The International Monetary Fund (IMF) has flagged several economic, geopolitical, and environmental risks facing Pakistan, while tightening conditions for the release of the next tranches of its ongoing loan program.

As policy-level talks continue between the IMF and the Pakistani government for the upcoming fiscal budget, the Fund has stressed the need for urgent structural reforms, increased tax collection, and responsible fiscal management.

Rising geopolitical and economic threats

The IMF expressed serious concerns over persistent tensions between Pakistan and India, declaring them a growing threat to the country's economic stability and business activity if they continue or escalate. It also identified the potential impact of additional US tariffs as a negative risk to Pakistan’s already fragile external sector.

While the IMF noted that some uncertainty has decreased, it warned that fear of instability continues to threaten Pakistan's financial, reform, and external agenda.

The IMF emphasized that lending activities must be protected from misinterpretations and that Pakistan remained committed to the agreed reform path. The Fund reiterated that the current loan program is designed to bring long-term economic stability and sustainable development.

Demand for strict fiscal discipline

During the ongoing negotiations, the IMF has called on Pakistan to increase tax revenues, limit public expenditures, and adopt an alternative revenue plan to provide relief to vulnerable sectors, including government employees.

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As part of the new budget framework for the next fiscal year, the IMF has proposed setting the economic growth rate target at 4.4%, with agriculture and industry targeted at 4.8% and the services sector at 4.3%. These targets will be finalised after the Annual Plan Coordination Committee (APCC) meeting and submitted to the National Economic Council (NEC) for approval.

The IMF also demanded timely adjustments in electricity and gas prices, alongside a gradual withdrawal of tax incentives offered to businesses operating in special economic zones.

Focus on climate resilience and green growth

In a strong message regarding climate risks, the IMF declared Pakistan among the top 15 countries most affected by environmental hazards. The Fund cited the devastating 2022 floods that displaced over 33 million people and caused over $30 billion in economic losses as a stark warning of growing climate vulnerabilities.

To support climate resilience, the IMF will disburse $410 million under a $1.4 billion climate financing plan in the next fiscal year. The funds are aimed at protecting Pakistan’s economy from environmental shocks and improving the balance of payments. The Fund announced that the climate financing will be released after the second economic review.

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The IMF has outlined clear climate-related targets, including:

Promoting electric vehicles.
Limiting coal-fired power plants.
Increasing the share of renewable energy.
Launching a 10-year national tree plantation drive.
Reducing greenhouse gas emissions by 15% by 2030.

The Fund noted that Pakistan’s capacity to deal with climate disasters remains weak, and emphasized that climate financing should be aligned with broader economic reform goals.

Commitment to IMF program

Despite the tightening conditions, the government has reaffirmed its commitment to the IMF program, and officials say the new budget will reflect these reforms. Negotiations continue to finalize key budget targets, growth assumptions, and climate-linked policy actions for the next fiscal year.