ISLAMABAD:
The International Monetary Fund (IMF) on Saturday announced a staff-level agreement with Pakistan to release a $1.2 billion loan, but linked the board meeting to approve the tranche to Islamabad’s ability to collect Rs322 billion in revenue from the lawsuits.
After finding the performance of the Federal Board of Revenue below par, the Washington-based global lender has imposed a “prior action” whose successful implementation will pave the way for the executive meeting, Pakistani authorities said.
The IMF only reached agreement on staff levels after seeking assurances that the government would strictly adhere to pre-war fiscal targets, while the central bank would raise interest rates if inflation exceeds the target range and allow exchange rate flexibility to absorb external shocks arising from the conflict.
According to the earlier action, the FBR would collect additional tax revenue arising from the recent court judgments in the previously disputed cases and where the courts have given decisions by the end of February, according to the government officials.
They said that both the IMF and Pakistan have agreed that an amount of Rs 322 billion would be collected from the court rulings, mainly in the super tax cases. FBR not only collects the principal, but also requires a late payment surcharge of up to 25%.
The government has already collected the majority of the disputed taxes and was confident that the required amount would be generated before Pakistan’s case is circulated to the board for approval. Pakistan hopes that after meeting the previous action, the board can meet in early May to approve the next loan tranche.
Upon approval, Pakistan will access about $1 billion under the EFF and $210 million under the RSF, bringing total disbursements under the two schemes to about $4.5 billion.
The FBR has missed its first eight months of this fiscal year’s original tax target by a margin of Rs640 billion. It has attributed the shortfall to falling collections in the power, oil and gas sectors.
The FBR stated at these meetings that during the first half of the fiscal year, about half of the deficit was offset by higher oil tax collection and provincial cash surpluses, lower than expected flood response costs and repayment of loans from state-owned enterprises stemming from the power sector’s circular debt settlement.
Amid growing tax disputes and the FBR’s struggle to manage the cases, Prime Minister Shehbaz Sharif has constituted a task force to improve the FBR’s legal affairs, according to a release.
The task force will revamp and strengthen the FBR’s framework for revenue cases at all levels, including initial rulings by the Revenue Department, the Commissioner, the Collector Appeals, the Inland Revenue and Customs Appellate Tribunals, the High Courts, the Supreme Court and the Federal Constitutional Court.
The Task Force will be led by Mr. Shad Mohammad and include senior and the prominent constitutional and tax lawyer Hafiz Ahsaan Ahmad Khokhar, Advocate Supreme Court, highlighting the seriousness of the government’s initiative.
Members are required to conduct a comprehensive assessment of the existing legal wings covering workload management, human and logistical resources and overall operational capacity. The review will focus on identifying structural weaknesses, procedural bottlenecks and systemic inefficiencies that contribute to protracted litigation and delayed resolution of tax and customs disputes.
A key component of the review will be the Litigation Management System (LMS), which has faced challenges in integrating with appellate and superior courts.
The task force is expected to recommend reforms that ensure a more efficient, data-driven and institutionally coordinated approach to litigation.
The IMF is now also focusing on weaknesses in the FBR’s internal governance, signaling concern that the government’s efforts to strengthen the tax machinery have yet to yield fully effective results.
Middle East war will affect Pakistan
“However, the conflict in the Middle East casts a cloud over the outlook, as volatile energy prices and tighter global financial conditions risk putting upward pressure on inflation and weighing on growth and the balance of payments,” the IMF said.
In contrast, Pakistan’s finance ministry has forecast inflation to rise only marginally by 0.3%, remain within target, economic growth to remain around 4% and the current account deficit to remain within $2 billion despite global oil price shocks.
Iva Petrova, the IMF’s chief of mission, said the Pakistani authorities “remain committed to pursuing sound and prudent macroeconomic policies to preserve recent progress in macro-financial stabilization, while deepening structural reforms to accelerate growth and strengthen social protection to mitigate the impact of volatile energy prices”.
The fund’s assessment contrasts with forecasts from Pakistan, which has said the war would have no major economic impact.
No relaxation at the finish line
The IMF did not ease the pre-war primary budget surplus target of 1.6% of GDP despite the State Bank of Pakistan previously indicating that the target may be difficult to achieve due to the FBR’s weak tax collection. The foundation also maintained strict fiscal targets for the next financial year.
Petrova said the authorities remain committed to ensuring a sustainable fiscal position and reducing the still high public debt burden in the medium term.
“Efforts continue to meet the FY26 primary budget surplus of 1.6% of GDP and target an underlying primary balance of 2% of GDP in FY27, supported by measures to broaden the tax base and strengthen expenditure discipline,” she said.
She also pointed to efforts to increase cost-sharing between the federal and provincial governments, as Islamabad has requested the provinces to share the burden of fuel subsidies, which had already risen to Rs125 billion as of April 3.
“There are efforts to improve fiscal burden sharing between federal and provincial governments and to strengthen public financial management,” Petrova said.
The IMF emphasized that a steady implementation of fiscal reforms remains essential to achieving the program’s goals.
Petrova said the State Bank of Pakistan remains committed to keeping inflation within its target range and is ready to raise interest rates if price pressures intensify, including due to spillover effects from global food and fuel price volatility. Pakistan has set an inflation target of 7.5%, which the finance ministry believes remains achievable despite fuel price shocks.
The IMF said exchange rate flexibility should continue to act as the primary buffer against spillovers from the Middle East conflict, while ensuring banks can finance imports and external payments amid potential balance of payments pressures. The fund reiterated that Pakistan must achieve viability in the energy sector and prevent a recurrence of circular debt.
“It is crucial that sustainability is maintained through timely tariff adjustments that ensure cost recovery,” Petrova said, adding that energy price subsidies should be avoided due to their high fiscal costs and distortive effects.
The IMF also highlighted structural reforms, saying progress on state-owned enterprise reforms and the privatization agenda remain key to reducing the state’s financial footprint and improving service delivery.
The authorities are also strengthening institutional capacity and intensifying efforts against corruption to promote inclusive growth and ensure a level playing field for businesses and investors.
