IMF sets stringent pre-budget conditions for Pakistan

ISLAMABAD: The International Monetary Fund (IMF) has set 11 new conditions under its $7 billion Extended Fund Facility (EFF) programme for Pakistan, while also urging implementation of previously agreed measures.

This comes after the IMF recently released a $1.2 billion tranche to Pakistan under the ongoing programme.

A staff-level review report issued earlier outlined the programme’s progress and included fresh conditions meant to ensure the continuity of the facility.

According to the IMF’s report on Pakistan, these 11 new conditions or proposals must be met for the loan programme to continue.

The IMF has asked Pakistan to prepare the upcoming federal budget in line with the staff-level agreement and must be passed by Parliament.

The IMF has stipulated that the fiscal year 2026 budget must be approved by Parliament in accordance with agreed targets by the end of June 2025.

The second condition calls for a comprehensive plan to tax agricultural income, including return filing mechanisms, taxpayer identification, registration, awareness campaigns, and improved compliance, with a deadline of 30 June 2025.

The third condition requires the government to publish a governance action plan to address key institutional weaknesses.

The fourth condition demands that cash assistance provided through government social safety programmes, such as the Benazir Income Support Programme (BISP), be increased annually in line with inflation to maintain purchasing power.

Also read: IMF sees Pakistan’s reserves rising to $17.7b by 2026

The fifth condition requires the government to publish a post-2027 financial sector strategy that outlines the institutional and regulatory framework beyond 2028.

In the energy sector, four new conditions have been laid out which said that the government must issue a notification by 1 July for an annual review of electricity and gas tariffs to keep them aligned with cost.

It said that a biannual adjustment notification for gas tariffs must also be issued.

The IMF has asked the government that Parliament must pass legislation by the end of this month to convert the Captive Power Levy Ordinance into permanent law.

It said that legislation must be passed by end-June to remove the upper limit on debt servicing surcharges included in electricity bills.

In the areas of trade, investment, and deregulation, the IMF has made two demands: “Pakistan must draft a plan to phase out all incentives for Special Technology Zones and other industrial zones by 2035, with the plan to be completed by the end of this year. Through parliamentary legislation, Pakistan must lift the ban on commercial import of used cars, starting with removing restrictions on vehicles used for less than five years. This legislation must be enacted by the end of July.”

Budget Approval Linked to IMF Conditions

Senior journalist Mehtab Haider, who covers IMF and Pakistan affairs, told BBC that this is a significant condition, marking the first time that a budget must be crafted in line with a staff-level agreement.

This means, he said, the new budget must meet all targets set in the agreement. Haider explained that this includes creating a primary budget surplus — ie, excluding debt and interest payments — which will require increased revenue and reduced expenditures.

While the defence budget is unlikely to be cut, Haider suggested development spending might face reductions. Despite the possible announcement of major projects, many of them might not actually be initiated or completed under current constraints, he said.

Will Electricity and Gas Bills Rise?

The IMF conditions related to energy include annual tariff revisions and the removal of a cap on the debt-servicing surcharge, currently at Rs3.21 per unit, to be implemented by the end of June.

Haider noted that the aim is to ensure energy prices reflect production costs. Circular debt in the sector has reached hundreds of billions of rupees because tariffs haven’t matched production costs. He said that a gas price hike is likely, meaning consumers could face higher bills. Similarly, removing the surcharge cap could affect electricity prices.

Relaxation on Used Car Imports

The IMF has called on Pakistan to lift the ban on commercial imports of used cars through legislation, initially for vehicles used for less than five years, with a deadline of end-July.

All Pakistan Motor Dealers Association Chairman HM Shehzad told the BBC Urdu that allowing the import of cars aged three to five years would make imported vehicles cheaper. He said, for example, a three-year-old imported car may cost $3,000, while a five-year-old model may cost $1,400 to $1,500, making them more affordable for the public.

Auto industry expert Mashood Ali Khan said that while cheaper car prices depend on dealers, the move could severely impact the local auto parts industry, as manufacturers may simply import complete vehicles, affecting local production.

Pakistan Automotive Manufacturers Association (PAMA), Director-General Abdul Waheed said the association plans to discuss the matter with the government, expressing concern over the potential negative impact on the domestic auto industry.

Currently, according to the FBR, new cars can be imported after fulfilling all requirements and paying duties and taxes. However, used car imports require using overseas Pakistanis under the “gift scheme”, with most cars imported from Japan.

The Import Policy Order 2022 permits the import of vehicles no older than three years.

Under the gift scheme, overseas Pakistanis can send cars to family members (parents, siblings, children, spouse), and duties and taxes must be paid in foreign currency.