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The International Monetary Fund (IMF) has approved the disbursement of two loan tranches, totaling $2.4 billion, to Pakistan as part of its Extended Fund Facility (EFF). This decision, made on May 9, is accompanied by the imposition of 11 new structural benchmarks that Pakistan must meet before the next review of the EFF in September. These benchmarks span various sectors, including fiscal policy, governance, social programs, monetary and financial parameters, the energy sector, and trade and investment policy. The IMF's actions come against a backdrop of heightened tensions between Pakistan and India, which the Fund acknowledges as posing increased “enterprise risks” to Pakistan's economic stability. The IMF's staff country report, issued on May 17, explicitly highlights these risks, suggesting that escalating tensions could negatively impact Pakistan's fiscal outlook, external financial position, and reform efforts. The Fund also expressed concerns about potential “reputational risks” arising from perceived misuse of Fund disbursements. These concerns have been amplified by statements from India's Defence Minister, who characterized financial assistance to Pakistan as akin to terror funding and urged the IMF to reconsider its support. The IMF is currently providing a $7 billion aid package to Islamabad, approved in September 2024. The ongoing 37-month EFF program includes six reviews designed to monitor Pakistan's progress and compliance with the agreed-upon conditions. The IMF maintains that the program aims to restore economic stability, strengthen reserve buffers, and promote reforms that foster stronger and more inclusive growth. To mitigate concerns about misuse of funds, the IMF emphasizes that disbursements are specifically earmarked for building reserves and that fiscal and reserve goals, including minimum social spending requirements, limit the scope for non-priority spending and import financing.
The 11 new structural benchmarks introduced by the IMF cover a broad range of economic and governance reforms. A key requirement is the parliamentary approval of the FY26 budget, aligning with the IMF staff agreement to meet program targets by the end of June 2025. This benchmark aims to ensure that Pakistan's fiscal policies are consistent with the IMF's program objectives. Other fiscal measures include adopting legislation to remove the cap on the debt service surcharge by the end of June 2025. To promote trade and investment, Pakistan must submit legislation to parliament by the end of July 2025 to lift all quantitative restrictions on the commercial importation of used motor vehicles (initially for vehicles less than five years old), aiming to increase vehicle affordability. The energy sector faces stringent conditions. Pakistan is required to issue notifications of annual electricity tariff rebasing and gas tariff adjustments by July 1, 2025, to maintain energy tariffs at cost recovery levels. This aims to address the chronic issue of underpricing in the energy sector, which has contributed to fiscal deficits and energy shortages. Additionally, Pakistan must adopt legislation to make the captive power levy ordinance permanent by the end of May 2025, incentivizing the uptake of electricity grid usage. Several benchmarks have deadlines beyond September 2025. By the end of December 2025, Pakistan must prepare a plan to fully phase out all incentives related to Special Technology Zones and other industrial parks and zones by 2035, to provide a level playing field for investment. The IMF has also requested the Pakistan government to prepare and publish a plan by the end of June 2026 outlining the government’s post-2027 financial sector strategy, detailing the institutional and regulatory environment from 2028 onwards.
The IMF's report includes a supplement incorporating updates on recent economic developments and program performance. However, the Fund states that these developments do not alter the core assessment of the staff. The updates acknowledge the significant rise in tensions between Pakistan and India following the April 22 attacks. Despite these tensions, the IMF notes that the market reaction has been relatively contained, with the stock market retaining most of its recent gains and spreads widening moderately. On May 9, the IMF's Executive Board completed the first review of Pakistan’s economic reform program supported by the EFF arrangement, allowing for an immediate disbursement of approximately $1 billion, bringing total disbursements under the arrangement to around $2.1 billion. Additionally, the IMF Executive Board approved a tranche of $1.4 billion under the Resilience and Sustainability Facility (RSF). India abstained from voting in the Board meeting, citing concerns about the efficacy of IMF programs for Pakistan, given its “poor track record,” and the possibility of “misuse of debt financing funds for state-sponsored cross-border terrorism,” according to an official release by the Ministry of Finance, Government of India. Before the meeting, India’s Foreign Secretary Vikram Misri had urged the Fund’s Board to “look ‘deep within’ and take into account the facts before generously bailing out the country.” The IMF acknowledges the sensitivity of its lending activities in the context of regional tensions. The Fund emphasizes the importance of careful communication to underscore its neutral role and avoid misperceptions about its lending activities. This is crucial for maintaining the credibility of the IMF and ensuring that its support is seen as impartial and beneficial to the recipient country's long-term economic stability. The IMF faces a challenging balancing act in providing financial assistance to Pakistan while addressing concerns about governance, fiscal responsibility, and regional security. The success of the program will depend on Pakistan's commitment to implementing the structural benchmarks and managing its relationship with India in a way that promotes stability and economic growth.
The IMF's decision to approve the loan tranches to Pakistan, accompanied by stringent conditions and heightened awareness of regional risks, underscores the complex interplay of economic, political, and security factors in international financial assistance. The 11 new structural benchmarks represent a comprehensive effort to address Pakistan's fiscal vulnerabilities, promote good governance, and stimulate sustainable economic growth. However, the success of these measures hinges on Pakistan's ability to implement them effectively and maintain a stable macroeconomic environment. The IMF's acknowledgment of the increased “enterprise risks” stemming from tensions with India highlights the vulnerability of Pakistan's economy to external shocks and regional instability. The Fund's concern about potential “reputational risks” associated with misuse of funds reflects a broader concern about governance and transparency in Pakistan. India's abstention from the vote and its sharp criticism of the IMF's lending to Pakistan underscore the geopolitical dimension of the issue. India's concerns about the efficacy of IMF programs and the potential for misuse of funds for state-sponsored terrorism raise serious questions about the accountability and oversight of international financial assistance. The IMF's emphasis on careful communication and its commitment to a neutral role are essential for maintaining its credibility and ensuring that its support is seen as beneficial to Pakistan's long-term economic stability. The Fund's balancing act in providing financial assistance while addressing governance concerns and regional security challenges is a complex and delicate undertaking. The ultimate success of the program will depend on Pakistan's commitment to implementing the reforms, managing its relationship with India, and ensuring that the funds are used effectively and transparently. The IMF's continued monitoring and engagement will be crucial for supporting Pakistan's efforts to achieve sustainable economic growth and stability.
The IMF's strategy incorporates a multifaceted approach to stabilizing Pakistan's economy. Firstly, the imposition of 11 structural benchmarks acts as a mechanism to enforce fiscal discipline and structural reform. These benchmarks are not merely guidelines but rather obligatory targets that Pakistan must achieve to unlock further disbursements. The spectrum of these benchmarks, encompassing fiscal policy, governance, social programs, the energy sector, and trade and investment, showcases a comprehensive strategy to address systemic weaknesses within Pakistan’s economy. The emphasis on fiscal objectives such as parliamentary approval of the FY26 budget and removing the cap on the debt service surcharge is targeted at reducing Pakistan’s debt burden and improving its fiscal sustainability. The trade and investment policies focused on lifting quantitative restrictions on the commercial importation of used motor vehicles aim to stimulate economic activity and enhance vehicle affordability for the population. Secondly, the IMF's focus on the energy sector is designed to rectify the inefficiencies and financial drain caused by underpriced energy tariffs. By requiring Pakistan to issue notifications of annual electricity tariff rebasing and gas tariff adjustments, the IMF seeks to bring energy tariffs in line with cost recovery levels. This is intended to reduce government subsidies, attract private investment in the energy sector, and promote efficient energy consumption. Making the captive power levy ordinance permanent is another step towards incentivizing the use of electricity grids and reducing reliance on costly and inefficient captive power plants. Thirdly, the long-term structural reforms mandated by the IMF aim to create a more level playing field for investment and promote sustainable growth. The requirement to prepare a plan to fully phase out all incentives related to Special Technology Zones and other industrial parks by 2035 is aimed at ensuring that investments are driven by market forces rather than preferential treatment. This will create a more competitive environment and promote innovation. Furthermore, the preparation of a post-2027 financial sector strategy is designed to provide clarity and stability to the financial sector, thereby attracting both domestic and foreign investment.
The IMF's response to the heightened tensions between Pakistan and India is critical in understanding the organization's role in global economic stability. By acknowledging the increased 'enterprise risks' associated with these tensions, the IMF underscores the importance of regional stability for economic growth and development. The recognition of potential 'reputational risks' linked to the misuse of funds demonstrates the IMF's commitment to accountability and transparency, especially in regions where governance challenges are prevalent. The IMF's requirement for careful communication to emphasize its neutral role is a strategic effort to mitigate perceptions of bias and maintain its credibility as an impartial lender. This is particularly important in a region fraught with geopolitical tensions and historical mistrust. The IMF's strategy to build reserve buffers and set floors on social spending is designed to shield Pakistan's economy from external shocks and ensure that the most vulnerable segments of the population are protected. These measures aim to enhance economic resilience and promote inclusive growth. The IMF's conditionality often includes provisions for social safety nets to mitigate the adverse effects of austerity measures on the poor. Moreover, the IMF's efforts to balance financial assistance with stringent conditions reflect a nuanced approach to addressing complex economic challenges. The IMF is not simply providing a bailout but rather working to create a framework for sustainable economic reform. The success of this approach, however, hinges on Pakistan's political will, governance capacity, and ability to manage its regional relations. The IMF's role extends beyond providing financial assistance; it involves providing technical expertise, policy advice, and institutional support to help Pakistan achieve its economic goals. This includes strengthening tax administration, improving public financial management, and enhancing regulatory frameworks.