An agreement at the staff level for a $1.2 billion loan has been established with the IMF.

On Saturday, the International Monetary Fund (IMF) announced a staff-level agreement with Pakistan for the disbursement of a $1.2 billion loan, contingent to the executive board’s approval, which is tied to Islamabad’s capacity to generate Rs322 billion in revenue from court proceedings.

The Washington-based global lender has deemed the performance of the Federal Board of Revenue inadequate and has instituted a “prior action,” the successful execution of which will facilitate the upcoming executive board meeting, according to Pakistani officials.

The IMF attained a staff-level agreement solely after obtaining guarantees that the government would rigorously comply with pre-war fiscal objectives, while the central bank would elevate interest rates if inflation surpasses the target range and permit exchange rate flexibility to mitigate external shocks resulting from the conflict.

The FBR will receive supplementary tax revenue resulting from recent court rulings in previously contested instances, as determined by government officials, effective as of the end of February.

Both the IMF and Pakistan have concurred that Rs322 billion will be collected via court verdicts, primarily concerning super tax cases. The FBR is collecting the principle amount and imposing late payment surcharges of up to 25%.

The administration has collected most of the contested taxes and is sure that the necessary amount will be obtained before Pakistan’s case is presented to the board for approval. Pakistan is optimistic that upon fulfilling the prerequisite actions, the board will convene in early May to sanction the subsequent loan tranche.

Upon approval, Pakistan will receive around $1 billion under the EFF and $210 million under the RSF, resulting in total disbursements from both arrangements of over $4.5 billion.

The FBR has fallen short of its planned tax target for the first eight months of current fiscal year by Rs640 billion. The gap has been ascribed to diminishing collections in the power, oil, and gas industries.

The FBR indicated in these meetings that in the first half of the fiscal year, approximately half of the shortfall was mitigated by increased revenue from the petroleum levy, provincial cash surpluses, lower-than-anticipated expenses for flood responses, and loan repayments from state-owned enterprises resulting from the power sector circular debt resolution.

In response to escalating tax disputes and the FBR’s difficulties in managing these issues, Prime Minister Shehbaz Sharif has established a task group to enhance the legal operations of the FBR, as indicated by a notification.

The task group will overhaul and enhance the FBR’s revenue litigation framework across all tiers, including initial adjudication by the tax department, commissioner, collector appeals, appellate tribunals for Inland Revenue and Customs, High Courts, Supreme Court, and the Federal Constitutional Court.

The Task Force will be chaired by Mr. Shad Mohammad and will include the distinguished constitutional and tax lawyer Hafiz Ahsaan Ahmad Khokhar, Advocate Supreme Court, underscoring the gravity of the government endeavor.

Members must perform a thorough evaluation of the current legal divisions, encompassing workload management, human and logistical resources, and overall operating capabilities. The review will concentrate on pinpointing structural deficiencies, procedural impediments, and systemic inefficiencies that lead to extended litigation and postponed resolution of tax and customs disputes.

The evaluation will prominently feature the Litigation Management System (LMS), which has had difficulties in integrating with appellate tribunals and superior courts.

The Task Force is anticipated to propose measures that guarantee a more efficient, data-informed, and institutionally synchronized approach to litigation.

The IMF is currently concentrating on deficiencies in the FBR’s internal governance, indicating apprehensions that governmental initiatives to enhance the tax apparatus have not yet yielded entirely effective outcomes.

The conflict in the Middle East will affect Pakistan.The IMF stated that the crisis in the Middle East obscures the outlook, as fluctuating energy prices and stringent global financial conditions threaten to elevate inflation and hinder growth and the current account.

Conversely, Pakistan’s Finance Ministry anticipates that inflation would increase slightly by 0.3%, remain within the target range, economic growth will approximate 4%, and the current account deficit will stay below $2 billion despite fluctuations in global oil prices.

Iva Petrova, the IMF Mission Chief, stated that Pakistani authorities “are dedicated to implementing sound and prudent macroeconomic policies to maintain recent achievements in macro-financial stabilization, while enhancing structural reforms to expedite growth and fortifying social protection to alleviate the effects of fluctuating energy prices.”

The Fund’s evaluation diverges from Pakistan’s forecasts, which assert that the conflict will not significantly impact the economy.

No leniency in objectives

The IMF did not ease the pre-war primary budget surplus target of 1.6% of GDP despite the State Bank of Pakistan previously indicating the goal might be difficult to achieve due to weak tax collection performance by the FBR. The Fund also maintained stringent fiscal targets for the next financial year.

Petrova said authorities remained committed to ensuring a sustainable fiscal position and reducing the still high public debt burden over the medium term.

“Efforts are ongoing to meet the FY26 budget primary surplus of 1.6% of GDP and to target an underlying primary balance of 2% of GDP in FY27, supported by measures to broaden the tax base and strengthen expenditure discipline,” she said.

She also pointed to efforts to enhance expenditure sharing between the federal and provincial governments, as Islamabad has requested provinces to share the burden of fuel subsidies, which had already risen to Rs125 billion by April 3.

“Efforts are underway to enhance fiscal burden sharing between federal and provincial governments and to strengthen public financial management,” Petrova said.

The IMF stressed that steadfast implementation of fiscal reforms remains critical to achieving programme objectives.

Petrova said the State Bank of Pakistan remains committed to maintaining inflation within its target range and stands ready to raise interest rates if price pressures intensify, including due to pass-through effects from global food and fuel price volatility. Pakistan has set an inflation target of 7.5%, which the Finance Ministry believes remains achievable despite fuel price shocks.

The IMF said exchange rate flexibility should continue to serve as the primary shock absorber against spillovers from the Middle East conflict, while ensuring banks can finance imports and external payments amid potential balance-of-payments pressures. The Fund reiterated that Pakistan must achieve energy sector viability and prevent a recurrence of circular debt.

“It is critical that sustainability is maintained through timely tariff adjustments that ensure cost recovery,” Petrova said, adding that energy price subsidies should be avoided due to their high fiscal cost and distortionary effects.

The IMF also highlighted structural reforms, saying progress on state-owned enterprise reforms and the privatisation agenda remains central to reducing the state’s economic footprint and improving service delivery.

Authorities are also strengthening institutional capacity and intensifying anti-corruption efforts to promote inclusive growth and ensure a level playing field for businesses and investors.