IMF urges Pakistan to sustain momentum in climate and energy reforms

December 12, 2025 (MLN):  Pakistan is entering a new phase of climate-focused economic reform, with fresh momentum building behind policies designed to strengthen resilience and drive low-carbon growth.

As highlighted in the IMF’s latest staff-level report for the second review under the Resilience and Sustainability Facility (RSF), the country is beginning to shift from short-term crisis management toward more structured, forward-looking climate adaptation and mitigation planning.

The review comes after another spell of severe flooding earlier this year, the country’s continued exposure to extreme weather.

While the economic toll was less severe than the 2022 catastrophe, the IMF emphasized that building resilience remains an existential priority for Pakistan, one of the world’s most climate-vulnerable nations.

According to the Fund, Pakistan is making good progress towards climate-related reforms. however it is to further improve the use of scarce water resources, raise climate considerations in project selection and budgeting, and improve the information on climate-related risks in financing decisions.

Through the FY26 Finance Act, the government implemented a carbon levy that increased the Petroleum Development Levy by Rs2.5 per liter, with an additional increase of the same amount legislated for FY27.

Fuel oil was also brought under the levy system for the first time. These measures, the IMF noted, mark a significant step in carbon pricing and are expected to curb emissions while reducing the country’s dependence on imported petroleum products.

Alongside the levy, Pakistan introduced a Rs9 billion electric vehicle subsidy focused on promoting two- and three-wheelers the backbone of urban mobility while applying a one to three percent tax on internal combustion engine vehicles.

The IMF stated that together, these reforms will help accelerate electric mobility, lower carbon intensity in the transport sector, and support balance-of-payments stability.

The report also highlighted progress in strengthening climate governance. Both the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan are preparing to issue climate-related risk disclosure guidelines for banks and listed companies well ahead of their December 2025 deadlines.

Developed in line with a new green taxonomy finalized with World Bank support, these guidelines aim to improve climate risk management and unlock greater private sector investment in adaptation infrastructure.

Longer-term structural reforms are also gaining traction. The rollout of the digital e-Abiana irrigation fee system has already begun in Khyber Pakhtunkhwa and is set to expand to Sindh and Balochistan.

Planned adjustments to irrigation tariffs in Punjab and Sindh are expected to bring water management closer to operational cost recovery.

In parallel, the government is moving to establish a coordinated framework for disaster risk financing across federal and provincial levels, with a draft due to be shared by March 2026.

Energy sector reforms form another major pillar of Pakistan’s climate agenda. The government is preparing to shift from broad electricity subsidies to a targeted system for low-income households through the Benazir Income Support Programme.

Work is underway to match consumer data with the national social registry by the end of 2025, after which a nationwide public communication campaign will inform consumers of the upcoming changes.

Similar targeting reforms are being explored in the gas sector, while minimum energy performance standards for appliances are expected to be fully implemented by mid-2027, supported by new procurement regulations and a national monitoring system.

Through these measures, the IMF observed, Pakistan is beginning to build the foundations for a more resilient and climate-aligned economy.

While major challenges remain, the country’s progress under the RSF reflects a shift toward longer-term planning, better institutional coordination, and policies designed to withstand the impacts of climate change.

As extreme weather events continue to intensify, the IMF emphasized that maintaining this reform momentum will be essential for Pakistan’s economic stability and sustainable development trajectory.

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