Pakistan plans to ask the IMF for softer budget, tax and energy targets under its loan program, citing slow growth and weak investment ahead of the 2026–27 budget.
Shehbaz–IMF Talks in Davos to Set the Tone
Pakistan is preparing to request more flexibility from the International Monetary Fund during the remaining period of its ongoing loan programme, as economic pressures re-emerge and growth stays weaker than hoped. Prime Minister Shehbaz Sharif is expected to raise the issue directly with the IMF’s Managing Director during their meeting on 21 January on the sidelines of the World Economic Forum in Davos. Islamabad’s goal is to secure a softer approach on key budget and reform targets without derailing the broader IMF-supported framework.
According to reports, the government will push for a renegotiation of some conditions attached to the 7 billion dollar Extended Fund Facility (EFF) and the 1.4 billion dollar Resilience and Sustainability Facility (RSF), both of which run until September 2027. Officials argue that while stabilisation has been achieved on paper, strict targets on taxation, energy pricing, and spending are constraining growth and investment at a time when the economy needs room to recover.
Why Islamabad Wants Softer Fiscal and Energy Targets
A central part of Pakistan’s request is “breathing space” for the 2026–27 federal budget. The government wants greater flexibility on fiscal deficit targets, the pace and structure of new taxes, and the timing of further energy price adjustments. Policymakers say that with businesses already under pressure from high input costs and tight credit, another round of aggressive tax hikes and tariff increases could further damage industrial activity and job creation.
A senior official has indicated that Pakistan is seeking the IMF’s support for a more growth-friendly budgetary and fiscal framework next year. To back this up, a high-level committee led by Deputy Prime Minister Ishaq Dar has been formed to craft a long-term strategy for exiting IMF support by 2027–28. The plan centres on reviving investment and lifting growth from the next fiscal year, rather than relying mainly on new taxes and higher energy charges to meet programme benchmarks.
Mixed Economic Signals: Growth Up, Investment Down
Recent economic indicators present a mixed picture. On the positive side, the Ministry of Finance maintains that the economy is stabilising and now projects GDP growth close to 4 percent, higher than the IMF’s earlier post-flood estimate of around 3.25 to 3.5 percent. The current account deficit for the full fiscal year is projected at 2.2 to 2.3 billion dollars, with exports expected at roughly 32 billion dollars and imports in the range of 72 to 76 billion dollars. Remittances are forecast to reach about 42 billion dollars by June 2026.
However, there are serious concerns on the investment side. Foreign direct investment has dropped by about 43 percent, and the current account has already slipped from surplus into a 1.2 billion dollar deficit during the July–December period. Officials warn that the investment-to-GDP ratio could fall to its lowest level in Pakistan’s history by the end of the current fiscal year. On the fiscal front, the Federal Board of Revenue is struggling to meet its revised tax target, forcing the government to lean more heavily on higher petroleum levies to stay within IMF-agreed limits on the primary balance and overall deficit.
Four Policy Proposals: Exports, Investment, Energy, and Interest Rates
Against this backdrop, Islamabad is working on four major policy proposals it hopes the IMF will endorse. The first is a strong push for export-led growth, after the prime minister voiced concern over the widening trade deficit. The idea is to shift away from short-lived, import-driven upswings and instead anchor growth in competitive, value-added exports that can earn foreign exchange and support jobs.
The second pillar focuses on boosting investment, with the Special Investment Facilitation Council playing a central role in attracting both domestic and foreign capital. Officials want to offer a more predictable policy environment, streamline approvals, and unlock stalled projects so that private investment becomes a more reliable engine of growth. Without a turnaround in investment, they argue, Pakistan will struggle to sustain even modest growth once IMF support tapers off.
The third proposal centres on reducing electricity tariffs to improve industrial competitiveness. The government is seeking IMF approval to gradually cut the super tax on manufacturing, aiming to reduce it to 5 percent over four years and abolish it in the fifth year if a primary budget surplus is achieved. Under this plan, the income threshold for super tax on manufacturers would rise from 200 million to 500 million rupees, while the threshold for the 10 percent super tax slab would increase from 500 million to 1.5 billion rupees. Officials argue that this tax relief, combined with lower energy prices, would help revive industrial output and exports.
The fourth proposal uses easing inflation as a basis for cutting the policy rate to make credit cheaper for businesses. The government wants banks to be given specific lending targets for small and medium enterprises so that lower interest rates translate into real borrowing opportunities on the ground. The details of these proposals are expected to be assessed during the IMF review mission due in late February or early March 2026, a visit that will also shape the framework for the 2026–27 budget. How much flexibility Pakistan ultimately secures will depend on the IMF’s assessment of risks, reforms, and the credibility of Islamabad’s medium-term plans.
