Pakistan’s economy has been tethered to an IMF program, twice disrupted—first by the 2020 COVID-19 crisis and later in 2022-23 due to breaches by former Finance Minister Ishaq Dar. These setbacks taught hard lessons: the IMF demands strict adherence to tough conditions, and allies like China, Saudi Arabia, and the UAE condition their $16 billion rollovers on an active IMF program.

Subsequent programs—a $3 billion Stand-By Arrangement in 2023 and a $7 billion Extended Fund Facility post-2024 elections—highlight persistent design flaws, particularly in tax and energy reforms. As the 2025-26 budget looms, hopes rest on creating a fairer tax system and resolving energy sector issues without overburdening citizens.

Since 2019, Pakistan has been navigating an International Monetary Fund (IMF) program, which faced interruptions. The Pakistani government learned a tough lesson at the cost of its struggling citizens: the IMF would not ease its stringent upfront requirements or grant leniency during quarterly reviews. This stance stemmed from Pakistan’s track record of either dodging politically tough reforms or undoing IMF-mandated changes once a program concluded.

The country’s elite also faced a stark reality. Friendly nations like China, Saudi Arabia, and the UAE, whose $16 billion in loan rollovers were vital for bolstering Pakistan’s reserves and stabilizing the rupee’s external value, conditioned their support on Pakistan adhering to a strictly monitored IMF program.

This context explains the urgency behind Pakistan’s next two IMF programs: a $3 billion, nine-month Stand-By Arrangement starting in July 2023 to bridge the caretaker government’s tenure, followed by a 36-month, $7 billion Extended Fund Facility after the February elections. However, flaws in the design of these programs persist, which both the IMF and Pakistani authorities should address in the 2025-26 budget, especially regarding overdue tax and energy sector reforms.

So far, tax reforms have aimed at an ambitious 40% revenue increase, a target that has proven unrealistic. The Federal Board of Revenue (FBR) reported a shortfall of 833 billion rupees in the first 10 months of the current fiscal year. This gap exists despite the FBR’s reliance on easy measures, such as hiking taxes for existing taxpayers and imposing withholding taxes in the sales tax mode—an indirect tax that disproportionately burdens the poor compared to the wealthy.

The Federal Board of Revenue (FBR) came up short by nearly Rs831 billion in the first ten months of the current fiscal year, as shrinking imports and surprisingly low inflation dealt a blow to tax collections—especially sales tax. Between July and April of FY25, the FBR brought in Rs9.299 trillion, falling behind its target of Rs10.130 trillion. Still, there’s a silver lining: this year’s revenue so far is 27% higher than the Rs7.350 trillion collected during the same period last year. Looking at April alone, the FBR collected Rs846 billion—well below the Rs963 billion target, resulting in a Rs117 billion gap. Yet, when compared to April of last year, collections were up a strong 30%, jumping from Rs651 billion. Provisional figures released Wednesday highlight this improvement. Despite broader economic challenges and muted inflation, April’s gains were largely driven by stronger enforcement—especially in the sugar industry and a handful of other sectors. Meanwhile, the IMF has adjusted its expectations, lowering the FBR’s annual revenue target for FY25 from Rs12.913 trillion to Rs12.333 trillion—a downward revision of Rs580 billion. The Fund also signaled openness to revising the target further if needed. The shortfall, officials say, is largely due to falling import tax revenues, weak industrial activity, and the lowest inflation rates seen in decades.

One would hope that the 2025-26 budget prioritizes a fairer, more balanced tax system. A key step is enforcing the tax on wealthy landlords’ income, passed by all provincial assemblies and set to take effect from January 1, 2025, with implementation starting July 1. However, the lack of a clear mechanism to assess landlords’ income raises concerns about its execution.

Additionally, government sources indicate that traders will face taxation next fiscal year, a commitment repeatedly made to the IMF. Past attempts, including in 2024, faltered due to traders’ significant street influence, casting doubt on the plan’s success.

Energy sector reforms remain stalled. Reports suggest the IMF has approved bank borrowing—despite banks’ heavy exposure to the sector—to tackle the over 2.3 trillion-rupee circular debt, with consumers footing the interest bill. Two points stand out: first, in 2013, then-Finance Minister Ishaq Dar coerced banks into similar lending, and the principal remains unpaid while consumers bear the interest. Second, this idea, proposed by caretaker minister Muhammad Ali last year, was initially rejected by the IMF as unviable. Banks have now reportedly agreed to lend at lower rates, prompting the IMF’s approval.

Electricity tariffs have decreased, driven by expected savings from renegotiated contracts with Independent Power Producers. Yet, these savings are speculative, and progress on rescheduling China-Pakistan Economic Corridor (CPEC) power projects is absent. Realizing these savings hinges on addressing governance issues, such as high distribution and transmission losses, adjusting net metering rates, and phasing out the politically sensitive half-trillion-rupee annual tariff differential subsidy, planned for 2026-27.

As with past IMF programs, reforms continue to burden consumers. To shift this, the elite must absorb more costs, which requires slashing current expenditure rather than leaning on higher taxes and borrowing.

Pakistan’s IMF-driven reforms have historically leaned on consumers, with tax hikes and energy costs hitting the vulnerable hardest. The 2025-26 budget offers a chance to pivot—taxing wealthy landlords, curbing traders’ exemptions, and addressing energy sector inefficiencies. Yet, success depends on political will to confront elite interests and slash wasteful spending. Without these, Pakistan risks perpetuating a cycle of dependency and inequity, undermining the promise of sustainable economic stability.