Pakistan and the International Monetary Fund (IMF) have moved into detailed negotiations on key economic targets after the Fund’s visiting review mission shared its first draft of the Memorandum of Financial and Economic Policies (MEFP) with the Pakistani authorities. The discussions are expected to continue in Islamabad over the coming days, with the mission likely to remain in the country until the middle of next week. If both sides reach consensus on the draft policy framework, Pakistan could move toward a staff-level agreement (SLA). In the absence of an agreement during the physical talks, negotiations could continue through virtual discussions between the two sides.
One of the major concerns raised by the IMF is Pakistan’s power-sector circular debt position, which exceeded the agreed target at the end of June 2026. The circular debt stock reached Rs1,675 billion, representing a breach of the target agreed under the programme. The issue has become an important part of the latest discussions as the government has allocated Rs830 billion in power-sector subsidies for the fiscal year 2026-27. The IMF is also seeking changes to the existing electricity subsidy structure, including the elimination of the cross-subsidy applicable to consumers using up to 200 units per month.
Under the proposed approach, the electricity subsidy for eligible consumers would instead be provided through a targeted mechanism involving the Benazir Income Support Programme (BISP). The targeted subsidy is expected to be implemented from January 2027. The proposed change would shift the subsidy framework away from a broad electricity-based mechanism toward support directed at eligible households. The reform is part of the wider discussions between Pakistan and the IMF over reducing pressures in the power sector and improving the financial position of energy-related institutions.
The discussions are also covering Pakistan’s fiscal position and revenue collection targets. The Federal Board of Revenue (FBR) has retained its annual tax collection target of Rs15,264 billion for the current fiscal year. The tax authority exceeded its target by Rs27 billion during the first quarter, and it has not requested a revision to the full-year target at this stage. The IMF is also seeking progress on legislation linked to the Sovereign Wealth Fund, with the relevant legislation expected to be approved by Parliament as part of the commitments being discussed during the review.
Another area of discussion is Pakistan’s current account position. The IMF has pushed for a higher projection for the current account deficit, with the Fund seeking an estimate of up to $4 billion for the ongoing fiscal year. This is higher than the Ministry of Finance’s earlier projection of around $2.7 billion. Meanwhile, the Annual Plan for 2026-27, approved by the National Economic Council under Prime Minister Shehbaz Sharif, projected the current account deficit at approximately $3.6 billion. The Annual Plan estimates the deficit at around $3.599 billion if developments in the Gulf region result in a deal following the ceasefire.
External risks remain a significant consideration in these projections. A prolonged Gulf conflict could affect Pakistan’s external sector by disrupting trade with Gulf Cooperation Council countries, placing pressure on exports of goods and services and potentially affecting remittance inflows from more than one million Pakistani workers in the Gulf region. Remittances remain important for Pakistan’s balance of payments, while disruptions to global energy supply chains can increase the country’s oil import bill and widen the trade deficit. These risks are therefore being considered as Pakistan and the IMF assess the country’s external financing position for the current fiscal year.
Pakistan recorded a current account deficit of $543 million during the first two months of FY27, covering July and August. According to the State Bank of Pakistan, the deficit was 36 per cent lower than the $853 million shortfall recorded during the same period of FY26. The improvement provides some support to Pakistan’s external position, although the IMF’s higher deficit projection reflects concerns over the potential impact of energy prices, regional developments, trade conditions and remittance flows during the remainder of the fiscal year.
The IMF has also conducted Article IV consultations alongside the programme review. These consultations form part of the Fund’s regular assessment of a member country’s economic and financial conditions, policies and risks. During the discussions, Pakistani authorities indicated that economic growth could remain around 4 per cent during the current fiscal year, while the SBP has projected real GDP growth in a range of 3.5 to 4.5 per cent. The government’s 4 per cent growth target includes projected agriculture growth of 3.6 per cent, industrial growth of 4.5 per cent and services growth of 4.2 per cent.
Inflation remains another major issue in the economic outlook. Pakistan’s FY27 inflation target has been set at 8.2 per cent, while the IMF expects average consumer price inflation to remain higher, in the range of 8.5 to 9.5 per cent during the fiscal year. The difference between the government’s projection and the IMF’s estimate highlights the uncertainty surrounding prices, particularly in the context of energy costs and external developments. As negotiations continue, the final MEFP will determine the policy commitments and economic assumptions that underpin the next stage of Pakistan’s engagement with the IMF.
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