Islamabad is facing renewed scrutiny from the International Monetary Fund (IMF) as the Fund’s review mission continues discussions with Pakistani officials on the release of the third tranche of $1 billion under the Extended Fund Facility (EFF). With revenue shortfalls already emerging in the first quarter of the fiscal year, the IMF has hinted it may not support the government’s proposal to impose a special “flood tax” on imported luxury items, a measure initially considered to plug fiscal gaps.
Senior officials from the Federal Board of Revenue (FBR) briefed the IMF’s technical team during ongoing talks, acknowledging that tax collections for July–September 2025 may fall short of the target by more than Rs 100 billion. This revelation has cast uncertainty over Pakistan’s ability to meet its annual revenue collection goals, already set at ambitious levels under the IMF program.
The FBR had established a quarterly target of Rs 3.08 trillion for the first three months of the fiscal year, though the IMF’s own benchmark for the period ending September 30 was slightly lower, at Rs 3.023 trillion. Despite this adjustment, actual collections in the first two months have consistently lagged, raising fears of a shortfall between Rs 100 billion and Rs 150 billion for the quarter.
Officials attributed part of the shortfall to the devastating floods that hit the country earlier this year, disrupting supply chains, lowering consumption, and slowing overall economic activity. According to their briefing, indirect taxes, particularly consumption-related levies, were the hardest hit. However, they expressed confidence that by December 2025, consumption-driven taxes would begin to recover as economic activity stabilized, reducing the pressure on the annual revenue target of Rs 14.13 trillion.
The IMF, however, appears unconvinced about certain remedial measures. Specifically, the Fund is signaling resistance to Pakistan’s idea of introducing a flood tax on luxury imports, a policy meant to boost revenues while discouraging the inflow of non-essential goods. IMF officials reportedly argued that such a levy could distort trade, complicate customs administration, and risk pushing imports through informal channels. Instead, the IMF has suggested focusing on broad-based measures that enhance compliance and widen the tax net.
This stance is part of the Fund’s broader push for structural tax reforms, which emphasize documentation of the economy, withdrawal of exemptions, and digitalization of tax collection rather than ad hoc levies. The IMF mission has already raised questions about Pakistan’s overall tax strategy, particularly the sustainability of its reliance on indirect taxes and import duties, which tend to be vulnerable to economic shocks such as floods or currency fluctuations.
Despite these concerns, Pakistani authorities are maintaining that the annual revenue goal of Rs 14.13 trillion remains achievable, provided that consumption rebounds in the second half of the fiscal year. They pointed to seasonal patterns in revenue collection and ongoing administrative measures that could tighten enforcement against tax evasion.
The current talks between Pakistan and the IMF are critical, as the successful completion of this second review will pave the way for the release of the third tranche of funding, essential for shoring up Pakistan’s fragile foreign exchange reserves. With a mounting import bill, fluctuating currency, and debt servicing obligations, the government is under significant pressure to secure this installment and avoid destabilizing its economic recovery program.
Analysts note that the IMF’s reluctance to endorse new levies like the flood tax underscores its preference for long-term institutional reforms over short-term revenue fixes. They argue that unless Pakistan takes meaningful steps to broaden its tax base—bringing more sectors, including agriculture and retail, into the net—revenue shortfalls will continue to haunt future fiscal frameworks.
For now, the focus will remain on how the government balances political considerations, especially avoiding unpopular taxes on influential sectors, with the IMF’s insistence on credible reforms. The next few weeks of negotiations will determine whether Pakistan can convince the IMF that its revenue strategy is sufficient without introducing controversial measures such as the flood tax on luxury imports.
