ISLAMABAD: Pakistanis may have to endure more taxes, including a new carbon levy, following a fresh $1.3 billion IMF deal agreement aimed at tackling climate change, officials said.
As part of the Staff-Level Agreement (SLA) announced on Wednesday, the IMF also agreed to release the second tranche of about $1 billion under the country’s existing $7 billion loan program.
“The IMF team has reached a SLA with Pakistani authorities on the first review of the 37-month Extended Arrangement under the Extended Fund Facility (EFF) and on a new 28-month arrangement under the IMF’s Resilience and Sustainability Facility (RSF), with total access of around $1.3 billion,” the lender said in a statement.
With this latest RSF deal, Pakistan’s total IMF loan commitment rises to about $8.3 billion. Once the agreement receives final approval from the IMF’s Executive Board, the country will gain immediate access to about $2 billion, strengthening its balance of payments.
Higher Levies
However, the financial assistance comes at a price for Pakistan’s already overburdened taxpayers. The government has agreed to introduce a new carbon levy, raise water pricing, and gradually open up the automobile sector to global trade, Dawn reported.
A slight relief for consumers comes in the form of an expected reduction in power tariffs. However, even that is tied to an increase in the petroleum levy, allowing the government to use additional fuel tax revenue to offset electricity costs.
Senior officials familiar with the SLA and the accompanying Memorandum of Economic & Financial Policies (MEFP) told Dawn that the prime minister is expected to announce a Rs7 per unit cut in average electricity rates in the coming days, though it will take effect only from April 1, 2025.
Meanwhile, major tax hikes—including the carbon levy and water pricing—will be phased in from July 1, 2025. Fiscal consolidation will continue in the upcoming budget through cuts in energy subsidies and strict control over development spending.
Officials said the government had sought a reduction in the GST rate on electricity but was rebuffed by the IMF, which insisted on avoiding further distortions in the GST system. Instead, the lender approved a higher petroleum levy to cushion power tariffs.
A Rs10 per litre hike in the petroleum levy is expected to generate around Rs1.80 per unit in relief for electricity consumers. Combined savings from power purchase agreements and pending tariff adjustments would translate into the Rs7 per unit reduction set to be announced by the government.
Carbon levy, auto sector shakeup & water pricing
Pakistan has committed to introducing a carbon levy on all hydrocarbons, including petroleum products and coal, starting with Rs3-5 per litre or equivalent, with gradual increases over time. Revenue from the levy will be earmarked for climate-related expenses.
In a major shift, Pakistan’s heavily protected automobile sector will also see lower trade tariffs. Average customs duties will be slashed from 10.5 per cent to 6 per cent by FY 2030, a move backed by both the IMF and Pakistani authorities, who agree that the sector has enjoyed excessive protection for too long.
Cabinet approvals for these tax measures will be shared with the IMF before being included in the Finance Bill 2025-26, with implementation from July 1, 2025. Meanwhile, water pricing reforms will be introduced in consultation with provinces.
Macroeconomic gains
Despite the tax hikes, the IMF acknowledged Pakistan’s progress in stabilizing its economy over the past 18 months. The lender noted that inflation has dropped to its lowest level since 2015, financial conditions have improved, and external balances have strengthened.
Pakistan remains on track to achieve a primary budget surplus of at least 1 per cent of GDP in FY25. However, the government has pledged further fiscal tightening in the FY26 budget by cutting energy subsidies and restricting current expenditures while prioritising development spending.
Additionally, Pakistan has committed to widening its tax base, enhancing spending efficiency, and ensuring greater fiscal devolution. The provinces will also be required to implement an Agriculture Income Tax (AIT) regime starting July 1, 2025.
To keep inflation in check, the State Bank of Pakistan (SBP) will maintain a tight monetary policy, ensuring that inflation remains within its medium-term target range of 5–7 per cent. The government has also promised to uphold exchange rate flexibility while rebuilding foreign exchange reserves.
Green investments
Under the RSF program, Pakistan will strengthen public investment in projects that enhance disaster resilience, improve water resource management, and promote green mobility to curb pollution and mitigate health risks.
While the IMF deal offers economic stability, ordinary Pakistanis may feel the pinch of new levies, rising costs, and fiscal tightening—all in the name of reforms.
