FY26 budget talks with Pakistan 'constructive', to continue ahead: IMF

IMF concludes staff visit to Pakistan, says FY26 budget talks constructive and ongoing; confirms next review of Pakistan's funding programme set for second half of 2025

Pakistan has reiterated its commitment to fiscal consolidation, with a primary budget surplus target of 1.6 per cent of GDP for the 2026 financial year, according to the International Monetary Fund (IMF). The IMF concluded its staff mission to Islamabad, led by Nathan Porter, and confirmed that the next review of Pakistan’s funding programme will take place in the second half of 2025.

 

The IMF announced on Saturday that it had engaged in "constructive discussions" with Pakistani authorities regarding the upcoming financial year 2025-26 Budget. Talks began on May 19 in Islamabad but did not reach a conclusion, prompting the government to postpone the federal budget presentation to June 10.

 

 

In a statement, IMF Mission Chief Nathan Porter said, "We held constructive discussions with the authorities on their FY26 budget proposals and broader economic policy, and reform agenda supported by the 2024 Extended Fund Facility (EFF) and the 2025 Resilience and Sustainability Facility (RSF)."

 

He added, "We will continue discussions towards agreeing over the authorities' FY26 budget over the coming days."

 

The discussions centred on measures to increase revenue through improved tax compliance and base broadening, along with more efficient allocation of public spending.

 

IMF approves $1 billion loan

 

Earlier this month, the IMF’s Executive Board approved a $1 billion disbursement under the Extended Fund Facility (EFF), acknowledging that Pakistan had met all performance criteria. The funds are crucial for bolstering Pakistan’s foreign exchange reserves and providing a buffer for its fragile economy.   

 

The loan approval came despite India’s opposition, which cited concerns over potential misuse of multilateral funds for terrorism-related activities. India has reportedly communicated its objections to global financial institutions, arguing that Pakistan could divert aid toward military expenditure and arms procurement.

 

Reforms and conditions intensify under IMF programme

 

The IMF emphasised the importance of continued reforms to enhance fiscal resilience and promote investment. The current discussions focus on actions to boost revenue, prioritise spending, and finalise Pakistan’s FY26 Budget.

 

As part of its ongoing bailout programme, the IMF has introduced 11 new structural conditions. These include steps to rebuild foreign exchange reserve buffers, maintain a fully functioning FX market, and allow for greater exchange rate flexibility. The fund also highlighted external risks, warning that US trade policies and rising geopolitical tensions could undermine economic recovery.

 

Fiscal targets and sector reforms

 

According to Porter, the Pakistani authorities reiterated their commitment to fiscal consolidation while maintaining priority and social sector expenditures. The fiscal plan aims for a primary budget surplus of 1.6 per cent of GDP in FY26.

 

Talks also addressed ongoing reforms in the energy sector. These include efforts to improve financial stability and reduce the high cost structure of the power sector. Broader structural reforms were also on the table, aimed at enabling sustainable economic growth and a more competitive environment for business and investment.

 

Macro policy priorities and monetary strategy

 

Porter highlighted Pakistan’s focus on strengthening macroeconomic policymaking and enhancing economic resilience. "In this context, maintaining an appropriately tight and data-dependent monetary policy remains a priority to ensure inflation is anchored within the central bank's medium-term target range of 5–7 per cent," he said.   

 

  Efforts to rebuild foreign exchange reserves, maintain a functional FX market, and allow greater flexibility in the exchange rate were also deemed essential to shielding the economy from external shocks.

 

Next IMF mission set for late 2025

 

The IMF confirmed that its next mission, related to the upcoming reviews under the EFF and RSF programmes, is scheduled for the second half of 2025.

 

Pakistan entered a ₹7 billion Extended Fund Facility arrangement with the IMF last year and has so far received two disbursements, including one this month.

 

India raises concerns over IMF funding

 

Despite IMF board approval of the financial assistance, the programme faced criticism from India. On May 16, Defence Minister Rajnath Singh urged the IMF to reconsider its support, alleging that the funds might be diverted to finance terrorist activities across the border.

 

India’s opposition to Pakistan’s IMF funding coincides with heightened border tensions following a terror attack in Pahalgam, which claimed 26 lives. In response, India launched “Operation Sindoor” on May 7, targeting terror camps in Pakistan and Pakistan-occupied Kashmir (PoK).

 

India has consistently accused Pakistan of sheltering designated terrorists, with recent accusations reinforced by reports of senior Pakistani military officials attending funerals of militants killed in the Indian strikes. A government source told PTI that India intends to push for Pakistan’s return to the Financial Action Task Force (FATF) grey list and will oppose future World Bank assistance to Islamabad.

 

(With agency inputs)