The federal government has decided to bring the International Monetary Fund (IMF) into confidence regarding the recent escalation in tensions with India, particularly if the situation leads to a significant increase in defense spending and related fiscal requirements.
This development precedes formal negotiations with the Fund, which are expected to commence from May 14, as Islamabad prepares to present its budget for the fiscal year 2025-26.
According to sources within the finance ministry, consultations with the IMF will center on the government’s budgetary framework, encompassing proposed revenue targets and expenditure estimates.
“Should the situation with India escalate further and result in higher defense spending, the government will share these considerations with the IMF during the discussions,” stated a senior official familiar with the matter.
Recent skirmishes along the Line of Control (LoC) have generated concerns within economic circles about a potential surge in military expenditure at a time when the government is already struggling with limited fiscal space and stringent IMF conditions. Officials indicate that any substantial alterations in budgetary allocations — especially those pertaining to defense — must be communicated transparently to the Fund to avoid complications in the negotiation process.
Budget targets and tax proposals In line with ongoing fiscal reforms, the government is considering an ambitious tax revenue target for the upcoming fiscal year. Sources have confirmed that the Federal Board of Revenue’s (FBR) target is likely to exceed Rs14,000 billion. This will be supported by a plan to maintain the tax-to-GDP ratio at approximately 11 percent in FY2025-26 — a goal aligned with IMF benchmarks.
Officials have also mentioned that the issue of super tax — a levy that has faced criticism from the business community — is expected to be part of the forthcoming discussions. “There is a growing consensus within policy circles to re-evaluate the super tax, particularly in light of its economic distortion and the fact that the overall tax burden on certain sectors has risen as high as 39 percent — a level rarely observed globally,” a source noted.
IMF engagement crucial for budget finalization The upcoming talks with the IMF will play a vital role in shaping the next budget, especially as Pakistan aims for a new bailout program to stabilize its fragile economy. While the previous stand-by arrangement with the IMF recently concluded, Islamabad is now seeking a longer-term and more comprehensive loan package to support macroeconomic stability and structural reforms.
The government is also expected to update the IMF on its progress regarding tax broadening measures, energy sector reforms, and the restructuring of state-owned enterprises — all key points from previous discussions.
