Pakistan must build on its recent macroeconomic stability by introducing a broader, fairer and more predictable tax system, the International Monetary Fund (IMF) has said, emphasising the need to reduce tax exemptions, improve revenue collection and encourage private sector investment. The Fund believes that a comprehensive overhaul of the country’s tax structure could help sustain fiscal discipline while supporting productivity, competitiveness, formal employment and inclusive economic growth. The recommendations were presented by Jihad Azour, Director of the IMF Middle East and Central Asia Department, during a two-day workshop on “Reforms for a Modern and Growth-Friendly Tax System in Pakistan”, organised by the Ministry of Finance and Revenue in Islamabad on October 20–21, 2026. The event brought together government officials, international financial institutions, tax specialists, academics and private sector representatives to discuss ways to improve Pakistan’s taxation framework and strengthen its contribution to long-term economic development.
Azour said Pakistan had made important progress in restoring macroeconomic stability, rebuilding confidence and strengthening its external financial position despite international economic shocks and uncertainty. However, he stressed that stabilisation alone would not be sufficient to secure sustained economic expansion. The next phase requires reforms that can move the country beyond repeated cycles of economic adjustment towards a more competitive, investment-friendly and inclusive economy. The IMF is supporting this transition through its Extended Fund Facility (EFF), which aims to strengthen economic fundamentals and create conditions for higher productivity, a stronger private sector and better opportunities for younger generations. Azour added that uncertainty in the global economy had made these reforms more urgent, particularly as inflationary pressures, fiscal constraints and financing requirements continued to affect countries across the region.
According to the IMF, Pakistan remains exposed to fluctuations in international energy and food prices, disruptions to trade and supply chains, weaker external demand and tighter global financing conditions. These risks make it important for the government to preserve economic stability while creating room for recovery and development. Azour said fiscal policy must go beyond meeting primary balance targets and protecting debt sustainability. It should also strengthen policy credibility, support economic activity and provide adequate resources for public investment and social spending. Tax reform is central to this objective because the structure of taxation influences business decisions, investment, employment and the willingness of individuals and companies to operate within the formal economy. The Fund has therefore identified broadening the tax base, improving revenue mobilisation, reducing tax expenditures, protecting priority spending and enhancing public services as key areas for Pakistan’s economic reform agenda.
Azour outlined four major themes for the tax reform process: credibility, growth, fairness and implementation. He said credibility depends on maintaining fiscal and external targets, strengthening economic resilience and ensuring that reforms remain consistent over time. A medium-term tax strategy could help establish clear objectives, define policy priorities and provide transparent responsibilities for implementation. On growth, he argued that a simpler and more predictable taxation framework could reduce the costs associated with formal business operations, improve the allocation of resources and give companies greater confidence to invest and expand. Tax policies that avoid unnecessary distortions can also help productive firms grow instead of remaining small or operating informally. These changes would be particularly important for Pakistan as it seeks to increase private investment and improve its competitiveness in domestic and international markets.
Fairness, the IMF official said, is equally important for securing public support and improving compliance. Taxpayers are more likely to follow the rules when the system is transparent, concessions are justified and businesses operating informally do not receive preferential treatment over compliant enterprises. Azour called for addressing under-taxed sectors, rationalising concessions and reducing disproportionate tax burdens. He also emphasised the importance of coordination between federal and provincial governments, engagement with businesses and civil society, and effective communication with citizens. Successful implementation would require administrative capacity as well as better alignment between tax policy and tax administration. The workshop was intended to move beyond general principles and identify practical policies, implementation priorities and follow-up mechanisms, including ways to broaden the tax base without weakening economic recovery and use technology without undermining taxpayer trust.
Finance Minister Muhammad Aurangzeb, addressing the workshop, highlighted improvements in Pakistan’s fiscal position and revenue collection. He said the country’s twin deficits had declined from a combined 12.5% of gross domestic product (GDP) to 2.6%, reflecting progress in macroeconomic stabilisation and fiscal consolidation. Pakistan also recorded its lowest fiscal deficit in 22 years during the previous fiscal year and achieved primary surpluses for three consecutive years. Aurangzeb said the Federal Board of Revenue’s tax-to-GDP ratio had increased from 8.8% to 10.3%, while tax revenues had risen by 40% over the preceding two fiscal years. According to the minister, enforcement measures accounted for 0.9 percentage points of the 1.5-percentage-point improvement in the tax-to-GDP ratio over the past two and a half years, while new tax policy measures contributed the remaining 0.6 percentage points.
The finance minister said the government intended to strengthen enforcement further, reduce revenue leakages and bring more sectors and taxpayers into the tax net. He also highlighted the ongoing FBR transformation programme, which covers human resources, administrative processes and technology. The programme is being led by the prime minister and monitored through weekly reviews, according to Aurangzeb. He said taxation reforms formed part of a wider structural reform agenda covering the energy sector, state-owned enterprises, privatisation, public finance, pensions and tariffs. The government’s objective, he added, was to move beyond stabilisation towards a growth model supported by stronger economic fundamentals. Pakistan had recovered from an economic contraction of 0.3% and returned to positive growth, but the minister stressed that future expansion should be sustainable and export-led rather than driven primarily by liquidity and domestic consumption.
Aurangzeb said Pakistan needed to avoid the boom-and-bust cycles that had previously emerged when consumption-led expansion was not supported by lasting improvements in productivity and exports. He also pointed to the recovery in foreign exchange reserves, which had risen from a level equivalent to approximately two weeks of import cover to more than three months, reaching a record high. He said the quality of reserves was as important as their volume, particularly because the improvement had not been accompanied by a comparable rise in external debt. Pakistan’s external debt stock had increased by around $4 billion over the preceding four years, he said, compared with annual increases of $6 billion to $7 billion during the 2015–2022 period, when external liabilities rose from approximately $55 billion to more than $100 billion.
The minister said future tax policies would need to account for economic value and competitiveness instead of focusing exclusively on revenue targets. Referring to the previous budget, he said the government had recalibrated measures affecting exports and export-oriented industries and would continue working to support export-led expansion. Broadening the tax base, simplifying the taxation code and maintaining policy predictability and continuity were identified as central priorities. Aurangzeb warned that frequent and unexpected changes in tax rules could discourage private investment by making long-term planning more difficult for businesses. He called for political consensus, stronger institutions, improved taxpayer confidence and clearer communication to support the reform process. Coordination between federal and provincial authorities would also be essential, alongside efforts to rebuild trust in the tax administration and explain how revenue collection was improving the country’s public finances.
The IMF and the Ministry of Finance and Revenue concluded that Pakistan’s recent economic stabilisation had created an opportunity to introduce reforms capable of delivering more durable results. The challenge is to convert improvements in fiscal balances and external reserves into higher productivity, stronger exports, increased private investment and better public services. A more predictable tax framework could help businesses make long-term investment decisions, while a broader tax base could reduce the disproportionate burden on existing compliant taxpayers. The two-day workshop was expected to help participants assess ongoing initiatives and develop a coordinated roadmap for the next phase of reform. The outcome will depend on whether the government can translate policy commitments into consistent implementation, strengthen cooperation between federal and provincial institutions, and build public confidence in a taxation system designed to support sustainable economic growth.
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