WASHINGTON: Pakistan and the International Monetary Fund (IMF) opened high-level policy talks in Islamabad on Monday to discuss the upcoming federal budget for fiscal year 2025-26, officials said.
The current round of discussions, which will continue till May 23, will help determine whether Pakistan’s proposed budget meets the fiscal and reform targets agreed with the IMF under the Extended Fund Facility (EFF).
An IMF delegation arrived earlier in Islamabad for the formal policy-level negotiations on budget finalisation, after last week technical discussions held via video link amid heightened tensions between India and Pakistan.
The Islamabad talks focus on revenue targets, expenditure controls, and budgetary projections as Pakistan grapples with mounting fiscal and external financing pressures.
An agreement between the IMF staff mission and the authorities on next year’s budgetary measures and macroeconomic framework would lead to the announcement of the federal budget on June 2.
IMF staff have emphasised the need to align budget priorities with programme goals of “restoring macroeconomic stability, building resilience through stronger reserve buffers, and advancing structural reforms for inclusive growth”.
Positive trends
One encouraging development is the turnaround in Pakistan’s external account.
From a deficit of 0.5pc of GDP during the July-March FY24, the current account has swung to a surplus of the same proportion in FY25, mainly due to a recovery in remittances and relative political stability. These inflows helped offset deficits in trade and primary income, underscoring the economy’s growing resilience.
Headline inflation, which had surged to nearly 40pc in mid-2023, dropped sharply to 0.7pc by March 2025. This dramatic disinflation allowed the State Bank of Pakistan to cut its policy rate by 10 percentage points since June 2024, bringing it down to 12pc by January. The easing of monetary policy is expected to support investment and consumption.
Sovereign risks have also moderated. The continuation of the IMF programme and a more disciplined fiscal approach have led to a sovereign credit rating upgrade and a narrowing of international borrowing spreads, reflecting greater investor confidence.
Challenges remain
Despite these gains, Pakistan faces a widening external financing gap, projected to reach $19.75 billion in FY26 and stay above $19bn through FY27. By FY28, the shortfall could exceed Rs8.8 trillion. While foreign exchange reserves may rise to $23bn by then, “no significant income is expected from privatisation before 2030.”
Remittances are expected to remain steady at $36bn, while the current account deficit is projected to hover around $3.85bn.
The IMF has warned of risks to Pakistan’s economic outlook from global developments, noting: “Risks to the outlook remain significant, including from global financial conditions, commodity price volatility, and geo-economic fragmentation.” It noted regional tensions as a key concern, stating that “renewed clashes with India could unsettle financial markets, deter investment, and distract from reform implementation.”
The IMF has already put on the table its projections for major economic indicators, including fiscal and monetary policies, envisaging an economic growth rate of 3.6 per cent and average inflation of 7.7pc. This means the inflation rate would be significantly higher than the current year’s average of 5.1pc.
The Fund expects Pakistani authorities to continue to focus on expenditure control, trimming it from 21.6pc of GDP in the current year to 20.3pc next year. But even then the expenditures would get close to Rs26.57tr next year compared to budget estimates of about Rs18.9tr. The two sides have yet to work out the final numbers on revenue collection and revised expenditures, particularly those that have arisen recently due to the security situation.
The IMF wants Pakistan to reduce its fiscal deficit from 5.6pc of GDP during the current year to 5.1pc next year. The government is also being asked to maintain a primary surplus — revenues minus non-interest expenditures — of around Rs2.1tr, a key condition for improving debt sustainability.
Achieving this target is anticipated to bring down the debt-to-GDP ratio from the current 77.6pc to 75.6pc in FY26.
Published in Dawn, May 20th, 2025
