Pakistan assures IMF of farm input tax hikes, cuts in growth programs

• Selected items for shifting to 18% GST slab.
• Measures related to the completion of the 2nd review of the IMF program.
• Islamabad targets $1.2 billion from EFF and RSF.

ISLAMABAD: Pakistan has pledged to the International Monetary Fund (IMF) to increase tax rates on fertilizers, pesticides and sugar products and move select items to the standard 18% GST slab. The News reported on Friday.

These steps are part of Islamabad’s effort to successfully complete the second review and unlock the third tranche of $1 billion under the $7 billion Extended Fund Facility (EFF), as well as the first $200 million tranche of the $1.4 billion Resilience and Sustainability Facility (RSF).

Further details of the IMF report on Pakistan’s economic performance have been released, with the Fund saying Pakistan has met most of the targets under the loan programme.

In its recent staff report, the IMF projected that the balance of payments gap would continue to widen from the current fiscal year, reaching $3.253 billion by 2029–30, once the existing program is completed. This forecast signals that Pakistan may require another IMF program in the near future.

The staff report states that contingency measures provide significant protection against fiscal risks.

If revenues fall short of expectations by the end of December 2025, Pakistani authorities plan to adopt additional measures to ensure fiscal targets, such as raising excise duties on fertilizers and pesticides by five percentage points, introducing excise duties on high-value sugar items and widening the sales tax base by moving selected items to the normal rate.

They are also willing to reduce or postpone spending in response to lower revenues.

The government also assured the Washington-based lender that it will fully liberalize the sugar sector, continue tariff adjustments in the power sector and reduce system losses and reduce costs. A national installation of point-of-sale systems for 40,000 large retailers will be completed over the next two years, while all four provinces will move towards harmonized sales tax procedures.

The IMF report notes that during the current fiscal year, Pakistan will limit spending on new development programs to 10% of the PSDP and prioritize the completion of ongoing projects worth about Rs2.5 trillion.

From the next fiscal year, more emphasis will be placed on climate-related development programs. Public procurement will shift to digital e-pads, with the Auditor General mandated to submit a compliance report to the President by March 2026.

Under the social protection pillar, the Kafalat cash transfer under the BISP scheme will be increased to Rs 14,500 per quarter from January 2026, while the number of beneficiaries will be expanded to 10.2 million families. Biometric verification for payments will remain mandatory and the long-awaited e-wallet system will be rolled out by June 2026.

On energy reforms, the IMF noted that the government has already decided to shift the annual tariff revision from July to January 2026. Last year, the circular debt stock fell to Rs 1.614 trillion.

By January 2026, the government aims to settle Rs1.2 trillion owed to commercial banks, of which Rs660 billion will go to Pakistan Private Holdings Limited and the rest to the Central Power Purchasing Agency.

The plan also includes the elimination of Rs 128 billion interest payments due on IPPs and keeping the circular debt at zero inflow by FY 2031.

The Fund notes that 5.2 million income tax returns were filed in 2024, with the number expected to reach 7 million in 2025. It recognizes Pakistan’s progress in stabilization, noting improvements in foreign exchange reserves, which have increased to $14.5 billion, and a primary surplus of 1.3% delivered in FY2025.

Fiscal performance remains strong, with the primary surplus at 1.3%, and the IMF report says this surplus was achieved in line with the program target.

According to the report, within a year, foreign exchange reserves increased from $9.4 billion to $14.5 billion, and the reserves are projected to increase further in the coming years.

The IMF says Pakistan has achieved its first current account surplus in 14 years and says the primary surplus target for fiscal year 2025-26 is within reach. Reforms to raise revenue and reduce debt are described as ongoing.

On inflation, the IMF notes that inflation has risen due to food prices following the floods, but says that this inflationary pressure is temporary. Inflation is forecast to ease to 7% this fiscal year. The IMF has emphasized maintaining a tight monetary policy to keep inflation under control. He also says that exchange rate flexibility is essential to absorb shocks.

At the same time, the IMF warns that the 2022 floods highlighted Pakistan’s deep climate vulnerability, having affected seven million people and claimed nearly 1,000 lives, while causing widespread loss of infrastructure, homes and livestock.

The report says that since the floods, the importance of policy reforms and continuity has further increased, and urges stronger climate adaptation measures, improved water management and disaster preparedness.

The global lender also highlighted continued reforms in taxation, governance, state-owned enterprises and energy to ensure long-term growth.

He says Pakistan needs to widen the tax net, simplify tax procedures, ensure data transparency and maintain a tight monetary policy to keep inflation stable. Enhancing foreign exchange market transparency and reducing policy uncertainty is also essential.

The IMF report adds that progress has been made in improving the energy sector through energy tariff adjustments, but further reforms are needed to stabilize the sector.

It also notes that improving governance in state-owned enterprises and the investment environment is important, and that trade and investment reforms are essential for sustainable growth. It says the RSF reforms will help improve flood risk management and water governance.

The report concludes that Pakistan’s economic recovery remains fragile but is moving in the right direction under the current programme. Stronger reforms and consistent policy implementation, he notes, will be critical to reducing debt, raising revenues and sustaining growth in the coming years.