The International Monetary Fund (IMF) has emphasized the need for Pakistan to enhance revenue collection by expanding the tax base, eliminating special sector regimes, and shifting the tax burden to sectors that have historically been undertaxed, such as industrialists, developers, and large-scale agriculture. These reforms would improve fairness and efficiency, creating fiscal space for critical investments in human capital, infrastructure, and social services.
The IMF forecasts Pakistan’s economic growth rate to rise to 3.2% in the current fiscal year, up from 2.4% last year. Inflation is expected to drop significantly, with the average rate falling from 23.4% to 9.5%. Unemployment is also anticipated to decrease slightly from 8% to 7.5%.
Following a discussion by the IMF Executive Board, which approved the $7 billion Extended Fund Facility program, Okamura, Deputy Managing Director and Acting Chair, acknowledged that although progress has been made, Pakistan still faces considerable structural challenges. Sustained efforts are needed to improve the country’s resilience and long-term economic prospects.
The IMF called on Pakistan to transition away from a state-led growth model and pursue structural reforms. The Executive Board highlighted the importance of continuing with fiscal consolidation in the fiscal year 2025 budget and beyond. This would involve strengthening fiscal institutions to ensure long-term debt sustainability, particularly given the ambitious growth targets.
According to the IMF, sound economic policies over the past year have played a crucial role in stabilizing the economy, reducing risks, and restoring confidence. Growth has resumed, external pressures have eased with reserves doubling over the past year, and inflation has fallen sharply. However, significant structural challenges remain, requiring ambitious and sustained reforms to boost resilience and economic growth. The EFF-supported program is a vital anchor for these reforms and provides a framework for partner financing.
Maintaining fiscal consolidation through increased revenue generation and prudent expenditure management is essential to achieving fiscal sustainability and reducing the crowding out of private investment. Reforms to broaden the tax base, remove special sector regimes, and impose fairer taxation on previously undertaxed sectors will be key to improving fairness and efficiency. Complementary structural reforms will focus on improving federal-provincial institutional arrangements, tax administration, and public investment management.
Energy sector reforms are also critical. While timely tariff adjustments have stabilized circular debt, cost-side reforms will be necessary to ensure long-term viability and reduced costs for the sector.
The decline in inflation is a welcome development, enabling the State Bank of Pakistan to lower policy rates while maintaining a tight monetary stance. Continued efforts to build up foreign exchange reserves, supported by inflows and a flexible interbank market, will help buffer external shocks, attract financing, and protect economic competitiveness.
Tackling longstanding structural issues, such as low productivity, limited economic openness, resource misallocation, and climate vulnerability, will require faster implementation of reforms. These include advancing state-owned enterprise (SOE) reforms, leveling the playing field for businesses, strengthening governance and anti-corruption institutions, and building climate resilience.
The IMF directors commended Pakistan for improved policymaking over the past year, which has led to renewed economic stability. However, they cautioned that the country still faces high risks and requires continued strong commitment to sound policies and reforms under the Extended Fund Facility. These reforms are critical for creating conditions for inclusive growth and putting debt on a downward trajectory.
The IMF praised efforts to create a fairer tax system and called for additional revenue mobilization by broadening the tax base and enhancing tax administration. This, alongside prudent expenditure management, will allow for increased investments in human capital, infrastructure, and social protection. Directors also emphasized the need to ensure energy sector sustainability through cost-based tariffs and improved debt management.
Directors supported a tight, data-driven monetary policy to keep inflation on target, while allowing the exchange rate to serve as a shock absorber. To safeguard financial stability, Pakistan must strengthen bank regulatory frameworks, monitor risks, and address undercapitalized financial institutions.
The IMF stressed the need for Pakistan to transition from a state-led growth model to a more business-friendly environment with freer competition, reversing the decline in living standards. Reform priorities include reducing trade barriers, restructuring SOEs, and improving governance frameworks. Climate resilience must also be a priority through the implementation of the C-PIMA Action Plan and the National Adaptation Plan.
While acknowledging the improvements in Pakistan’s economic outlook following the $7 billion loan package, the IMF noted that the country’s budget deficit remains a concern. The deficit is expected to shrink to 6.1% of GDP, down from 6.8%, but debt-to-GDP is projected to rise from 69.2% to 71.4%. Foreign exchange reserves are expected to improve, reaching $12.75 billion by the end of the fiscal year, easing external sector pressures.
Expenditure is projected to increase from 19% of GDP in 2024 to 21.4% in 2025, while revenue is expected to rise from 12.6% of GDP in 2024 to 15.4% in 2025, according to IMF estimates.
