Making stabilisation last

On October 7, Pakistan and the International Monetary Fund reached a staff-level agreement on the fourth review of the Extended Fund Facility (EFF) and the third review of the Resilience and Sustainability Facility.

Once the Executive Board signs off, it will release about $1.2 billion. Stronger reserves and recovering growth are welcome. The harder question is whether this recovery discipline will continue after the programme ends in October 2027 and the next election approaches.

The IMF’s 2026 Review of Program Design and Conditionality offers a way to think about that. It draws on 132 arrangements between 2018 and 2024 and examines why some programmes deliver lasting results. Three themes run through its findings: whether revenue targets are realistic, whether reforms build on one another, and how political incentives shape behaviour. For Pakistan, each matters at least as much as the next disbursement.

Start with taxation. The third review found that Pakistan met all seven binding targets for end-December 2025, including the primary budget balance. Two indicative targets were missed: overall FBR revenue and income tax from retailers. By end-March, the FBR shortfall had reached Rs611 billion.

Pakistan did report 557,000 new income tax returns with positive tax liability, above the target of 500,000. That indicates improving compliance. A filed return, however, only shows that someone has entered the tax net. How much they actually paid, and whether lightly taxed sectors are now contributing more, remain open questions.

The IMF’s cross-country evidence helps explain the gap. Revenue disappointments usually have two sources: measures that are only partly implemented, and estimates that were too optimistic from the start. Even fully implemented measures often raise less than projected, because every target rests on assumptions about taxpayer behaviour and administrative capacity. When collections keep falling short, those assumptions deserve as much scrutiny as the government’s performance.

The October statement highlights digital invoicing, risk-based audits and third-party data. These should be judged by sustained collections, with clearer reporting on which sectors are contributing. Registering activity, identifying unpaid liabilities and actually collecting the money are three separate achievements, and progress on the first says little about the third.

How fiscal targets are met matters as much as whether they are met. The October agreement keeps the primary surplus target at 2% of GDP for FY27. The IMF’s evidence links strong early adjustment to better later results. It also shows a recurring pattern: when revenue disappoints, governments protect their targets by cutting spending – and development spending is usually the first casualty.

At the same time, these cuts to capital spending led to only small downward revisions in medium-term growth forecasts. If the investment meant to drive growth doesn’t happen, the growth and revenue projections built on it also need revising.

Pakistan has seen a version of this. The third review recorded a Rs100 billion cut to the Public Sector Development Program to help finance temporary fuel support. The trigger was an energy shock, yet the lesson applies more broadly: immediate pressures can displace investment. Low-return projects can reasonably be dropped. Productive ones need protection.

The next test is whether reforms deepen over time. Across the programmes studied, more than 80% of structural conditions were met, on time or with delay. Yet only 27% of sequenced reforms actually grew deeper at each step. Growth-related conditions, such as those on state-owned enterprises and trade, often received limited follow-up after initial compliance.

Pakistan’s third review shows both sides. The gas tariff adjustment benchmark was met, while governance amendments to the Sovereign Wealth Fund Act were still outstanding at the end-of-March deadline. A tally of completed actions is most useful when each comes with an explanation of what it changed. In energy, for instance, raising tariffs to recover costs needs better management, lower losses and more efficient supply to reduce the need for repeated financial adjustments.

Barbados shows what a better sequence looks like. Its 2022 programme paired early fiscal measures with tax, pension and state-owned enterprise reforms planned in order. Because the difficult reforms started early, later reviews could concentrate on implementation. Pakistan needs a similar roadmap linking today’s measures to lasting institutional change, with responsibilities and technical support specified.

Corrective action also needs to improve when problems recur. The IMF examined 13 programmes with repeated breaches of binding targets, including Pakistan’s 2013 arrangement. Responses were generally appropriate but sometimes relied on temporary measures, such as recovering tax arrears, without fully addressing underlying weaknesses.

The current programme has recovered Rs327.7 billion in disputed tax obligations after court rulings. That is valuable enforcement. The further question is whether collections continue to rise once the backlog is cleared. Arrears recovery and recurring revenue are best tracked separately.

Timing makes these questions particularly relevant. The EFF expires on October 24, 2027, while the National Assembly’s term runs to February 2029. That leaves roughly 16 months without programme monitoring as an election approaches. This creates a potential tension between maintaining discipline and seeking greater policy freedom ahead of the vote.

The financing picture adds pressure. The third review projects gross external financing needs rising from $21.2 billion in FY2026/27 to $29.9 billion in FY2027/28, the highest level projected through FY2030/31, mostly because of debt repayments falling due. The baseline assumes these needs will be met, so they represent gross requirements rather than an uncovered gap. Securing those flows nevertheless depends on confidence, policy continuity, and creditor support.

Recent data show both support and strain. The planning ministry’s October Economic Pulse reports that remittances rose 14.7% year on year to $7.3 billion in July–August 2026. Over the same period, goods imports rose about 11% and goods exports about 4%. Two months do not establish a trend, but the figures underline the value of combining strong remittance inflows with faster export growth once the program ends.

An incumbent government may find a new IMF arrangement politically unattractive as elections approach. Greater freedom over spending, subsidies and taxation may appeal. No such intention has been announced; this is a risk to assess. The decision on further IMF engagement should rest on financing needs and policy credibility, and electoral preference cannot make those needs disappear.

The IMF’s evidence gives the risk some substance. In programmes financed through the Fund’s General Resources Account, which includes Pakistan’s EFF, median primary balances fell roughly half a percentage point of GDP short of forecast in election years. Pre-election slippages also tend to shift the burden onto the government that follows. Political assurances offer only partial protection.

Any slippage need not take the form of an announced increase in spending. It could emerge through delayed tariff decisions, selective tax concessions or postponed difficult reforms. Each might seem manageable alone. Together they could undermine the assumptions on which a credible programme exit depends.

One way forward is to build discipline into domestic institutions before external monitoring ends. Parliament should receive regular reports on revenue performance, spending changes and financing risks. Any new subsidy or tax concession should carry a published cost and an identified source of funding. The domestic budget process should monitor provincial commitments, energy reforms and protections for social spending.

The government should also publish a medium-term financing plan setting out repayment obligations, expected inflows and what it would do if financing fell short. That would let parliament and the public judge whether Pakistan should continue IMF engagement or proceed without another arrangement. The test is simple: can the chosen path withstand a plausible shock without reversing reforms or forcing another abrupt adjustment?

Discipline must still leave room for shocks. The binding BISP spending floor and higher health and education spending are important gains. Pre-agreed, pre-funded arrangements for targeted support would make it easier to protect households without sharply cutting investment or introducing costly broad subsidies.

The Fund itself notes that lessons from Pakistan’s earlier programmes helped shape the current EFF. What remains to be seen is whether those lessons hold once political incentives change. Exiting a programme can be a mark of strength, provided financing is credible and reform continues. Without that preparation, today’s stabilisation risks becoming tomorrow’s adjustment burden.

The writer is a research fellow at the Sustainable Development Policy Institute (SDPI), Islamabad.

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

Originally published in The News