in this TMU will be adjusted to reflect program design and accounting classification changes introduced during the program period.

### Program Exchange Rates and Key Numbers
- Program exchange rate of the Pakistani rupee to the U.S. dollar: 278.3412 rupee per one U.S. dollar.
- Text Table 1. Pakistan: Program Exchange Rates (Units of currency per U.S. dollar) 1/ (As of June 28, 2024.)
  - 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

### Definitions of Performance Criteria and Indicative Targets (Section A)
- Performance Criteria (stock or cumulative flows as specified):
  - 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 — Key Definitions and Adjustment Mechanisms
- General government definition:
  - Central (federal) government and local (provincial) governments, excluding state-owned enterprises.
  - Includes new funds or special budgetary or extra-budgetary entities carrying out fiscal operations per IMF’s Manual on Government Finance Statistics 2014; authorities to inform IMF staff without delay of any such creations.
- B.1. Net International Reserves (NIR) of the SBP
  - NIR (stock): 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: readily available claims on nonresidents in foreign convertible currencies controlled by monetary authorities for balance of payments needs, exchange market intervention, and related purposes.
  - Gross official 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; and (vii) balances at foreign branches of non-investment rated domestic banks.
  - Reserve-related liabilities include: (i) foreign currency liabilities (excluding liabilities to general government) with remaining maturity of one year or less; (ii) foreign exchange liabilities from derivatives positions (net basis); (iii) outstanding IMF credits to Pakistan; and (iv) foreign exchange deposits with SBP by foreign governments, central banks, foreign deposit money banks (excluding regulatory capital deposits), international organizations, foreign nonbank financial institutions, and certain domestic financial institutions. Excludes 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 SBP and general government vis-à-vis domestic currency (including forward leg of currency swaps).
  - Gross sale of foreign exchange: outright and swap sales by SBP to banks; swap sales and forward maturities measured net daily.
  - Net purchase of foreign exchange: outright and swap purchases minus outright and swap sales by SBP to/from banks; measured net daily.
- Adjustment mechanism for NIR floor (¶11):
  - Floor on NIR will be adjusted upward (downward) by the cumulative excess (shortfall) in:
    - a. cash inflows usable for financing of the government budget from multilateral and bilateral creditors, commercial borrowing, and bond issuance relative to projected inflows (Table 1). Cumulative cash inflows usable for financing of 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 that are 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: maximum of US$2,000 million for both the December 2025 and June 2026 test dates.

- B.2. Net Domestic Assets (NDA) of the SBP
  - NDA = reserve money (RM) − NIR (NIR valued at program exchange rate and expressed in Pakistani rupee for NDA computation).
  - Reserve money (RM) = (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 SBP; and (iv) deposits of the rest of the economy with SBP, excluding those held by the federal and provincial governments and SBP staff retirement accounts.
  - Adjustment mechanism for NDA ceiling (¶14):
    - NDA ceiling will be adjusted downward (upward) by the cumulative excess (shortfall) in cash inflows from multilateral and bilateral creditors, and commercial borrowings and bond issuances relative to projected inflows (Table 1) evaluated at the program exchange rate.
    - Upward adjustment of NDA ceiling limited to same maximum adjustor limit set for NIR evaluated at program exchange rate.

- B.3. SBP’s Stock of Net Foreign Currency Swap/Forward Position
  - Defined as aggregate net positions in forwards and futures in foreign currencies of SBP vis-à-vis domestic currency (including forward leg of currency swaps), evaluated at program exchange rate.

- B.4. General Government Primary Budget Deficit Excluding Grants
  - Primary deficit (excluding grants) monitored quarterly as general government’s overall budget deficit (excluding grants) minus the consolidated interest bill of federal and provincial budgets.
  - General government overall budget deficit (excluding grants) measured as the cash deficit from below the line, defined as sum of:
    - a. net external budget financing (excluding valuation changes), foreign currency disbursements/payments converted into PRs at actual exchange rates applied to each transaction;
    - b. change in net domestic credit from banking system (cash basis), excluding valuation changes from deposits 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 net domestic nonbank financing, excluding valuation changes, comprising: (i) privatization receipts (received directly or transferred from privatization accounts to general government budget, including from abroad and in foreign currency); (ii) change in stock of issued government securities held outside general government and banking system, net of valuation changes; (iii) change in net deposits and reserves received by 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; and
    - d. total external grants to 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 converted into PRs at actual exchange rates applied to each transaction.
  - Net external budget financing (excluding valuation changes and external financing counted as SBP reserve liabilities) defined as sum of:
    - a. external budget loans to general government, including on-lent to financial institutions and companies and external emergency relief lending — comprising medium- and long-term maturity from official multilateral sources (including IMF budget support), official bilateral sources, 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 general government, the change in its stock of external debt service arrears net of debt amortization due on external budget loans (accounting for rescheduled, relieved, or accelerated amortization, including that related to debt swaps or debt cancellation recorded as capital grants).
  - Adjustment mechanism for primary deficit ceiling (¶19):
    - Ceiling adjusted on cumulative basis since fiscal year start:
      - 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 (see Table 1). External project financing = disbursements from bilateral and multilateral creditors to general government for specific project expenditure.
      - b. downward by any underexecution in targeted cash transfers (BISP) relative to indicative program target.
      - c. downward by any excess in flow of power sector payment arrears above indicative program target.
      - d. downward by any excess in flow of tax refund arrears relative to respective indicative program targets.
      - e. downward (upward) by any excess (shortfall) in flow of SBP profit transfer relative to respective projections (Text Table 1).

- B.5. Ceiling on Amount of Government Guarantees
  - Applies to stock of publicly guaranteed debt for which guarantees issued by central government; includes domestic and external government guarantees.
  - External guarantees converted into Pakistani rupees at program exchange rate.
  - If an entity incurs interest arrears on borrowings backed by guarantee, for QPC the guarantee evaluated as higher of value of guarantee issued or total amount owed.
  - Excludes guarantees issued by Ministry of Finance for SBP borrowing from the IMF.

- B.6. Floor on Targeted Cash Transfers Spending (BISP)
  - Applies to cumulative targeted cash transfers on social spending by Benazir Income Support Program (BISP), i.e., all spending on unconditional cash transfer and conditional cash transfer BISP programs.

- B.7. Floor on Number of New Tax Returns
  - Measured as additional non-nil-tax returns beyond existing stock of non-nil-tax filers.
  - Non-nil-tax filer returns: filers presenting a tax return with a liability greater than zero.
  - Stock of non-nil-tax filers: 3,531,767 as of end-June 2025.
  - Floor counted from starting point of 3,531,767.

### C. Continuous Performance Criteria
- C.1. No New Flow of SBP’s Credit to General Government (¶23)
  - Continuous prohibition on new flows of SBP’s direct credit to general government, including purchases of public debt securities on primary market, to protect central bank’s price stability objective.
- C.2. Zero Ceiling on Accumulation of External Payment Arrears by General Government and SOEs (¶24)
  - External payment arrears defined as all unpaid debt-service obligations (payments of principal and interest) of 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 beyond 30 days after due date).
  - Definition of debt for EFF purposes per ¶8 of 2020 Guidelines on Public Debt Conditionality in Fund Arrangements.
  - Ceiling on accumulation of external payment arrears set at zero; applies continuously throughout program period.
- C.3. Other Continuous Performance Criteria (¶25)
  - During program period, Pakistan will not:
    - a. impose or intensify restrictions on making payments and transfers for current international transactions;
    - b. introduce or modify multiple currency practices (MCPs);
    - c. conclude bilateral payment agreements inconsistent with Article VIII of IMF Articles of Agreement;
    - d. impose or intensify import restrictions for balance of payments purposes.

### D. Indicative Targets — Definitions
- D.1. Floor on Weighted Average Time-to-Maturity (ATM) of Domestic Debt Securities Stock (¶26)
  - ATM calculated based on exact remaining time to maturity (in years) of each instrument in portfolio (T-bills, PIBs, Sukuks).
  - Remaining time to maturity of each instrument as of relevant test date 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
  - (Definition and application described in the TMU; indicative target category listed among D.1–D.2 items.)

### Program Projection Table (SBP profit transfer)
- Text Table 1. Pakistan: Projections for SBP profit transfer (Cumulative flows from start of fiscal year; billions of Pakistani Rupees)
  - end-Sep 2025: 0
  - end-Dec 2025: 2,428
  - end-Mar 2026: 2,428
  - end-Jun 2026: 2,428

*Source: Technical Memorandum of Understanding between the Pakistani authorities and IMF staff (TMU).*

### 27.      The floor on the general government budgetary health and education spending will

### 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 supported by requisite documentation 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.
- Reported stocks and counting starting points as of end-June 2025:
  - the stock of income tax refund arrears is PRs 234.8 billion, and the net accumulation of income tax refund arrears will be counted from the starting point of PRs 234.8 billion;
  - the stock of sales tax arrears is PRs 155.5 billion, and the net accumulation of sales tax refund arrears will be counted from the starting point of PRs 155.5 billion.

### 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;
  - (v) delays in tariff determinations resulting in pending generation cost;
  - (vi) non-payments by K-Electric; and
  - (vii) other adjustments (including prior year recoveries, spillovers etc.).

*IMF staff report content (PDF chapter/section).*

### 35.      To effectively monitor the program performance, the authorities will provide all the

### 1pakea2025002-source-pdf - 35.

### Program monitoring and reporting
- Authorities will provide all needed data to the IMF in line with Article VIII, Section 5 of the IMF Articles of Agreement.
- Performance monitored from data supplied by: SBP, Ministry of Finance, FBR, Pakistan Bureau of Statistics, Ministry of Energy (Power and Petroleum Division), and other agencies as outlined in Table 2.
- Authorities will report on an ongoing/continuous basis any non-observance of continuous Performance Criteria (PCs) and promptly transmit any data revisions and other information necessary to monitor the arrangement.

### Projected external disbursements (Table 1 highlights)
- Projected multilateral and bilateral disbursements (Millions of U.S. dollars):
  - Jul-Sep 2025 Est.: 2,667
  - Oct-Dec 2025 Proj.: 4,531
  - Jan-Mar 2026 Proj.: 3,315
  - Apr-Jun 2026 Proj.: 5,606
- Of which in cash 1/:
  - Jul-Sep 2025 Est.: 2,397
  - Oct-Dec 2025 Proj.: 4,193
  - Jan-Mar 2026 Proj.: 3,019
  - Apr-Jun 2026 Proj.: 5,217
- Commodity loans (including Saudi and IDB facilities):
  - Jul-Sep 2025 Est.: 800
  - Oct-Dec 2025 Proj.: 490
  - Jan-Mar 2026 Proj.: 386
  - Apr-Jun 2026 Proj.: 924
- Project support 2/:
  - Jul-Sep 2025 Est.: 725
  - Oct-Dec 2025 Proj.: 848
  - Jan-Mar 2026 Proj.: 758
  - Apr-Jun 2026 Proj.: 979
- International bond issuance 3/:
  - Oct-Dec 2025 Proj.: 250
- Commercial borrowing 4/:
  - Oct-Dec 2025 Proj.: 300
  - Jan-Mar 2026 Proj.: 700
  - Apr-Jun 2026 Proj.: 1,200
- Gross inflows:
  - Jul-Sep 2025 Est.: 2,667
  - Oct-Dec 2025 Proj.: 5,081
  - Jan-Mar 2026 Proj.: 4,015
  - Apr-Jun 2026 Proj.: 6,806
- Memo: New loans/deposits at SBP 5/: 0 across quarters (Not included in multilateral and bilateral disbursements for the purposes of the adjustor).
- Note: Cumulative excess/shortfall of flows cumulates from July 1, 2025 onwards.
- 1/ Assumes that 65 percent of project loans and 50 percent of project grants are received in cash.
- 2/ Excluding WB Policy-for-Results Lending.
- 3/ Includes Naya Pakistan Certificates (NPC). NPC flows are recorded on a net basis.
- 4/ Includes foreign currency denominated loans from local branches of foreign banks.
- 5/ Not included in multilateral and bilateral disbursements for the purposes of the adjustor.

### Monitoring and reporting requirements (Table 2 key items and frequencies)
- State Bank of Pakistan (SBP) submissions:
  - SBP balance sheet summary: Weekly (First Thursday of the following week); Monthly (Within 15 days of the end of each month) — summary at program exchange rates and by official exchange rates.
  - Monetary survey: Monthly (Within the first 30 days of each month).
  - International reserves: Daily (The following working day) at (i) program exchange rates and (ii) at actual official exchange rates.
  - Inflows/outflows into/out of Naya Pakistan Certificates: Daily (The following working day).
  - Foreign exchange market data (market exchange rates, weighted average customer exchange rate, monthly trade volume, high/low interbank and KERB): Daily/Monthly (Within one day/monthly within five working days).
  - SBP foreign exchange operations, interventions, swaps/forwards positions and daily outstanding positions: Daily (Within one day).
  - Interbank market transactions (spot and forward) detailed metrics: Daily (Within one day).
  - Aggregate customer transactions of commercial banks (gross sales/purchases): Weekly (Third working day of the following week).
  - Net International Reserves at program exchange rates, breakdown by currency and nostro balances: Quarterly (Seventh working day after quarter end).
  - External financing projections for four quarters (grants and loans by program/project and amounts received/expected in cash): Quarterly (Within 15 days of the end of each quarter).
  - Banking sector indicators, FSIs, liquidity, deferred/restructured loans, holdings of government securities, bank-by-bank (without names but with consistent identifiers): Weekly/Monthly/Quarterly with specified timing ranging from within 5 days to within 60 days depending on the item.
  - Workers’ remittances: Monthly (Within 25 days of the following month).
  - Balance of payments: Detailed monthly export/import and BOP data: Monthly (Within 28 days of the end of each month).
- Ministry of Finance (MOF) submissions:
  - External debt disbursements and stock of outstanding short-term and medium- and long-term external debt (government, SBP, SOEs), arrears, and guarantees: Monthly (Within 25 days of the following month).
  - External financing projections and categorization by program/project (cash and in kind): Quarterly (Within 15 days of the end of each quarter).
  - List of disbursements and amortization payments for external budget financing and grants above US$3 million: Quarterly (Within 25 days of the end of each quarter).
  - Domestic financing and Naya Pakistan Certificates flows by residents and non-residents: Quarterly (Within 25 days of the end of each quarter).
  - Domestic debt composition: Monthly (Within 25 days of the end of each month).
  - T-Bill, PIB, Sukuk bid sheets from domestic auctions (including via PSX): Daily (Within 1 day of each T-Bill and PIB auction).
  - Federal and provincial fiscal operations including outcomes broken down by province: Monthly (Within 30 days of the end of each month).
  - Government guarantees issued and executed, and interest arrears on guaranteed loans: Quarterly (Within 15 days of the end of each quarter).
  - Consolidated general government fiscal operations: Quarterly (Within 45 days) and Annual (Within 180 days).
  - Detailed quarterly financing plan for the coming 12 months (domestic public securities, external financing, SBP profits, short-term borrowing, other schemes, borrowing from SBP): Monthly (One month in advance).
  - Total general government budgetary spending on health and education by federal and provincial governments: Monthly (Within 15 days).
  - Stock of government borrowing from the SBP: Quarterly (Within the first five days of each quarter).
- Pakistan Bureau of Statistics (PBS):
  - SPI, CPI, WPI detailed monthly price indices: Monthly (Within five days of the following month).
  - CPI core inflation index: Monthly (Within 21 days of the end of each month).
- Federal Board of Revenue (FBR):
  - Total revenue collected by tax and customs administrations, by individual tax and social contributions: Monthly (Within seven days of the end of each month).
  - Tax arrears, tax refund claims in arrears, automated GST refunds, large taxpayer unit data, new taxpayers, import data, audits: Monthly/Quarterly with timing generally within seven to 45 days depending on the item.
- Ministry of Water and Power:
  - CD flow report, DISCO collections/losses, electricity consumption and revenues by consumer group, tariffs, anti-theft yields, arrears to IPPs (broken down by IPP): Monthly (Within 25 days from the end of the month).
- Ministry of Petroleum and Natural Resources:
  - Detailed CD flow (receivables) by entity and receiver; gas tariffs, volumes and revenues by consumer category (domestic by slab); UFG losses per entity: Monthly (Within 30 days from the end of the month).
- BISP:
  - Targeted cash transfers coverage (number of beneficiaries paid) and payment by all BISP programs: Monthly (Within 30 days from the end of the month).
- Additional agencies (Ministry of Finance financial statements for key SOEs, Pakistan Public Procurement Authority public procurement through e-PADS): Quarterly submissions with 30-day timing.

### Quantitative performance and indicative targets (selected outcomes and statuses)
- Prior action on undercapitalized bank:
  - Authorities required undercapitalized banks as of end-March 2025 to either return to full compliance with capital requirements or be put under resolution.
  - One private sector bank identified as undercapitalized as of end-March implemented a multi-step recapitalization plan and, based on bank and auditor information, SBP concluded that as of November 28, 2025, the bank is compliant with applicable capital requirements.
- End-September Indicative Targets (ITs) — summary of compliance:
  - Met: floor on net international reserves of the SBP; ceiling on net domestic assets of the SBP; ceiling on SBP’s stock of net foreign currency swaps/forward position; floor on targeted cash transfer spending (BISP); ceiling on aggregate provincial primary budget deficit; floor on consolidated net tax revenues collected by provincial revenue authorities; ceiling on net accumulation of tax refund arrears; ceiling on power sector payments arrears.
  - Not met: floor on net tax revenues collected by the FBR (partly due to an extension of the filing deadline in response to the floods).
  - Continuous ITs met: zero new flow of SBP’s credit to the general government; zero ceiling on accumulation of external public payments arrears of the general government.
- Selected table entries (Billions of Pakistani rupees, unless otherwise indicated; millions of U.S. dollars where noted):
  - Floor on net international reserves of the SBP (millions of U.S. dollars): examples of outturns — end-Sep 2024 Prog. (IT) -12,150 Adjusted Actual -12,709 -11,316 Met; end-Jun 2025 Prog. (IT) -10,200 Adjusted Actual -12,200 -10,078 Met; end-Jun 2025 FY2024/25 Prog. (PC) -7,450 Adjusted Actual -7,359 -6,834 Met.
  - Ceiling on net domestic assets of the SBP (stock): examples of outturns — values such as 15,044, 15,200, 14,387 (Met) across reporting dates.
  - Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): numerous targets met (e.g., -2,500 ... -2,496 Met).
  - Ceiling on general government primary budget deficit (cumulative, excl. grants): multiple reporting periods show targets met (e.g., Prog. (IT) -198 Adjusted Actual -2,724 -3,202 Met).
  - Cumulative floor on targeted cash transfers spending (BISP) (billions of Pakistani rupees): mixed outcomes — several periods Met; end-Jun 2025 Prog. (PC) 599 ... Adjusted Actual 598 Not Met.
  - Cumulative floor on the number of new tax returns (thousands): notable outturns — Prog. (IT) 75 ... Adjusted Actual 621 Met; Prog. (PC) 850 ... Adjusted Actual 986 Met.
  - Indicative target not met examples:
    - Floor on the weighted average time-to-maturity of the local currency domestic debt securities stock (years): Prog. 2.8 ... Adjusted Actual 2.66 Not met (end-Sep 2024); later periods Met.
    - Cumulative floor on general government budgetary health and education spending: Prog. 685 ... Adjusted Actual 535 Not met; subsequent quarters also Not met.
    - Floor on net tax revenues collected by the FBR (cumulative): Prog. 2,652 ... Adjusted Actual 2,564 Not met; repeated Not met across multiple reporting dates.
    - Floor on net tax revenues collected by the FBR from retailers under the Tajir Dost scheme: Prog. 10 ... Adjusted Actual 0.003 Not met; target later discontinued.
  - Future program parameters (end-Mar 2026 / end-Jun 2026 proposed):
    - Example: Floor on net international reserves of the SBP (millions of U.S. dollars): end-Mar 2026 Prog. (IT) -7,000 Adjusted Actual -7,523 -6,674 Met; end-Jun 2026 Prog. (PC) -6,500 Proposed (PC) -5,600 -4,800.
    - Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees): targets such as 200 ... Adjusted Actual 79 Met; proposed increases to 300, 300, 400, 400 across horizons.

### Authorities’ statement: program performance and outlook (selected findings and policies)
- Program status and support:
  - Program remains on track with macroeconomic stabilization consolidating.
  - External financing support acknowledged from bilateral and multilateral partners—particularly the People’s Republic of China, the Kingdom of Saudi Arabia, and the United Arab Emirates.
- Macroeconomic outcomes and outlook:
  - FY25 real GDP growth surpassed forecasts due to industrial expansion and improved business confidence.
  - Pakistan recorded its first current account surplus in 14 years; reserves rose above program benchmarks to US$14.5 billion by June 2025 (2.3 months of import cover).
  - Sovereign risk premiums fell, credit ratings improved, rupee remained stable.
  - Outlook: growth uptick projected for FY26 driven by industry, services, and reforms; inflation may temporarily edge up but expected to return to target levels; current account may shift to a modest deficit.
  - Fiscal discipline to be upheld; authorities prepared to adjust revenue and spending priorities as needed.
  - Public debt to GDP ratio projected to be reduced to about 60 percent by FY30.
  - Highlighted downside risks: natural disasters, global market volatility, commodity price shocks, geopolitical tensions.
- Fiscal policy and revenue mobilization:
  - FY26 budget expands tax base, removes GST and income tax exemptions, aligns withholding taxes, and restrains wage and pension adjustments.
  - Aggregate FY25 tax revenue fell 0.3 percent of GDP short of target; revenue-to-GDP ratio rose from 12.6 percent to 15.8 percent within a year, with federal taxes accounting for a 1.7 percentage point increase.
  - Measures: intensified audits, digital invoicing, comprehensive compliance roadmap by March 2026.
  - Temporary tax exemptions for sugar imports used as targeted response to supply shortages.
  - Provincial revenue capacity strengthened via new agricultural income tax regimes and harmonized GST on services.
- Social protection and public investment:
  - BISP: end-June QPC for BISP spending missed by 0.1 percent due to lower administrative costs; BISP received a substantial budget increase for higher benefits and broader outreach.
  - Missed program target for health and education spending described as marginally missed by less than 01 percent (0.02 percent of the GDP) due to administrative bottlenecks and limited provincial absorption capacity; FY26 increases in expenditure for health and education enacted.
- Energy sector and circular debt:
  - Gas sector: priorities include ongoing tariff adjustments, tighter circular debt oversight, improved RLNG surplus coordination and quarterly reporting.
  - Power sector: debt restructuring of 1,225 billion rupees improved liquidity for social allocations and resolved longstanding financial obligations without extra costs for end users.
  - Strategy shift from flow-containment to structural reforms addressing systemic financial distortions; KPMG preparing comprehensive sector report for Cabinet Committee on Energy.
- Monetary, exchange rate, and financial sector policies:
  - Policy rate held at 11 percent; credit to private sector picking up, especially in manufacturing and car financing.
  - SBP committed to tight, data-dependent policy, monitoring flood impacts, strengthening policy analysis and communication, and improving FX market depth and remittance mobilization.
  - SBP actions on undercapitalized banks: consolidation with solvent counterparts, facilitation of recapitalization, mandate that failing banks present credible recapitalization plans or face formal resolution; supervisory timelines and remedial actions for microfinance institutions.
  - Financial sector reforms advancing: capital market development and AML/CFT effectiveness.
- Structural reform program:
  - Governance and anti-corruption institutions strengthened; GCD report published; asset declaration amendments enacted.
  - SOE governance reforms progressing: board independence, business planning, public service obligation costing.
  - Privatization pipeline advanced for Pakistan International Airlines, First Women Bank, DISCOs, GENCOs; liquidation of non-viable SOEs accelerated.
  - Energy reforms: tariff rationalization, DISCOs and GENCOs privatization, transmission reconfiguration, operational rollout of wholesale electricity market.
  - Improvements to macroeconomic statistics: major surveys upgraded and fiscal operations reporting enhanced.
- Climate resilience and RSF measures:
  - 2025 monsoon floods affected nearly 7 million people, caused over 1,000 deaths, and resulted in losses of PRs 800 billion (0.6 percent of GDP).
  - RSF-supported reforms mainstream climate into budget and investment planning, improve water system resilience, and promote green mobility and energy sector decarbonization.
  - FY26 Finance Act introduced a carbon levy and EV subsidy (RM9 and RM10, met).
  - Further reforms to enhance disaster response and energy efficiency are underway.

*Prepared by the Middle East and Central Asia Department; supplementary information and program tables as provided in the source document.*

### CONCLUSION

### CONCLUSION

### Overview
- Pakistan faces the dual challenge of advancing an ambitious reform agenda while simultaneously responding to urgent natural disasters and pressing social needs.
- Despite these difficulties, the authorities remain steadfast in their commitment to addressing longstanding issues, upholding program integrity, and maintaining the credibility of ongoing reforms.

### Challenges
- Performance shortfalls have occurred amid the combined pressures of reform implementation and disaster and social needs.
- These difficulties have the potential to affect the credibility and progress of ongoing reforms if not managed transparently and effectively.

### Authorities' response and governance practices
- Performance shortfalls are neither obscured nor downplayed.
- Challenges are methodically and transparently reported and subjected to rigorous analysis.
- Credible and actionable remediation strategies have been developed and implemented to address identified gaps.

### Outlook and implications
- The rigorous and transparent approach to managing performance deviations provides a solid foundation for Pakistan’s pursuit of sustainable, inclusive, and climate-resilient growth.

*Source: CONCLUSION, 1pakea2025002-source-pdf - CONCLUSION*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1pakea2025002-source-pdf.pdf_