The second half-yearly economic review talks between Pakistan and the International Monetary Fund (IMF) are underway, with the global lender pressing Islamabad to explain the reduction in provincial budget surpluses and demanding immediate steps to end the flow of circular debt in the energy sector.

According to sources, the IMF mission has asked provincial governments to justify why their combined budget surplus fell short of the Rs1,200 billion target, reaching only Rs921 billion.

Punjab posted a surplus of Rs348 billion, Sindh Rs283 billion, Khyber Pakhtunkhwa Rs176 billion, and Balochistan Rs114 billion. The Khyber Pakhtunkhwa government will brief the IMF mission separately on September 29 and October 1.

Pressure on energy sector reforms

The IMF also raised red flags over Pakistan’s energy sector, demanding a concrete plan to stop line losses and power theft, alongside suggestions for reducing capacity charges. Officials from the Power Division briefed the mission on progress, including a Rs1,225 billion loan agreement with banks aimed at eliminating circular debt within six years.

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The government assured the IMF that payments would be made from an existing surcharge of Rs3.23 per unit, without placing new burdens on consumers. Officials also highlighted that loans had fallen to Rs397 billion, compared to the earlier estimate of Rs635 billion.

Loan restructuring and privatisation

Briefings to the IMF revealed that the new agreement includes restructuring old loans worth Rs660 billion, along with fresh financing of Rs565 billion. Negotiations with private power producers are also ongoing, with excess electricity expected to be diverted to the industrial sector and crypto mining.

The IMF has urged the government to speed up governance reforms in power distribution companies (DISCOs) and was informed about progress on the privatization of three profitable units. Loss-making companies are expected to be handed over to private management in the coming months.

Tax revenue concerns

Alongside energy issues, the IMF reviewed Pakistan’s revenue performance. The Federal Board of Revenue (FBR) disclosed that it collected Rs11.74 trillion last year, falling short of the Rs12.97 trillion target. Officials cited sluggish economic activity, devastating floods, and unresolved tax cases worth over Rs250 billion as major reasons for the shortfall.

Despite these setbacks, Pakistan managed to post a primary surplus of Rs2.4 trillion—the highest in 24 years—and limited the fiscal deficit to 5.4% of GDP. The number of income tax filers also grew from 7 million to 7.7 million.