IMF seeks 18pc petroleum levy, Rs430bn new taxes in budget talks

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have largely reached an understanding on key fiscal and economic targets for the upcoming federal budget, as the IMF mission extended its stay in Islamabad by two days to continue negotiations on the budget strategy for fiscal year 2026-27.

According to sources familiar with the talks, the IMF has recommended an 18 per cent increase in the petroleum levy target as part of broader revenue-generation measures aimed at ensuring fiscal consolidation under the ongoing Extended Fund Facility (EFF).

The recommendation comes at a time when the petroleum levy on petrol already stands at Rs108.17 per litre.

The proposed increase is expected to help the government meet ambitious revenue and primary surplus targets agreed with the IMF.

“The IMF mission, led by Iva Petrova, concluded its staff visit to Islamabad after holding discussions with Pakistani authorities from May 13 to May 20 on recent economic developments, implementation of reforms and preparations for the FY2027 federal budget,” said a statement issued by the IMF.

In an official statement, the IMF said discussions focused on the impact of ongoing disruptions arising from the conflict in the Middle East, Pakistan’s budget formulation process and progress under the EFF and the Resilience and Sustainability Facility (RSF).

The Fund said Pakistani authorities had reaffirmed their commitment to achieving a primary budget surplus of 2 per cent of GDP in FY2027, describing the target as essential for maintaining fiscal sustainability and strengthening economic resilience.

“The envisaged gradual fiscal consolidation will be supported by efforts to broaden the tax base, improve tax administration, enhance spending efficiency and public financial management at both federal and provincial levels,” the IMF statement said, adding that budget discussions would continue in the coming days.

Sources said the IMF had proposed additional tax measures worth Rs430 billion for the next fiscal year and asked provinces to generate an additional Rs430 billion in revenue. The IMF has also reportedly sought a combined provincial surplus of nearly Rs2 trillion to support the federal government’s fiscal framework.

According to sources, the Federal Board of Revenue (FBR) has been assigned a tax collection target of Rs15.264 trillion for the next fiscal year, while the first-half target through December 2026 has been set at Rs7.022 trillion.

Pakistan’s external financing requirements for the next fiscal year are estimated at $21.2 billion, sources said, underlining the continued pressure on the country’s balance of payments position despite recent improvements in macroeconomic indicators.

The IMF projections reportedly estimate Pakistan’s economic growth at 3.5 per cent in the coming fiscal year, while average inflation is expected to remain around 8.4 per cent.

Sources further said that the government and the IMF had reached a temporary understanding to increase payments under the Benazir Income Support Programme from Rs14,500 to Rs18,000 in an effort to cushion lower-income households against inflationary pressures and rising utility costs.

Provincial revenues are projected to rise to Rs1.95 trillion during the next fiscal year, while the IMF mission is continuing consultations to finalise budget proposals before the federal budget announcement.

The talks also covered energy-sector reforms, with the IMF maintaining its condition that gas and electricity tariffs should be adjusted twice annually to limit the accumulation of circular debt and ensure cost recovery.

In its statement, the IMF said the State Bank of Pakistan had reiterated its commitment to maintaining a sufficiently tight monetary policy stance to anchor inflation expectations and contain the secondary effects of energy price increases.

The Fund also emphasised the importance of exchange-rate flexibility, saying it should continue to act as a key shock absorber while efforts to deepen the foreign exchange interbank market should continue.

Beyond fiscal and monetary policy, discussions also focused on structural reforms in the energy sector, state-owned enterprises, financial markets and product-market liberalisation aimed at supporting sustainable economic growth and attracting private investment.

According to sources, the IMF has recommended against granting new tax exemptions for Special Economic Zones (SEZs), while incentives currently available for special economic and technology zones may be gradually phased out by 2035.

The IMF further said progress under the Resilience and Sustainability Facility was also reviewed, including work on disaster-risk financing frameworks, climate-sensitive budget planning and reforms related to power subsidies.

The Fund appreciated the cooperation of both federal and provincial authorities during the discussions and confirmed that the next IMF mission — expected to include the Article IV consultation along with EFF and RSF reviews — is likely to take place in the second half of 2026.