Pakistan cuts spending, commits to fiscal discipline to uphold IMF loan program

June 11, 2025 (MLN): Pakistan slashed spending and pledged to stay the course on fiscal consolidation for the upcoming financial year, reinforcing the government’s commitment to its International Monetary Fund (IMF) loan program.

The budget plan unveiled Tuesday kept expenses unchanged, while proposing to increase taxes by 18% to Rs2.56 trillion ($9 billion) for the year starting July, Finance Minister Muhammad Aurangzeb said in a parliament speech.

That will lead to a primary balance surplus of 2.4% of gross domestic product, said Aurangzeb, higher than the 1.6% agreed with the IMF.

The country has undertaken sweeping reforms in the last few years, from raising gas and electricity prices to adding new taxes that have triggered protests, according to Bloomberg.

While the fiscal discipline has helped unlock billions of dollars from the IMF, including a $1bn disbursement approved last month, it has also weighed on growth.

Pakistan last month slashed its gross domestic product projections in the fiscal year through June, citing global trade disruptions and reduced spending.

Markets were looking for reassurance on Pakistan’s commitment to the $7bn loan program that will help bonds rally, according to fund managers.

An IMF delegation visited Islamabad last month to discuss the budget. Expectations of a no-frills budget already boosted the KSE-100 to a record high on Tuesday.

Pakistani assets have been among the world’s top performers the past two years, helped by IMF support, improving company earnings and steep interest rate cuts by the State Bank of Pakistan.

But momentum has cooled in recent months as tensions with India and the threat of US tariffs cloud the outlook.

The KSE-100 Index has risen 6% this year, following gains of 84% last year and 54% in 2023.

Meanwhile, the country’s dollar bonds have returned 7% in 2025, compared with about 30% during the same time period last year.

Pakistan also raised defense spending by 20% to Rs2.5tr following renewed tensions with India, after the two nuclear-armed powers came close to all-out war last month.

The government has cut allocations on development projects slightly to Rs1tr for next year.

Still, Neuberger Berman is continuing to hold the country’s short-end dollar bonds.

Ninety One is similarly betting on Pakistan’s shorter-dated notes, where the return potential can be “reasonably high,” said Thys Louw, portfolio manager at Ninety One in London.

The government’s efforts to adhere to the IMF’s program, underscored by the recent $1bn disbursement, have boosted confidence.

“We’re quite optimistic for the second half of the year, and believe the market has room to revalue,” said Mattias Martinsson, partner and chief investment officer at frontier-market specialist Tundra Fonder.

“I would say that there is a low likelihood that we will have negative surprises in the budget", he said.