Pakistan’s IMF Program is Buying Time. Markets Want To Know What Comes Next.

Pakistan has just cleared another International Monetary Fund (IMF) review, and on paper the news looks good. Growth is back, inflation has come down from painful highs, and the country has even posted its first current account surplus in 14 years. But for ordinary Pakistanis and a global audience, the real question is not “Is the crisis over?” but “Can this fragile stability last, and will it ever translate into better lives?” 

Over the past few years, Pakistan has lurched from one near‑crisis to another. Foreign exchange reserves fell to dangerously low levels, inflation surged, and there were real fears of default. The latest IMF report marks a turning point of sorts. It says the economy grew by about 3 percent in the last fiscal year, with a slightly higher rate expected next year if current policies continue. Inflation, which had been near 30 percent, has dropped sharply, even though recent floods have pushed food prices up again. 

The external picture has improved too. Pakistan recorded a small surplus on its current account, largely because overseas Pakistanis sent more money home and imports were kept in check. Foreign exchange reserves rose from around $9.4 billion to about $14.5 billion and are projected to keep rising. That is still not a comfortable cushion for a country of Pakistan’s size, but it is better than the cliff edge it faced in 2023. 

What the IMF Is Actually Doing

All of this is happening under two IMF arrangements. The first is a 37‑month Extended Fund Facility that focuses on stabilizing the economy and putting it on a sustainable growth path. The second is a newer Resilience and Sustainability Facility that helps countries tackle climate risks. Together, these programs have already disbursed around $3.3 billion to Pakistan, with the latest reviews unlocking another $1.2 billion. 

In practical terms, the IMF is doing three main things. It is helping Pakistan manage its budget so that debt does not spin out of control. It is pushing for reforms to make the economy more competitive and less distorted. And it is supporting investments and policies that make the country less vulnerable to floods and other climate shocks. None of this is glamorous, but it matters for whether Pakistan can attract investment, create jobs, and avoid returning to the IMF every few years. 

The Budget Story: More Discipline, Tough Choices

A major takeaway from the report is fiscal discipline. Last year the government ran a primary surplus, meaning that before paying interest on its large debt, it collected more than it spent. It aims to repeat and slightly improve on this in the current year, even while spending more on flood relief. Tax revenue has risen to just over 12 percent of GDP, and the authorities want to push this to 15 percent in the coming years.  

For a general audience, that sounds abstract, but the logic is simple. Pakistan has borrowed heavily in the past. To keep that debt from exploding, it must either grow much faster or run budget surpluses for several years, or both. The IMF’s math assumes that Pakistan will keep delivering primary surpluses of around 2 percent of GDP over the medium term. If that happens, public debt, now in the low 70s as a share of GDP, could fall toward 60 percent by 2030. That would make the country less risky in the eyes of lenders and investors. 

But these numbers hide difficult choices. Raising more revenue means cutting back on exemptions, taxing sectors that have been lightly taxed, and improving enforcement. Containing spending means saying no to some politically popular projects and subsidies. The IMF praises the progress so far, but it also warns that the gains are “fragile” and require sustained political will. 

Energy and State Companies: Where Problems Live

If there is a “villain” in Pakistan’s economic story, it is often the energy sector. For years, the power system has been trapped in a cycle of unpaid bills, losses, and government bailouts, a phenomenon known as circular debt. The new report notes that this debt has stopped growing and has even come down somewhat because of tariff increases, better bill collection, and lower losses. Gas tariffs have also been brought closer to the actual cost, which slows the build‑up of arrears in that sector. 

Yet the problem is far from solved. The stock of circular debt is still huge. Demand patterns are shifting as some industries move back from running their own generators to using the grid, and Pakistan is locked into long‑term gas contracts even as demand changes. 

The IMF urges deeper reforms that include bringing private partners into distribution companies, launching a proper electricity market, and creating a clear plan to deal with gas‑sector debt and surplus imported gas. This is not just a technical issue; if energy remains expensive and unreliable, it will keep dragging down growth and public finances. 

The same goes for state‑owned enterprises beyond energy, including airlines, railways, and many others. Pakistan has passed a modern law to improve how these companies are run, and it has set up a central unit to monitor them. But many firms still lack credible business plans, independent boards, and transparent accounts. High‑profile privatizations, like Pakistan International Airlines and several power distributors, have moved slowly. 

The IMF’s message is that as long as these entities are allowed to run losses and rely on government support, they will crowd out private investment and strain the budget. 

Poverty, Safety Nets, and Climate Shocks

Economic stabilization has a human cost. Poverty, which had been falling for years, has risen again in recent times because of repeated shocks, both economic and climatic. 

The IMF report noted that the authorities are trying to soften the blow on the most vulnerable. The Benazir Income Support Program’s budget has been increased, cash benefits are being adjusted for inflation, and there are plans to extend coverage to more families. Health and education spending has also inched up as a share of GDP, though progress varies across provinces. 

Climate change complicates everything. The 2025 monsoon floods affected almost 7 million people, caused an estimated 0.6 percent of GDP in damage, and hurt crops, exports, and growth. The full economic impact is smaller than the devastating 2022 floods, but it is still meaningful. The government plans to fund immediate relief largely by reallocating existing budgets and using contingency reserves, rather than blowing up the fiscal framework. That is fiscally prudent, but it also shows how thin the margins are. 

Can This Time Be Different?

For many Pakistanis, IMF programs feel like a recurring drama: a crisis, an IMF bailout with tough conditions, temporary relief, then back to square one. The IMF itself acknowledges this pattern. Its risk assessment points to familiar dangers such as global shocks, higher commodity prices, tightening financial conditions, weaker remittances, and most importantly, policy slippage at home. It also notes that Pakistan’s exposure to the IMF will become quite large relative to its reserves and revenues in the next few years, making consistent policies essential to keep creditors on side. 

So, what would make this time different? In plain terms, reforms would continue after the immediate pressure fades. Taxes would keep rising through a broader, fairer base, not just one‑off measures. Energy reforms would proceed even when they are politically inconvenient. State‑owned enterprises would either be fixed or privatized, rather than quietly bailed out. Social protection would keep expanding in a targeted way, protecting the vulnerable without breaking the budget. Climate resilience would be treated as core economic policy, not an add‑on. 

The latest IMF report shows that Pakistan has stepped back from the edge and bought itself time. For an international audience and for Pakistanis alike, the question now is whether that time will be used to build a more resilient, fair, and investable economy or whether, a few years from now, the country will once again be asking for emergency help. The answer will depend on whether the broader political system chooses to own and sustain the reforms it has begun. 

Image credit: Shutterstock ID: 2689073105. This article was originally published in The Diplomat.