IMF staff-level agreement: why Pakistan's $1.2bn deal now hinges on ending broad fuel relief

The International Monetary Fund (IMF) announced on Wednesday that its staff had reached agreement with Pakistan on the next stage of its lending programme. The details were reported across the country on Thursday. The IMF staff-level agreement covers the fourth review of the $7 billion Extended Fund Facility (EFF). It also covers the third review of the $1.4 billion Resilience and Sustainability Facility (RSF). Once the IMF Executive Board gives its approval, Pakistan can draw about $1.2 billion. The headline numbers describe an economy that has steadied. The conditions attached to the deal tell a different story about where the difficulty now lies. The central question is no longer whether Pakistan can avoid an external crisis, but whether it can spend public money with greater precision.

The mechanics of the agreement are simple enough. According to the IMF, approval would release about $1 billion under the EFF and about $210 million under the RSF. Combined disbursements under the two arrangements would then reach about $5.7 billion. The mission, led by Iva Petrova, held discussions in Karachi and Islamabad from September 23 to October 7. Finance Minister Muhammad Aurangzeb held a closing session with Petrova, according to the Ministry of Finance. The talks also completed the 2026 Article IV consultation, the Fund's regular health check of a member economy. No date for the board meeting has been announced, so the money is not in hand. The agreement is a staff judgement that has still to clear the Fund's governing body.

That judgement rests on figures which, taken together, show recovery under strain. The IMF puts real gross domestic product (GDP) growth at 4 percent in the first three quarters of the 2025-26 fiscal year. It estimates growth for the full year at 3.6 percent, because higher energy prices and supply disruptions weakened momentum. Headline inflation peaked in May and eased to about 10.3 percent in September, while core inflation stayed contained. The current account was broadly balanced over the year, supported by strong remittances. Gross reserves rose to about $21.5 billion by the end of September. These numbers explain why the review was completed. They also show an economy still exposed to the price of imported fuel.

That exposure is the source of the main point of friction. The conflict in the Middle East pushed up global energy prices, and Pakistan raised domestic fuel prices in response. The government then introduced fuel relief aimed at motorcyclists and owners of small cars of up to 800cc. The IMF has now asked for the scheme to be phased out promptly, citing its cost and design. Its statement refers to the scheme's "high cost and broad targeting". The Fund adds that any future support, should oil prices rise again, must be limited and time-bound. It must also be delivered through established social assistance programmes and fit within the 2026-27 budget.

Both sides of this argument deserve a fair hearing. The government's case is that fuel is among the most visible costs for working households, and inflation remains above 10 percent. Relief for motorcyclists reaches many lower-income commuters directly and quickly. The IMF's case is that eligibility based on vehicle type is a blunt tool. A subsidy tied to engine size reaches some households that do not need it and misses many poor households that own no vehicle at all. The more defensible reading is that the disagreement concerns the delivery channel, not the principle of protection. The Fund is not asking Pakistan to abandon vulnerable households. It is asking that help be routed through systems built to identify them.

The fiscal stakes make the point sharper. The 2026-27 budget is anchored by an underlying primary surplus of 2 percent of GDP. Revenue must exceed spending, before interest payments, by that margin. Every rupee spent on broadly targeted relief must be found elsewhere. The IMF wants the target backed by revenue administration reforms, including risk-based audits, digital invoicing and the use of third-party data. It also seeks a medium-term tax reform strategy and steps to reduce debt rollover risks and servicing costs. Spending on health and education rose from 2.2 percent of GDP in 2023-24 to 2.5 percent in 2025-26. The target for 2026-27 is 2.8 percent.

Monetary and exchange rate policy follow the same logic of caution. The IMF wants the State Bank of Pakistan to keep an "appropriately tight" policy stance until inflation returns to its target range. In the Fund's view, exchange rate flexibility should continue to absorb external shocks. It also wants further reserve accumulation and a gradual liberalisation of the foreign exchange regime. With inflation still near 10 percent, this guidance leaves limited room for early cuts in interest rates. Businesses hoping for cheaper credit may find that frustrating. The alternative, however, is to repeat a familiar sequence in which easing comes before price stability is secure. The IMF staff-level agreement effectively asks policymakers to let the recent gains settle before spending them.

The energy sector is where these strands meet. The IMF calls for timely tariff adjustments and cost-reducing reforms. Their purpose is to prevent a renewed build-up of circular debt, the arrears that accumulate in the power sector. It also wants private participation in electricity distribution, more competition in the power market, cost recovery in the gas sector and lower unaccounted-for gas losses. Beyond energy, the Article IV discussions covered competition policy, regulatory and trade barriers, privatisation, the governance of state-owned enterprises and anti-corruption institutions. The Fund warns that risks "remain high", citing geopolitical tensions and volatile energy prices. The same external shock that prompted the fuel relief is therefore the main threat to the programme itself.

A constructive way forward is visible in the agreement's own terms. The government could set a clear end date for the current fuel scheme and publish its full cost, so that the trade-off is transparent. Any future relief could be paid as cash through existing social assistance programmes, which reach households by need rather than by vehicle type. Energy tariff changes could be paired with protection for the poorest consumers. Cost recovery would then not fall hardest on those least able to pay. Budget releases for health and education could be protected so that the 2.8 percent target is met in practice. Each of these steps would make the programme easier to defend at home.

The IMF staff-level agreement therefore marks progress, not completion. Pakistan has rebuilt reserves, narrowed its external gap and brought inflation down from its peak, and the Fund's staff have recognised that record. The next tests are concrete. The first is the date of the Executive Board meeting that would release the $1.2 billion. The second is how quickly the fuel support scheme is wound down and what replaces it. The third is whether energy prices stay volatile through the winter. The government now has to show that relief can be targeted without weakening the 2 percent primary surplus. If it does, the IMF staff-level agreement may mark the point where stabilisation turned into reform.