Tensions with India may derail bailout scheme's goals: IMF warns Pakistan

The International Monetary Fund (IMF) has warned Pakistan ahead of the release of the next tranche of its bailout programme, saying that tensions with India could "heighten risks to the scheme's fiscal, external, and reform goals".

 

In its first review of the over $1 billion bailout programme, the IMF noted the tensions between India and Pakistan following the April 22 Pahalgam terror attack, in which 26 people were killed. The report said that so far, the market reaction in Pakistan had been modest, with the stock market retaining most of its recent gains and spreads widening moderately.

 

"The rising tensions between India and Pakistan, if sustained or deteriorate further, could heighten enterprise risks to the fiscal, external and reform goals of the program. Reputational risks could also come from any perceived lack of evenhanded or if there was a perceived misuse of fund disbursements," the report said.

 

 

The IMF report places Pakistan’s defence allocation for the upcoming fiscal year at PKR 2.414 trillion, reflecting a 12 per cent increase or PKR 252 billion more than the previous year. In contrast, the government has signalled plans to allocate over PKR 2.5 trillion, marking an 18 per cent rise, following the recent escalation with India earlier this month.

 

IMF imposes fresh conditions on Pakistan

 

The IMF also slapped 11 new conditions on Pakistan for the release of the next tranche of its bailout programme. This takes the total conditions imposed on Pakistan to 50.

 

A key condition requires the parliamentary approval of the FY26 budget—projected at PKR 17.6 trillion, including PKR 1.07 trillion for development spending—by the end of June 2025, in line with IMF programme targets. 

 

On the provincial side, the four federating units must implement new agricultural income tax laws, supported by digital platforms for taxpayer registration, return processing, and compliance measures, with a deadline of June 2025.

 

The IMF also expects Islamabad to publish a Governance Action Plan, based on findings from the Fund’s Governance Diagnostic Assessment, to address persistent governance weaknesses. Pakistan must also unveil a post-2027 financial sector strategy, outlining long-term institutional and regulatory reforms from 2028 onwards. 

 

In the energy sector, four conditions have been introduced to ensure cost recovery and reduce circular debt: the rebasing of electricity tariffs by July 1, 2025, a semi-annual gas tariff adjustment by February 15, 2026, legislation to make the captive power levy permanent, and the removal of the PKR 3.21/unit cap on the debt servicing surcharge—currently hindering full cost recovery.

 

The IMF has mandated Pakistan to draft a plan for phasing out incentives related to Special Technology Zones and other industrial parks by 2035, with the reform roadmap due by the end of this year. The Fund also wants the government to introduce legislation in Parliament by July 2025 to lift quantitative restrictions on importing used vehicles, initially for cars less than five years old—expanding the current limit set at three years.

 

IMF loan to Pakistan

 

On May 9, the IMF approved the immediate disbursement of about $1 billion to Pakistan under the ongoing Extended Fund Facility. The global lender said that Pakistan's 37-month EFF was approved on September 25, 2024, and "aims to build resilience and enable sustainable growth", with priorities including entrenching macroeconomic sustainability.

 

India opposed the IMF's extension of fresh loans to Pakistan, saying they could be misused for financing state-sponsored cross-border terrorism. New Delhi also abstained from voting at the crucial IMF meeting.