- Energy sector viability and tax enhancements promise private investment rebound and sustainable economic growth
Pakistan’s economy stands at a pivotal juncture in 2026, propelled by the International Monetary Fund’s (IMF) $7 billion 37-month Extended Fund Facility (EFF), approved on September 25, 2024. This program emphasizes structural reforms to restore fiscal stability, catalyze private investment rebound, and foster sustainable growth amid global headwinds. IMF projections indicate GDP growth reaching 3.6% in FY2026, up from 2.7% in FY2025, with inflation stabilizing around 6% and unemployment easing to 7.5% from 8%.
Energy sector viability and tax policy enhancements form the core, promising lower inflation and boosted industrial output, yet tight monetary policies risk tepid poverty reduction in a slowing global economy growing at just 3.1%. These reforms address deep-rooted vulnerabilities exposed by recent floods, which inflicted Rs371 billion in losses and prompted a GDP target revision from 4.2% to 3.9%. The EFF’s second review, completed in December 2025, unlocked $1 billion, bringing total disbursements to $3.3 billion and affirming Pakistan’s commitment despite disruptions. Success hinges on balancing opportunities like fiscal buffers with challenges such as circular debt and SOE inefficiencies.
Historical Context of IMF Engagement
Pakistan’s IMF ties date back decades, with 24 programs since 1958, including the 2019 EFF that stabilized reserves but faltered on structural commitments. The current EFF builds on the 2023 Stand-By Arrangement, targeting macroeconomic stability through fiscal discipline, tax base broadening, and energy reforms. Prior programs highlighted recurring issues: fiscal deficits averaging 7-8% of GDP, tax-to-GDP ratios stuck below 10%, and energy circular debt ballooning to Rs2.5 trillion by 2023.
The 2024 EFF responds to post-2022 flood crises and external shocks, mandating primary balance targets of 2.4% in FY2025 rising to 2.5% in FY2026. Government net debt is projected to edge up to 65.7% of GDP in 2026 from 64.5%, with gross debt slightly declining to 71.3% as revenues climb to 16.2% of GDP. These metrics underscore the shift from stabilization to growth-enabling reforms.
Energy Sector Reforms: Tackling Circular Debt
Circular debt, exceeding Rs2.6 trillion in 2025, epitomizes energy sector woes, with Rs1.225 trillion restructured to ease liquidity and free fiscal space for social spending. IMF conditions prohibit new subsidies, enforce quarterly tariff adjustments (QTAs) via NEPRA, and cap annual debt flow at zero post-2031. Recent Rs400 billion stock clearance subsidies, including a Rs200 billion ECC-approved tranche in December 2025, align flows with IMF limits despite IPP dues hitting Rs1.07 trillion.
Key measures include:
- Tariff Rationalization: Incremental pricing for industry and agriculture at Rs22.98/kWh above baselines, boosting industrial consumption 35% year-on-year in April-August 2025 by incentivizing captive power shifts to the grid.
- Efficiency Gains: Reducing distribution losses (currently 18-20%) and bill collection shortfalls through private participation in DISCOs/GENCOs.
- Renewable Integration: Grid upgrades for solar/wind, addressing RLNG surpluses, and wholesale market development.
These could slash production costs by 20-30%, lowering tariffs and spurring industrial output growth to 4-5% in FY2026. However, floods exacerbated vulnerabilities, delaying privatization of three GENCOs/DISCOs.
Pakistan’s GDP and inflation have shown volatility from 2023 to 2026, reflecting post-flood recovery, IMF reforms, and global pressures. GDP growth contracted sharply in FY2023 before rebounding modestly, while inflation peaked amid energy and food shocks before easing under tight monetary policy.
GDP Growth Time Series
Real GDP growth (annual %) exhibits a recovery trajectory:
| Fiscal Year | GDP Growth (%) | Key Drivers |
|---|---|---|
| FY2023 | -0.2 | Floods, high inflation, import curbs |
| FY2024 | 2.4 | Agriculture rebound, remittances |
| FY2025 | 2.7 | Services growth, investment up 13.8% |
| FY2026 (proj.) | 3.6 | IMF reforms, industrial output |
Projections for FY2026 align with IMF estimates at 3.6%, supported by 2.5% primary balance targets, though World Bank forecasts 2.6% amid risks.
Inflation Time Series (CPI Annual Average %)
Headline CPI inflation surged in 2023 before declining sharply:
| Fiscal Year | CPI Inflation (%) | Notes |
|---|---|---|
| FY2023 | 29.2 | Food/energy peaks (38% May 2023) |
| FY2024 | 23.4 | Easing to 11.1% by Jul 2024 |
| FY2025 | 4.6 | Lows of 0.3% Apr 2025; avg 4.61% H1 |
| FY2026 (proj.) | 6.0 | Modest rise from base effects |
Urban CPI fell from 26.3% (Jul-Apr FY2024) to 5.7% in FY2025, rural from 25.5% to 3.3%; core inflation similarly moderated. FY2026 at 6% reflects monetary policy amid 2.9% global trade growth.
Key Insights
Floods drove FY2023 contraction, but FY2025 stabilization (current account surplus $1.2B H1) sets up 2026 expansion via energy/tax reforms. Inflation’s sharp drop to multi-decade lows in early FY2025 aided real wages, though rebound risks persist.
Tax Policy Enhancements: Broadening the Base
Tax-to-GDP rose to 10.6% in FY2025 from 9.1%, inching toward the 13% EFF target via FBR digitization and 7.2 million filers (up $1.6 billion from retail). Reforms mandate:
- Documentation Drive: Track-and-trace for sugar/tobacco, e-invoicing, and AI analytics to curb evasion estimated at Rs5 trillion annually.
- Provincial Alignment: NFC revisions for equitable sharing, federal excise hikes on fertilizers.
- Revenue Projections: FY2026 collections at 16.2% of GDP, funding primary surplus amid Rs26 billion external financing needs.
These bolster fiscal buffers, enabling private investment via lower corporate taxes (29% to 25% phased) and SOE dividend mandates. Yet, shortfalls risk expenditure deferrals to Q4 FY2026.
| IMF Tax Targets vs. Actuals | FY2025 Target | FY2025 Actual | FY2026 Projection |
|---|---|---|---|
| Tax-to-GDP Ratio | 12.5% | 10.6% | 13% |
| FBR Collections (Rs Tn) | 9.4 | 8.2 | 11.5 |
| Non-Tax Revenue (% GDP) | 2.5 | 2.8 | 2.9 |
Monetary Policy Tightness and Inflation Dynamics
State Bank of Pakistan holds rates at 15-17% to tame inflation to 6% in FY2026, supporting rupee stability (Rs278-285/USD). Global slowdowns, with trade growth at 2.9%, complicate this, as export demand weakens. Opportunities arise from remittances ($35 billion projected) funding consumption, but tepid wage growth risks poverty stagnation at 40%. Fiscal-monetary coordination targets overall deficit at -4.1% GDP in 2026 from -5.3%. Easing post-FY2026 could unlock credit for SMEs, amplifying reform impacts.
State-Owned Enterprises (SOEs): Governance Overhaul
SOEs drain 2-3% GDP annually; IMF mandates IFRS audits, business plans for 80 entities, and privatization of 15 by 2029. Delays hit benchmarks—like statutory SOE law amendments (reset to August 2026) but Central Monitoring Unit advances transparency. Pakistan International Airlines restructuring and three liquidations signal momentum, with independent boards by December 2025. Sovereign Wealth Fund operationalization by March 2026 integrates SOEs into FY2027 budgets, curbing implicit subsidies.
Social Safety Nets and Human Capital
Benazir Income Support Program expands to 9 million families with Rs450 billion, indexed to inflation. Reforms prioritize human capital via education (26% budget) and health spending, countering flood-induced poverty risks.
Global and Domestic Risks
Protectionism, US policy shifts under President Trump, and climate shocks (2025 floods) threaten 3.6% growth. Debt servicing at 14.2% GDP strains reserves ($12 billion target). Mitigation demands climate-resilient reforms under RSF ($1.3 billion).
| Macro Projections FY2026 | IMF Forecast | Risks |
|---|---|---|
| GDP Growth | 3.6% | Floods, trade wars |
| Inflation (CPI) | 6.0% | Commodity spikes |
| Unemployment | 7.5% | Jobless recovery |
| Fiscal Deficit | -4.1% GDP | Revenue shortfalls |
| Current Account | -1.5% GDP | Remittance drop |
Reforms could lift FDI to $3 billion from $1.5 billion, via SEZs and CPEC Phase II. Lower energy costs (target 10% reduction) and tax incentives spur manufacturing, targeting 20% industrial GDP share.
Sustained implementation, fiscal consolidation to 3% primary surplus by 2028, energy viability by 2031, positions Pakistan for 5%+ growth post-2026. Private sector-led expansion, with SOE reforms freeing Rs500 billion annually, underpins this.
Political consensus for tax hikes, judicial delays in privatizations, and global volatility. Yet, FY2025 over-performance (deficit 6.2% vs. 6.8%) signals traction. The IMF’s December 2025 endorsement reaffirms: unremitting reforms ensure resilience.
In 2026, IMF-driven changes offer fiscal anchors and investment catalysts, but demand resolve amid headwinds. Energy and tax fixes promise 6% inflation and industrial surge, provided monetary discipline endures. Failure risks entrenched poverty; success unlocks prosperity.
The author, Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at sir.nazir.shaikh@gmail.com