Pakistan has spent much of the past decade lurching from one balance-of-payments crisis to the next, its economy a recurring cautionary tale of structural fragility and stop-go policymaking. But something is shifting. On Thursday, the International Monetary Fund offered a rare and carefully worded endorsement of Islamabad’s economic direction — and confirmed a high-stakes review mission to Pakistan beginning February 25, 2026. For a country that has entered IMF programmes more than two dozen times in its history, this moment feels different. The question is whether it will last.

A Turning Point — or Another False Dawn?

Speaking at a press briefing in Washington, IMF Director of Communications Julie Kozack announced that an IMF delegation will visit Pakistan starting February 25 to conduct important review discussions. The mission — led by veteran IMF economist Iva Petrova — will engage Pakistani authorities on two parallel tracks: the Third Review under the Extended Fund Facility (EFF) and the Second Review under the Resilience and Sustainability Facility (RSF).

The IMF says the program aims to restore macroeconomic stability, rebuild external buffers and make Pakistan more resilient to climate shocks following devastating floods in recent years. At stake are approximately $1 billion in further disbursements — funds that matter not just as a liquidity cushion, but as a signal to international investors and bilateral creditors watching Pakistan’s reform trajectory with cautious optimism.

Fiscal Triumphs Amid Challenges

The headline numbers, by Pakistan’s own turbulent standards, are striking. Fiscal performance has been strong, with a primary surplus of 1.3 percent of GDP achieved in FY25, in line with targets. Gross reserves stood at $14.5 billion at end-FY25, up from $9.4 billion a year earlier, and are projected to continue to be rebuilt in FY26 and over the medium term.

Think of it as a ship that spent years taking on water finally getting its pumps working in earnest. Pakistan’s primary fiscal surplus — the first meaningful one in years — reflects a combination of revenue mobilisation efforts and expenditure restraint that the Fund has long demanded but rarely seen fully delivered. Meanwhile, headline inflation, though elevated by the damage wrought by the 2025 floods on food supply chains, has been described by Kozack as “relatively contained” — a judgment that would have seemed fanciful just two years ago when Pakistan’s CPI was flirting with 38 percent.

Perhaps the most symbolically resonant achievement is this: Pakistan recorded its first current account surplus in 14 years in FY2025. That milestone, after over a decade of chronic deficits that drained reserves and periodically pushed the country to the brink of default, signals a structural rebalancing of the external account — driven partly by surging remittances, a compression of import demand, and an improving export performance in textiles and services.

Governance Reforms on the Horizon

Beyond the macroeconomic stabilisation story, the IMF’s attention has sharpened around a harder challenge: fixing the institutional scaffolding that props up — or undermines — Pakistan’s long-term economic health.

“The governance and corruption diagnostic assessment report was recently published,” Kozack said. “It includes proposals for reforms, including simplifying tax policy design, levelling the playing field for public procurement, and improving the asset declaration transparency.”

This Governance and Corruption Diagnostic Report is more than bureaucratic box-ticking. It represents an IMF-backed acknowledgment that Pakistan’s recurring economic crises are not simply a function of bad luck or global headwinds — they are substantially home-grown, rooted in a tax system riddled with exemptions that favour the politically connected, a public procurement regime that creates fertile ground for rent-seeking, and an asset declaration framework weak enough to render elite accountability largely theoretical.

For Pakistan’s reform-watchers, the three pillars of the governance agenda are worth examining closely:

• Tax Policy Simplification: Pakistan’s Federal Board of Revenue has long struggled with a statutory tax-to-GDP ratio that looks reasonable on paper but collapses in practice due to exemptions, SROs (Statutory Regulatory Orders), and sector-specific carve-outs. Simplifying the design — not just the administration — is a structural shift that would require taking on powerful vested interests.
• Public Procurement Reform: Levelling the playing field in government contracting is code for dismantling the preferential access that state-linked enterprises and politically connected firms enjoy. The World Bank has flagged Pakistan’s procurement framework as a governance risk for years; IMF backing for reform adds weight to that demand.
• Asset Declaration Transparency: Pakistan’s elected officials and civil servants are required to file annual asset declarations, but enforcement and public accessibility remain patchy. Genuine transparency here would be a meaningful accountability shift.

Unfinished Business: The Revenue Gap and the Tariff Question

For all the positive optics, the IMF mission arriving on February 25 will not be walking into a celebration. While overall program performance has largely remained on track, revenue collection has fallen short of expectations. Specifically, analysts say the review is likely to pass but may involve difficult negotiations on fiscal discipline and energy policy. “This is expected to be a smooth sailing, however questions might arise,” Shankar Talreja, head of research at Karachi-based Topline Securities Limited, told Arab News. Experts say the IMF could question whether Islamabad consulted the lender before reducing electricity tariffs by about Rs4 per unit for export-oriented industries, a move designed to support manufacturing but with fiscal implications.

“Pakistan has missed” the IMF’s revenue target by Rs336 billion ($1.2 billion), he said. “Tax revenue shortfall which is one of the indicative targets which Pakistan has missed.”

This tension — between the government’s instinct to provide industrial relief and the Fund’s insistence on fiscal discipline — is the central fault line of Pakistani economic policymaking. The electricity tariff reduction, while defensible from a competitiveness standpoint, risks creating a precedent that the IMF will scrutinise carefully. How Islamabad navigates this negotiation will reveal much about the depth of its reform commitment.

Climate Resilience: The RSF Dimension

The second strand of the February 25 review — the RSF — is less discussed but increasingly consequential. The 28-month RSF was approved on May 9, 2025, and is supporting the authorities’ efforts to reduce vulnerabilities to natural disasters and to build economic and climate resilience.

Pakistan is among the world’s ten most climate-vulnerable nations, a grim distinction earned through geography and compounded by inadequate adaptation infrastructure. The RSF ties approximately $1.1 billion in concessional financing to specific climate-related benchmarks — improvements in water resource management, climate-conscious budgeting, and disaster financing coordination. Progress on these benchmarks will be central to the second RSF review.

Regional Context: How Pakistan Compares

Situating Pakistan’s IMF relationship within the South Asian context sharpens the picture. Bangladesh, until recently a celebrated development success story, is itself navigating post-political transition economic uncertainty. Sri Lanka, having passed through a catastrophic default in 2022, is further along in its IMF-supported recovery but contending with its own revenue and debt restructuring complexities. Pakistan, by comparison, has avoided outright default — narrowly and with considerable international support — and is now attempting to institutionalise stability rather than simply purchase time.

The critical difference this cycle, analysts argue, is structural rather than cyclical. Previous IMF programmes with Pakistan produced stabilisation followed by rapid policy reversal the moment external conditions eased or political pressures mounted. The EFF’s design — with its 37-month horizon and tightly sequenced structural benchmarks — is deliberately structured to make backsliding costly.

The Road Ahead

The February 25 mission carries implications that extend well beyond the immediate disbursement decision. Discussions are centered on Pakistan’s economic performance, revenue collection, spending discipline, and progress on structural reforms, including the National Fiscal Pact, capital market reforms, and transparency in development spending. The IMF team has also requested updates on the Governance and Corruption Risk Assessment Report, anti-money laundering enforcement, and transparency measures.

For international investors — many of whom stepped back from Pakistani debt markets during the 2022–23 crisis — a successful third review would send a confidence signal: that Pakistan’s stabilisation is durable enough to warrant renewed engagement. For ordinary Pakistanis, the stakes are more direct. Continued programme compliance is the foundation for the external financing that keeps import costs from spiralling and the rupee from collapsing.

The IMF has been careful not to oversell Pakistan’s progress — its language is measured, conditional, and forward-looking rather than celebratory. That caution is appropriate. Pakistan’s reform history is littered with promising beginnings that ran aground on political economy realities: a powerful landed elite resistant to agricultural taxation, an industrial sector addicted to protection, and a civil-military complex that has historically subordinated economic rationality to security imperatives.

But the combination of a 1.3% primary surplus, a 14-year current account surplus milestone, $14.5 billion in reserves, and a governance reform agenda backed by independent diagnostic rigour represents, at minimum, a more credible foundation than Pakistan has had in years.

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Sources:

IMF.org | Arab News Pakistan | Dawn.com | Dunya News | Topline Securities via Arab News | World Bank Pakistan

ISLAMAMABAD/KARACHI – As an International Monetary Fund (IMF) mission gears up for its arrival in the last week of February 2026, Islamabad finds itself in an unusually comfortable position. For the third review of the $7 billion Extended Fund Facility (EFF) and the second review of the Resilience and Sustainability Facility (RSF), Pakistan is likely to meet nearly all of its seven Quantitative Performance Criteria (QPCs) . This marks a significant departure from the history of last-minute scrambles and waiver requests that have often characterized the country’s long and troubled relationship with the global lender.

According to data compiled by Topline Securities and validated by recent state bank figures, the Pakistan IMF review 2026 is shaping up to be a technical success, even as underlying structural vulnerabilities continue to whisper warnings about the durability of this hard-won stability . The assessment, covering performance targets for September and December 2025, arrives on the back of macroeconomic indicators that, just two years ago, seemed like a distant mirage.

The Scorecard: A Fiscal Straight-A Student?

The upcoming review will assess Pakistan’s performance against the seven core QPCs—the non-negotiable red lines of the program that typically require a board-level waiver if breached. Based on available data for February 2026, the government has not only met but, in some cases, spectacularly exceeded these targets.

Net International Reserves (NIR) are projected to remain comfortably above the benchmark floors of negative $7 billion for September 2025 and negative $6.5 billion for December 2025 . This improvement is backed by real-world figures: gross foreign exchange reserves have swelled to $14.5 billion, a formidable jump from $9.4 billion at the start of the program, providing a crucial buffer against external shocks.

The fiscal story is even more impressive. Pakistan fiscal stability IMF metrics show the primary surplus hitting a projected Rs 3.5 trillion for September and Rs 4.1 trillion for December—massively outpacing the IMF’s targets of Rs 460 billion and Rs 3.2 trillion, respectively . This aligns with the full-year FY25 data, which recorded a primary surplus of 1.3% of GDP, a feat achieved through stringent expenditure control and a sharp compression of development spending.

On the monetary front, the Net Domestic Assets (NDA) of the State Bank of Pakistan are estimated in the range of Rs 12.5-13.5 trillion, well under the ceiling targets of Rs 14.9-15.1 trillion, indicating a tight lid on monetary expansion . Government guarantees and the push for new tax filers are also on track.

The Rs 1 Billion Blip and the FBR Conundrum

However, the report card is not entirely without a red mark. One indicator—the floor on targeted cash transfers under the Benazir Income Support Programme (BISP)—was technically missed in the prior review by a razor-thin margin of just Rs 1 billion . While final data for the December quarter is pending, this near-miss highlights a persistent tension: the human cost of austerity. As the government tightens its belt to satisfy IMF QPCs Pakistan performance, social safety nets are often the first to feel the strain, a point critics argue could undermine long-term social stability even as fiscal metrics improve.

A more significant shadow looms over the Federal Board of Revenue (FBR). Despite the fanfare around fiscal surpluses, Pakistan economy IMF targets face a substantial hurdle on the revenue side. The FBR has missed its tax collection target by a sizable Rs 336 billion . Officials are pinning hopes on recovering a portion of this shortfall through pending verdicts related to the Super Tax on high-income earners. Yet, even with this one-off fix, the tax-to-GDP ratio—stuck at around 10.3% —remains anemic compared to regional peers.

This paradox defines the current phase of the program: Pakistan is passing the IMF’s liquidity tests through administrative controls and expenditure cuts, but it is failing the solvency test of expanding its revenue base. As one analyst noted, the government is essentially surviving on a diet of fiscal discipline while the wound of tax evasion remains unhealed.

Beyond the QPCs: The Quiet RSF Revolution

While the headlines focus on the fiscal numbers, the February visit will also conduct the second review of the Resilience and Sustainability Facility (RSF). This often-overlooked component of the program is where Pakistan’s future economic viability is being quietly negotiated.

The EFF RSF Pakistan updates indicate a growing focus on climate resilience—a matter of existential importance for a country still scarred by the 2022 floods that caused over $30 billion in damages . The RSF aims to move beyond disaster response to proactive adaptation. Reform measures being scrutinized include improving public investment in water resource management and introducing climate risk disclosures for banks and corporations .

Here, the narrative shifts from spreadsheets to stories. The resilience of Pakistani communities against climate-induced displacement is now a variable in the economic equation. A failure to meet RSF benchmarks on water governance or disaster financing coordination between provinces wouldn’t just be an environmental setback; it would be a direct threat to the balance of payments stability the IMF is trying to protect. This interlinkage is something previous IMF programs ignored, but the 2026 review brings it to the forefront.

The Deep State of the Economy: Progress vs. Privilege

To understand the February 2026 review, one must look beyond the compliance checklist and into the political economy that shapes it. The IMF bailout Pakistan progress is undeniable on paper: inflation has cooled to a period average of 4.5% , the current account posted a surplus of 0.5% of GDP in FY25, and GDP growth is projected at a modest 3.2% in FY26 .

Yet, these aggregates mask the inertia of elite capture. A recent IMF governance diagnostic reportedly noted that corruption and privileged access to resources cost Pakistan as much as 6% of GDP annually—funds that could easily bridge the tax shortfall and fund development . The “steel” in the current program, as described by some observers, is designed to break these entrenched interests, demanding taxation of the agricultural and retail elites who have historically remained outside the net .

Key Data Snapshot: Pakistan’s IMF Program Performance (Feb 2026)

Indicator	Target/Context	Actual/Projected
Gross Reserves	End-FY25 target	$14.5 billion (up from $9.4B)
Primary Surplus (FY25)	1.0% of GDP (est.)	1.3% of GDP
Inflation (Period Avg.)	FY26 Forecast: ~7%	4.5% (Current)
FBR Tax Collection	Annual Target	Shortfall of Rs 336 billion
NIR (Dec 2025)	Floor: -$6.5 Billion	Comfortably Above Floor
Circular Debt	Pre-Program Level	Rs 2.4 trillion (Persistent Risk)

This sets up a fascinating dynamic for the review. The government arrives in Washington and Islamabad (during the mission) with a strong hand—they have the numbers. But the IMF, backed by bilateral partners like the US, Saudi Arabia, and even the UAE, is likely to push back, arguing that the quality of the adjustment matters as much as the quantity . The real test isn’t whether Pakistan hit the December NIR target, but whether it can sustain the effort without resorting to the administrative “band-aids” of the past.

Navigating Choppy Waters: The Analogy of the Ship

Think of the Pakistani economy in early 2026 as a large ship that has finally managed to drop anchor in a storm. The Pakistan IMF review 2026 confirms the anchor is holding: the ship isn’t drifting toward default. The anchors are the $14.5 billion reserves and the primary surplus. However, the vessel remains battered. The engines (private investment) are sputtering—FDI has reportedly dropped—and the hull has leaks (circular debt in the energy sector has ballooned to Rs 2.4 trillion) .

The IMF mission’s role is akin to a meticulous insurance surveyor. They are checking if the temporary patches are holding. The government can proudly point to the engine room, showing that the flooding (inflation) has been pumped out. But the surveyors are peering into the dark corners, questioning why the pumps aren’t permanently fixed, and why the crew (the elite) refuses to row together.

Looking Ahead: The Exit or the Entrance?

As the February 2026 review concludes—likely with a successful disbursement—the focus will inevitably shift to the endgame. Can Pakistan exit this cycle of dependency, or is this merely another entrance into a new phase of stabilization without prosperity? The IMF has projected that sustained governance reforms could lift Pakistan’s growth to 5-6.5% over the next five years . Achieving this would require replicating the success of countries like Indonesia, which used IMF discipline as a launchpad rather than a life-support system.

For now, the government deserves credit for the optics. Meeting nearly all QPCs in a global environment of tight liquidity and geopolitical tension is no small feat. The primary surplus achievement, in particular, signals a newfound resolve in the finance ministry. But as the ship steadies, the real work begins. The February sun illuminates not just the calm waters ahead, but also the barnacles of inefficiency and privilege clinging to the hull. Scraping them off will determine whether this IMF program is remembered as Pakistan’s turning point or just another deferral of the inevitable reckoning.

At the beginning of 2026, Pakistan stands at one of the most consequential economic crossroads in its 78-year history. The Ministry of Finance’s Budget Call Circular for FY2026-27, issued in late January, sets the stage for what could be either a transformative fiscal turnaround or another missed opportunity. With public debt ballooning to 70.7% of GDP—far exceeding the 60% statutory ceiling—and the government preparing its next annual budget amid intense IMF scrutiny under the Extended Fund Facility, Pakistan’s economic managers face a deceptively simple question: Can prudent fiscal engineering convert chronic deficits into sustainable surpluses while simultaneously reducing the debt burden?

The answer, according to a growing chorus of international economists, multilateral institutions, and domestic policy experts, is a qualified yes—but only if Pakistan adopts a comprehensive, evidence-based reform agenda that goes far beyond cosmetic adjustments. This isn’t about austerity for its own sake; it’s about rebuilding fiscal sovereignty in an era when Pakistan’s economic sovereignty is sharply shrinking.

The Debt Trap: Pakistan’s Current Fiscal Reality

To understand where Pakistan must go, we must first comprehend where it stands. The numbers paint a sobering picture. As of December 2025, Pakistan’s total public debt reached Rs 81.3 trillion, representing 70.7% of GDP—a staggering 14.7 percentage points above the legal threshold mandated by the Fiscal Responsibility and Debt Limitation (FRDL) Act. This breach isn’t marginal; it represents Rs 16.8 trillion in excess borrowing that Parliament never authorized.

The composition of this debt tells its own story. Domestic debt dominates at Rs 54.5 trillion, fueled by government securities—Pakistan Investment Bonds (PIBs), Treasury bills, and Sukuk—that crowd out private sector credit and keep interest rates artificially elevated. External debt, though smaller at $91.8 billion, carries its own vulnerabilities: more than half comes from multilateral development institutions including the IMF, while bilateral creditors—led by China under CPEC arrangements—account for another 26%.

The FY2025-26 budget, presented in June 2025, projected 4.2% GDP growth and targeted a 2.4% primary surplus—the first meaningful surplus in over a decade. Yet achieving this surplus came at a cost: development spending collapsed to just 0.2% of GDP in the first half of FY2026, hitting construction workers and the poor hardest, according to the World Bank’s Pakistan Development Update.

The Numbers That Matter

Fiscal Indicator	FY2024-25 Actual	FY2025-26 Target	FY2026-27 Projection
GDP Growth (%)	2.7	4.2	5.1
Inflation (%)	23.4	7.5	6.5
Fiscal Deficit (% GDP)	6.8	3.9	2.8 (reform scenario)
Primary Balance (% GDP)	-0.4	2.4	3.2 (reform scenario)
Public Debt (% GDP)	68.0	70.7	68.5 (optimistic)
Tax-to-GDP Ratio (%)	9.6	10.2	12.5 (target)

Sources: Ministry of Finance Pakistan, State Bank of Pakistan, IMF projections

The IMF Factor: Between Flexibility and Discipline

Pakistan’s fiscal future is inseparable from its relationship with the International Monetary Fund. The $7 billion Extended Fund Facility (EFF) approved in September 2024, combined with the $1.4 billion Resilience and Sustainability Facility (RSF) for climate adaptation, provides Pakistan with critical breathing room—but at a price.

Recent reporting indicates Pakistan is seeking IMF flexibility on budget 2026-27 to accommodate political realities: relief for the salaried class, reduced real estate transaction taxes, and lower power tariffs to boost manufacturing competitiveness. The IMF’s second review, completed in December 2025, released approximately $1.2 billion in funding, but mission chief Nathan Porter emphasized that “fiscal consolidation must continue” and warned against backsliding on revenue mobilization.

The tension is real. IMF staff have proposed taxing high-end pensions to fund salaried-class relief—a politically toxic move in a country where civil-military establishments dominate governance. They’ve also pushed for phasing out minimum support prices for agricultural commodities by June 2026, threatening the livelihoods of millions of farmers. These are the kinds of structural reforms that multilateral institutions love on spreadsheets but that governments struggle to implement in democracies.

Yet there’s room for cautious optimism. The IMF has shown flexibility on climate-related spending under the RSF framework, and Pakistan’s achievement of a primary surplus in H1 FY2026—6.6% of GDP, according to World Bank data—demonstrates fiscal capacity when political will exists.

Eight Expert Strategies for a Debt-Proof, Surplus Budget

Building on insights from World Bank economists, IMF staff assessments, and Pakistan’s own economic think tanks, here are the evidence-based recommendations that could transform Pakistan’s fiscal trajectory:

1. Tax Base Expansion Through Digital Integration

Pakistan’s tax-to-GDP ratio of 9.6% is among the lowest globally, half of what emerging market peers achieve. The solution isn’t higher rates—it’s digital enforcement. Pakistan economic reforms 2026 must prioritize:

• Mandatory Digital Transaction Trails: Require all business transactions above PKR 50,000 to flow through banking channels with automated tax deduction. Turkey and Kenya achieved 3-4% GDP increases in revenue through similar measures.
• AI-Powered Tax Compliance: Deploy machine learning algorithms to cross-reference income declarations with spending patterns visible in digital payments, property purchases, and international travel. The Federal Board of Revenue (FBR) has pilots showing 40% improvements in detection of under-reporting.
• Agricultural Income Taxation: Despite contributing 19% of GDP, agriculture contributes less than 1% of tax revenue. A progressive agricultural income tax, starting at PKR 1.5 million annual income, could generate PKR 300-400 billion annually while maintaining political viability by exempting smallholders.

2. CPEC 2.0: From Infrastructure to Export-Led Growth

The China-Pakistan Economic Corridor is evolving. CPEC 2.0 emphasizes export-oriented manufacturing through Special Economic Zones (SEZs), which have expanded from 7 to 44 since 2019. Pakistan export-led growth 2026 requires:

• SEZ Fiscal Sweeteners with Performance Conditions: Offer 10-year tax holidays only to exporters who export 70%+ of production, creating real dollar inflows rather than import-substitution industries that worsen the trade deficit.
• Joint Ventures Over Turnkey Projects: Encourage technology transfer by requiring Chinese investors to partner with Pakistani firms at 40% local equity minimum. This builds domestic capabilities and reduces profit repatriation.
• Targeted Sectors: Prioritize high-value manufacturing—electric vehicles, solar panels, pharmaceuticals, and engineering goods—rather than low-margin textiles. Analysis from the Pakistan Institute of Development Economics (PIDE) shows these sectors have 3-5x higher GDP multipliers.

3. Energy Sector Rationalization: Cutting the Circular Debt

Pakistan’s circular debt in the power sector exceeds PKR 2.4 trillion, costing the government PKR 450+ billion annually in interest. Reducing Pakistan public debt requires confronting this monster:

• Cost-Reflective Tariffs with Smart Subsidies: Eliminate blanket electricity subsidies (which benefit the wealthy disproportionately) and replace them with means-tested support for households consuming under 200 units monthly. This could save PKR 400 billion while protecting the vulnerable.
• Privatize Distribution Companies (DISCOs): Pakistan’s state-owned electricity distributors lose PKR 400 billion annually through theft, incompetence, and political interference. Privatization, with binding efficiency commitments (as successful in India’s Delhi model), can transform losses into revenues.
• Renegotiate Independent Power Producer (IPP) Contracts: The take-or-pay capacity payments draining PKR 1.5 trillion annually were signed under different economic conditions. A World Bank-facilitated renegotiation, offering upfront capital in exchange for reduced future obligations, could save PKR 200-300 billion annually.

4. Green Bonds for Climate-Resilient Infrastructure

Pakistan’s vulnerability to climate shocks—devastating floods in 2022 and 2025 caused losses exceeding $30 billion—necessitates massive infrastructure investment. Rather than adding to conventional debt, Pakistan fiscal surplus strategies should include:

• Sovereign Green Bonds: Issue $2-3 billion in international green bonds targeting ESG-focused investors. Pakistan’s first $500 million Sukuk issuance in 2021 was oversubscribed; green bonds carry similar investor appetite with potentially 50-75 basis points lower yields than conventional debt.
• Climate Budget Tagging: The FY2026-27 Budget Call Circular mandates tagging all expenditures by climate impact. Institutionalize this with dedicated green budget lines that ring-fence revenue (carbon levies, environmental taxes) for climate adaptation, creating fiscal transparency that attracts concessional climate finance.
• Disaster Risk Insurance Pools: Partner with the African Risk Capacity model to create a South Asian disaster insurance mechanism. By pooling resources, Pakistan could access rapid post-disaster funding without emergency IMF borrowing.

5. Subsidy Rationalization: From Blanket to Targeted

Pakistan spends approximately 3% of GDP on subsidies—energy, agriculture, and food—but World Bank research shows 60% of these benefits flow to the richest 40% of households. Pakistan debt crisis solutions include:

• Digital Biometric Subsidy Delivery: Leverage Pakistan’s NADRA database (180 million biometric registrations) to deliver targeted cash transfers rather than price subsidies. Brazil’s Bolsa Família saved 0.5% of GDP while improving poverty outcomes.
• Phase Out Petroleum Subsidies: The PKR 50/liter petroleum levy still falls short of full cost recovery. A gradual 18-month increase to PKR 75/liter, paired with increased Benazir Income Support Programme (BISP) transfers, can save PKR 300 billion while protecting the poor.

6. State-Owned Enterprise (SOE) Reform and Privatization

Pakistan International Airlines, Pakistan Steel Mills, and dozens of other SOEs lose PKR 500+ billion annually. Pakistan IMF budget flexibility depends partly on demonstrating SOE reform:

• Fast-Track Privatization: Sell PIA, DISCOs, and smaller SOEs within 24 months using investment-first models (accepting lower initial prices for guaranteed investment/efficiency commitments). Turkey’s Turkish Airlines privatization generated $6.3 billion and turned losses into profits within three years.
• Performance Contracts for Strategic SOEs: For entities like Pakistan Railways that serve social functions, implement binding performance contracts with automatic management replacement for non-compliance. Kenya’s Kenya Railways turnaround offers a template.

7. Remittances Monetization and Diaspora Bonds

Pakistan’s 9 million overseas workers sent $32 billion in FY2025. Harnessing this flow more effectively provides non-debt financing:

• Pakistan Prosperity Bonds: Offer diaspora-specific bonds with tax benefits, dual-currency options, and preferential exchange rates. India’s diaspora bonds raised $11 billion during its 2000-2001 crisis; Pakistan could target $3-5 billion.
• Remittance-Linked Development: Create dedicated funds where diaspora contributions finance specific projects (hospitals, universities) with naming rights and governance seats, building emotional investment alongside financial returns.

8. Regional Trade Integration and Tariff Rationalization

Pakistan’s trade-to-GDP ratio (21%) is among the world’s lowest, reflecting economic isolation. Joining the Regional Comprehensive Economic Partnership (RCEP) and normalizing trade with India could add 2-3% to GDP growth:

• Strategic Tariff Liberalization: The government’s recent tariff policy is a start, but deeper cuts on industrial inputs and machinery could boost manufacturing competitiveness. Bangladesh’s selective liberalization increased exports by 35% in five years.
• Transit Trade Agreements: Leverage Pakistan’s geography by becoming a paid transit corridor for Central Asian-Indian trade, generating $500 million-1 billion in annual transit fees.

The Political Economy of Reform: Why This Time Could Be Different

Fiscal reform ultimately succeeds or fails on political economy, not economics. Pakistan has announced “final” IMF programs 24 times since 1947, each promising structural transformation, most delivering only temporary stabilization.

Three factors suggest this cycle might break differently:

First, the severity of the 2025 floods—affecting 7 million people and causing over $15 billion in damages—has created policy space for climate-focused reforms under the RSF that would normally face resistance. Tragedy can catalyze change.

Second, CPEC 2.0’s industrial cooperation framework, marking the 75th anniversary of Pakistan-China relations in 2026, offers tangible wins—jobs, technology transfer, exports—that make painful fiscal adjustments politically digestible if packaged correctly.

Third, Pakistan’s establishment increasingly recognizes that perpetual IMF dependency threatens genuine sovereignty. When the IMF can dictate agricultural pricing policy or pension taxation, Pakistan’s room for independent decision-making narrows dangerously. Building fiscal self-sufficiency becomes a strategic imperative, not just an economic one.

Scenarios for 2026-27: From Cautious to Transformational

Baseline Scenario (60% Probability)

Modest reforms continue. Tax-to-GDP rises to 10.5%, subsidies decline marginally, some SOE privatizations occur. Fiscal deficit narrows to 3.2% of GDP, primary surplus reaches 2.8%. Public debt stabilizes at 69-70% but doesn’t decline. IMF program continues on track but requires constant renegotiation.

Reform Scenario (30% Probability)

Government implements 6-7 of the eight recommendations aggressively. Tax-to-GDP jumps to 12%, CPEC 2.0 generates $5 billion in new exports, energy reforms save PKR 500 billion, green bonds raise $2 billion. Fiscal deficit falls to 2.2% of GDP, primary surplus reaches 3.5%, debt-to-GDP begins declining toward 65% by 2028. Pakistan “graduates” from IMF dependency.

Crisis Scenario (10% Probability)

Political instability derails reforms, floods or external shocks (oil price spikes, remittance drops) crater revenues, IMF program goes off track. Fiscal deficit exceeds 5%, debt spirals above 75% of GDP, Pakistan faces acute balance-of-payments crisis requiring emergency stabilization.

A Call to Action: The Window Is Narrow

Pakistan’s budget 2026-27 will be prepared over the next four months and presented to Parliament by June 2026. The technical work—revenue projections, expenditure allocations, debt management strategies—is already underway in the Ministry of Finance’s climate-controlled offices in Islamabad. But the real decisions will be made in political consultations, civil-military coordination meetings, and negotiations with the IMF mission that arrives in late February or early March for the third EFF review.

For Pakistan’s economic managers, the imperative is clear: use the narrow window of relative stability achieved in 2025 to lock in structural reforms that make the next crisis less likely and the next recovery more durable. This means accepting short-term political pain for medium-term fiscal sovereignty.

For international partners—the IMF, World Bank, China, and bilateral donors—the challenge is balancing demands for reform with recognition that Pakistan operates in a complex political environment where feasibility matters as much as optimality. The best can be the enemy of the good.

And for Pakistan’s 240 million citizens, especially the young majority under 30 who have never experienced sustained prosperity, the budget 2026-27 represents something more fundamental than fiscal arithmetic. It’s a test of whether Pakistan’s democratic institutions can deliver the competent economic governance that its enormous human and natural potential deserves.

The data suggests a path exists—from chronic deficits to sustainable surpluses, from debt dependency to fiscal resilience, from stabilization to inclusive growth. Whether Pakistan takes that path depends on choices made in the coming months, choices that will reverberate for decades.

The window is narrow. The stakes could not be higher. And this time, failure is not an option Pakistan can afford.

FAQ: Pakistan Budget 2026-27 and Fiscal Sustainability

Q1: What is Pakistan’s current debt-to-GDP ratio, and why does it matter?
Pakistan’s public debt reached 70.7% of GDP in FY2025, exceeding the legal limit of 60% by 10.7 percentage points. This matters because high debt constrains fiscal flexibility, crowds out development spending, and makes Pakistan vulnerable to external shocks.

Q2: Can Pakistan achieve a fiscal surplus in 2026-27?
A primary surplus (revenues exceeding non-interest spending) is achievable and necessary. Pakistan recorded a 2.4% primary surplus in FY2025-26. However, an overall surplus (including debt servicing) remains unlikely given that interest payments consume 40-50% of revenue. The goal should be expanding the primary surplus to 3-3.5% of GDP, which would stabilize and gradually reduce debt.

Q3: How does the IMF program affect Pakistan’s budget flexibility?
The $7 billion EFF comes with conditions including maintaining fiscal targets, limiting subsidies, and advancing structural reforms. However, Pakistan is negotiating flexibility within these parameters, particularly for climate spending under the $1.4 billion RSF facility.

Q4: What is CPEC 2.0, and how does it support fiscal sustainability?
CPEC 2.0 shifts from infrastructure to industrialization, emphasizing export-oriented manufacturing in Special Economic Zones. By boosting exports and creating jobs, it can reduce trade deficits and generate tax revenue—both critical for fiscal sustainability.

Q5: Why are energy sector reforms critical for reducing debt?
Pakistan’s power sector circular debt exceeds PKR 2.4 trillion and grows by PKR 400-500 billion annually. Privatizing distribution companies, renegotiating IPP contracts, and implementing cost-reflective tariffs could save PKR 500-700 billion annually, directly improving fiscal balances.

Q6: How can Pakistan expand its tax base without harming economic growth?
Digital integration, agricultural income taxation (targeting large farmers, not smallholders), property taxes, and AI-powered compliance can expand the tax base while maintaining growth. The focus should be horizontal expansion (bringing more people into the tax net) rather than vertical increases (higher rates on existing taxpayers).

Q7: What role do green bonds play in debt management?
Green bonds allow Pakistan to finance climate adaptation infrastructure while attracting ESG-focused investors who accept lower yields. This can reduce borrowing costs by 50-75 basis points compared to conventional debt while building climate resilience.

Q8: Is it realistic to expect Pakistan to reduce debt while investing in development?
Yes, if done strategically. The key is shifting from consumption subsidies to productive investment, improving tax collection efficiency, and leveraging concessional financing (World Bank, Asian Development Bank, green climate funds) for development. Several emerging markets—Vietnam, Bangladesh, Rwanda—have achieved this balance.

Q9: How long before Pakistan can “graduate” from IMF programs?
If the reform scenario materializes, Pakistan could conclude its current IMF program in 2027 without needing an immediate successor. However, maintaining market access requires 3-5 years of consistent policy implementation to rebuild credibility with international investors.

Q10: What are the biggest risks to fiscal sustainability in 2026-27?
Climate shocks (floods, droughts), political instability, global oil price spikes, or a sharp decline in remittances could derail progress. Building resilience requires foreign exchange reserves of $20+ billion, fiscal buffers of 1-2% of GDP, and rapid disaster response mechanisms.