IMF urges Pakistan to maintain tight monetary policy and expand tax regime

• Efforts should be focused on improving the business environment: formal.
• Nigel Clarke says the reforms have helped macroeconomic stability.
• Advises SBP to allow exchange rate flexibility to absorb shocks.

ISLAMABAD: After approving two tranches of a loan totaling $1.29 billion, the International Monetary Fund (IMF) has urged Pakistan to continue a tight monetary policy, expand and simplify its tax regime, adjust electricity and gas tariffs and continue structural reforms to fix the troubled economy. The News reported on Wednesday.

The lender, a day earlier, announced that its Executive Board completed the second review of the Extended Arrangement under the Extended Fund Facility (EFF), allowing the authorities to draw the equivalent of about $1 billion, and the first review of the arrangement under the Resilience and Sustainability Facility (RSF), allowing the authorities to draw the equivalent of about $200 million.

“Accelerating energy sector reforms is critical to ensuring its sustainability and improving Pakistan’s competitiveness. Timely implementation of electricity tariff adjustments helped reduce the stock and flow of cyclical debt,” said IMF Deputy Managing Director and EB Deputy President Nigel Clarke.

Stressing that further efforts should focus on sustainably reducing the cost of electricity generation and distribution and addressing inefficiencies in the power and gas sectors, Clarke said efforts to promote structural reforms should continue to unlock growth potential and attract high-impact private investment.

“The publication of the Governance and Corruption Diagnostic report is a welcome step to accelerate governance reforms. Additional efforts should focus on state-owned enterprise governance reforms and privatization, strengthening the business environment, and improving economic data and statistics,” the IMF official noted.

The IMF said that strong implementation of the IMF program by Islamabad, despite recent devastating floods, has maintained stability and improved financing and external conditions.

Policy priorities remain focused on maintaining macroeconomic stability and promoting reforms to strengthen public finances, enhance competition, increase productivity and competitiveness, strengthen the social safety net and human capital, reform state-owned enterprises and improve public service delivery and the sustainability of the energy sector.

The recent floods highlight the urgent need to move quickly on climate-related reforms to build resilience to the frequent natural disasters Pakistan faces. The authorities are making progress on such reforms, with the support of RSF.

The completion of the revisions allows for the immediate disbursement of approximately $1 billion under the EFF and approximately $200 million under the RSF, bringing total disbursements under the two agreements to approximately $3.3 billion.

The country’s 37-month ETA aims to build resilience and enable sustainable development. Key priorities include consolidating macroeconomic stability through the consistent implementation of sound macroeconomic policies, including rebuilding international reserves and broadening the tax base. promoting reforms to strengthen competition and increase productivity and competitiveness; and reforming state-owned enterprises and improving public service delivery.

Pakistan’s policy efforts under the EDF have achieved significant progress in stabilizing the economy and rebuilding confidence amid a challenging global environment and recent severe floods. Fiscal performance was strong, with a primary surplus of 1.3% of GDP in year 25, in line with targets. Gross reserves stood at $14.5 billion at year-end 25, up from $9.4 billion a year earlier.

The 28-month RSF supports authorities’ efforts to reduce vulnerabilities to natural disasters and build economic and climate resilience. The authorities’ program prioritizes strengthening resilience to natural disasters and strengthening public investment processes. making the use of scarce water resources more efficient, including through better pricing; and strengthening federal-provincial coordination to respond to natural disasters.

“Pakistan’s reform implementation under the EFF helped maintain macroeconomic stability in the face of several recent shocks. Real GDP growth accelerated, inflation expectations remained stable, and fiscal and external imbalances continued to moderate,” observed Clarke.

The IMF deputy managing director further pointed out that in the face of an uncertain global environment, Pakistan needs to maintain prudent policies to further consolidate macroeconomic stability while accelerating the reforms necessary to achieve stronger, private sector-led and sustainable medium-term growth.

“The authorities’ commitment to the FY2026 primary balance target, while meeting urgent aid needs in response to recent severe flooding, is a strong signal of their commitment to building fiscal policy credibility. At the same time, promoting revenue-raising reforms through tax policy simplification and base broadening is key to achieving social sustainability. Human capital development and public investment.”

“An appropriately tight monetary policy stance has been instrumental in reducing inflation and should be maintained to ensure that inflation remains stable within the SBP’s target range. Further improvements in central bank communication will support the effective implementation of monetary policy,” he added.

Further, the IMF official advised that the SBP should continue efforts to deepen the interbank foreign exchange market while allowing exchange rate flexibility to absorb shocks.

Decisive enforcement of fiscal regulation is required to maintain a sound and adequately capitalized financial sector. At the same time, promoting the development of the capital market will contribute to the expansion of public and private sector financing options, he concluded.