IMF Discussions with Pakistan: Navigating Fiscal Challenges and Market Reactions

The ongoing negotiations between the International Monetary Fund (IMF) and the Government of Pakistan have garnered significant attention as they focus on the Extended Fund Facility (EFF) review. As of September 29, 2025, discussions have intensified surrounding fiscal measures, aimed at addressing the nation's mounting economic challenges. This article delves into the current status of the EFF review, proposed fiscal adjustments, risks associated with debt sustainability, and the anticipated reactions from financial markets.

Status of Pakistan's EFF Review

Pakistan's IMF EFF review is crucial for the country as it seeks to secure continued financial assistance amid a backdrop of economic instability. The last review, completed in August 2025, highlighted the urgent need for the Pakistani government to enhance its revenue generation and implement effective spending controls. According to the IMF reports, at the time of the review, Pakistan had achieved some progress, but substantial gaps remained that could jeopardize future funding.

The IMF's focus remains on ensuring that the fiscal measures align with the goals of economic stabilization and growth. The Pakistani government has been urged to prioritize reforms in tax collection and reduce inefficiencies in public spending. In its latest report, the IMF noted a target to raise the tax-to-GDP ratio from approximately 9.5% to 15% by 2026, which underlines the imperative of broadening the tax base and implementing progressive taxation.

Fiscal Measures Under Discussion

Recent discussions between the IMF and Pakistani officials have centered on several fiscal measures aimed at bridging the budget deficit, projected at around 6.5% of GDP for FY2025. These measures include:

• Tax Reforms: A comprehensive overhaul of the tax system is on the table, focusing on increasing the efficiency of revenue collection and expanding the tax net. This may involve introducing new taxation sources and revising existing laws.
• Public Sector Reforms: Significant reductions in non-essential government expenditures, alongside a rationalization of subsidies, are recommended to improve fiscal discipline.
• Revenues from State-Owned Enterprises (SOEs): The IMF has encouraged the government to strengthen the financial performance of SOEs, which currently represent a substantial drain on fiscal resources.

These reforms are crucial not only for IMF compliance but also for restoring investor confidence in Pakistan's economic management practices.

Risks to Debt Sustainability

Despite these positive developments, several risks to Pakistan's debt sustainability loom large. The country’s debt-to-GDP ratio is projected to exceed 88% in 2025, indicating a precarious fiscal position. High global interest rates and potential depreciation of the Pakistani rupee add further pressure, with the currency trading at approximately PKR 300 to 1 USD as of late September 2025.

The IMF has underscored the vulnerabilities associated with Pakistan's external debt obligations, highlighting the need for a multi-faceted approach to mitigate risks. Currency fluctuations and trade imbalances could exacerbate the financial situation, underscoring the importance of moving swiftly on proposed fiscal reforms.

Anticipated Market Reactions

Financial markets are poised for reactions as negotiations unfold. The currency markets may experience volatility, with expectations of the Pakistani rupee facing downward pressure unless substantial fiscal progress is made. Bond markets, too, are likely to respond to the government’s fiscal measures. Analysts predict that any signs of effective reforms may lead to a rebound in bond prices, while delays could result in heightened yields as investors seek higher returns to compensate for perceived risks.

The equity markets will likely react based on investor sentiment toward the sectors most affected by proposed reforms. Sectors heavily reliant on government subsidies, such as utilities, may see declines initially, while those poised for growth due to fiscal stability could gain investor favor.

Policy Recommendations for Pakistani Authorities

1. Implement Aggressive Tax Reforms: Prioritize legislative changes aimed at expanding the tax base and increasing collection efficiency to achieve the targeted tax-to-GDP ratio.
2. Enhance Public Financial Management: Focus on improving transparency and accountability within public finance to foster investor confidence and ensure effective allocation of resources.
3. Strengthen External Debt Management: Develop a comprehensive strategy for managing external debt, including active engagement with international creditors and diversifying funding sources to reduce dependency on flexibly linked loans.