Often villainised in Pakistan’s drawing room political discussions, the IMF and Pakistan have become a love-hate relationship. Entering the 25th program of the IMF since its inception, people believe that Pakistan might be in a paradoxical IMF loop; an addiction that may never be defeated.
However, as Pakistan navigates a crucial stage of economic recovery, the IMF’s latest Extended Fund Facility (EFF) offers both hope and constraints. Approved for 37 months in September 2024, with an accompanying $1.4 billion Resilience and Sustainability Facility, the arrangement aims to stabilise the macroeconomy, rebuild reserves, and support resilience to climate and structural shocks. Unlike previous instances, the current IMF program envisions long-term sustainability goals for the country, making it the best one by and large.
At the heart of the programme are four primary goals:
- Reinstating macroeconomic stability
- Broadening the national tax base
- Reforming state-owned enterprises
- Bolstering climate resilience
Its fiscal discipline mandate has already borne fruit: Pakistan reported a primary surplus of 2 per cent of GDP by mid‑FY 2025, on track to meet its end‑year target of 2.1 per cent. CPI inflation also plummeted to a near‑historical low of 0.3 per cent in April 2025, while the SBP slashed its policy rate by 1,100 basis points since June—a clear sign of regained monetary space.
Foreign exchange reserves have rebounded from US$9.4 billion in August 2024, bordering a severe balance of payments crisis, to USD 10.3 billion by April 2025, with forecasts projecting levels above USD 13.9 billion by June-end. These gains come on the back of IMF disbursements totalling roughly USD 2.1 billion by May 2025, including USD 1 billion post-review and USD 1.4 billion from the resilience package. In mid-March, IMF staff-level approval unlocked approximately US$1 billion more under the climate facility.
Compliance and Policy Conditions
At the core of the IMF’s support are structural reforms aimed at addressing Pakistan’s long-standing economic inefficiencies. These include:
- Broadening the tax base to improve revenue collection and reduce reliance on indirect taxation.
- Energy sector reforms, especially tackling circular debt and transitioning toward cost-reflective pricing.
- Privatisation and governance overhaul of loss-making state-owned enterprises (SOEs).
- Enhanced central bank autonomy and a market-based exchange rate mechanism.
- Targeted subsidies for vulnerable segments through improved social protection programs like BISP.
The IMF expects that adherence to these reforms will not only stabilise the economy in the short term but also unlock inclusive and sustained medium-term growth.
Pakistan’s agreed roadmap has drawn global praise; Bloomberg Intelligence recently termed the country “the most improved emerging market” in sovereign credit risk reduction, citing EFF-inspired reforms that led to a sharper decline in CDS default probabilities compared to peers.
Viewed positively, the EFF promises multiple long-term benefits for Pakistan. Restored reserves enhance external stability and import capacity, while restrained inflation protects household incomes. SOE reform and fiscal discipline may improve investor perceptions and business conditions. The resilience facility could catalyse longer-term infrastructure improvements, such as climate-adaptive water pricing and disaster-preparedness frameworks.
Testing and Risks Ahead
The programme’s mid-point assessment took place in March–May 2025. The IMF Executive Board confirmed Pakistan hit its performance targets, enabling another disbursement. Key indicators—reserves, inflation, and fiscal surplus—remained within agreed thresholds.
Yet the path ahead is fraught: IMF staff cautioned that any slip in fiscal discipline, stalling of structural reforms, rising geopolitical uncertainty, or global financial tightening could unravel recent gains. With a geopolitically strategic location and adversaries on both the eastern and western borders, and global powers attacking each other’s nuclear facilities, this becomes an extremely tight rope to walk, yet Pakistan has walked it perfectly up until now.
Apart from external factors, there are other structural and foundational risks to carrying out these reforms. Despite visible macroeconomic gains, there are lingering vulnerabilities. Pakistan’s tax-to-GDP ratio remains among the lowest in the region, and while the efforts to document the informal economy have yielded some progress, it has proven to be limited as of yet.
Moreover, the circular debt in the power sector has crossed Rs 4.9 trillion, largely due to inefficiencies, poor recovery ratios, and delays in tariff rationalisation, something that simply cannot be done when a majority is under the poverty line. Meanwhile, the State Owned Enterprises (SOE) continue to bleed financially, costing the exchequer over Rs 600 billion in just six months in FY2025.
On the political front, frequent changes in policy direction, weak enforcement of reforms, and resistance from internal and external vested interest groups pose major risks to continuity. The implementation of IMF-mandated reforms, such as phasing out untargeted subsidies, often leads to political backlash, especially in the pre-election environment. However, it is important to understand that these necessary evils have to be endured in order to carry out long-term reforms.
Looking Ahead: Will the Gains Hold?
Pakistan’s journey toward economic stability is clearly underway, but fragile. The country has successfully navigated a period of extreme vulnerability with IMF support. To sustain momentum, Pakistan must stay the course on reforms, particularly in revenue mobilisation, SOE restructuring, and the energy sector. Material rollback of policies could compromise not just the programme, but decades of investor confidence.
Ultimately, the EFF is a high-stakes balancing act: sacrifices today—including tighter budgets and structural adjustments—must yield durable macroeconomic and social stability tomorrow.
If implemented effectively, these reforms offer hope of reducing the country’s dependence on bailouts, fostering private sector investment, and creating fiscal space for development spending. The challenges are considerable, but so are the stakes. The next year will be pivotal in determining whether Pakistan’s economic recovery is cyclical or structural.
