The International Monetary Fund (IMF) has tightened its bailout terms for Pakistan, imposing 11 additional conditions for the release of the next tranche of its financial assistance program, bringing the total number of conditions to 50. The decision, outlined in an IMF staff-level report released on Saturday (May 17), comes amid heightened tensions between Pakistan and India, which the IMF warned could jeopardise the program’s fiscal, external, and reform objectives.
The new conditions include a Rs 17.6 trillion federal budget, agricultural income tax reforms across Pakistan’s four provinces, and energy sector adjustments, while India has raised concerns that the $1 billion bailout could be misused for terror funding.
Background of the Bailout and India’s Objections
Pakistan, heavily reliant on IMF support to bolster its dwindling foreign reserves, secured a $3 billion short-term loan last year to avert a financial collapse. The country has received at least 25 bailout packages since joining the IMF, yet its economic challenges persist. The recent approval of a $1 billion bailout tranche sparked controversy, with India abstaining from the vote and criticising the decision.
India’s Defence Minister Rajnath Singh, speaking on Friday, questioned the IMF’s disbursement, stating, “Pakistan would use the money for terror funding.” He reiterated concerns that such funds send a “dangerous message to the global community,” particularly in light of Pakistan’s alleged support for cross-border terrorism.
The IMF’s report acknowledged the escalating tensions, noting, “Rising tensions between India and Pakistan, if sustained or deteriorate further, could heighten risks to the fiscal, external and reform goals of the programme.”
The report highlighted recent events, including the April 22, 2025, terror attack in Pahalgam, which killed 26 civilians, and India’s subsequent military response, Operation Sindoor, launched on May 7, 2025, targeting terrorist infrastructure in Pakistan and Pakistan-occupied Kashmir (PoK).
Details of the 11 New Conditions
The IMF’s latest conditions, detailed by The Express Tribune, span fiscal, agricultural, energy, and regulatory reforms, reflecting the fund’s push for structural changes to stabilise Pakistan’s economy. Key conditions include:
Federal Budget Approval: The Pakistani Parliament must approve a Rs 17.6 trillion budget for fiscal year 2026, including Rs 1.07 trillion for development spending.
The IMF noted that Pakistan’s defence budget is set at Rs 2.414 trillion, a 12 per cent increase (Rs 252 billion) from the previous year, though the Shehbaz Sharif-led government plans to allocate Rs 2.5 trillion, an 18% hike, following recent confrontations with India.
Agricultural Income Tax Reforms: A new condition mandates that Pakistan’s four provinces (Punjab, Sindh, Khyber Pakhtunkhwa, and Balochistan) implement Agricultural Income Tax laws by June 2025. This involves establishing an operational platform for processing returns, taxpayer identification and registration, a communication campaign, and a compliance improvement plan.
Governance Action Plan: The government must publish a governance action plan based on the IMF’s Governance Diagnostic Assessment recommendations to enhance transparency and accountability.
Financial Sector Strategy: By the end of 2025, Pakistan must prepare and publish a post-2027 financial sector strategy, outlining the institutional and regulatory environment from 2028 onward.
Energy Sector Reforms: Four conditions focus on the energy sector: Issue notifications for annual electricity tariff rebasing by July 1, 2025, to maintain cost recovery levels.
Notify semi-annual gas tariff adjustments by February 15, 2026, to ensure cost recovery.
Adopt legislation by May 2025 to make the captive power levy ordinance permanent, increasing costs for industries to shift to the national electricity grid.
Remove the Rs 3.21 per unit cap on the debt service surcharge on electricity bills, a move the IMF report suggests penalises honest consumers for power sector inefficiencies.
Phase-Out of Special Technology Zones Incentives: Pakistan must prepare a plan by the end of 2025 to phase out all incentives for Special Technology Zones and other industrial parks by 2035, based on an assessment of their economic impact.
Lifting Import Restrictions on Used Cars: The government must submit legislation by July 2025 to lift quantitative restrictions on importing used motor vehicles, initially for vehicles less than five years old, expanding from the current three-year limit.
India-Pakistan Tensions and Operation Sindoor
The IMF report explicitly linked the new conditions to the deteriorating security environment, stating, “Tensions between Pakistan and India have risen significantly over the past two weeks, in wake of the Pahalgam terror attack and India’s Operation Sindoor against terror camps in Pakistan.” The Pahalgam attack on April 22, 2025, claimed 26 lives, including one Nepali national, prompting India to launch Operation Sindoor on May 7, targeting terrorist hideouts in Pakistan and PoK.
Pakistan responded with drone and missile attacks, cross-border shelling, and firing, which India countered with precise strikes on Pakistani military airbases. After four days of hostilities, both nations reached an understanding on May 10, 2025, to cease all military actions from 5 PM that day.
However, India warned that any future attacks would provoke a strong response “on India’s own terms.” The IMF noted that market reactions have been modest, with Pakistan’s stock market retaining recent gains and spreads widening moderately.
Economic and Political Implications
Pakistan’s increased defence budget, as highlighted in the IMF report, reflects the government’s prioritisation of military spending amid tensions with India. The Shehbaz Sharif administration’s plan to exceed the IMF’s projected defence allocation by 18% has raised concerns about fiscal discipline, a core focus of the bailout program. The IMF’s 50 conditions, including the 11 new ones, underscore the fund’s insistence on comprehensive reforms to address Pakistan’s chronic economic challenges, despite its history of limited progress under previous bailouts.
India’s vocal opposition, led by Defence Minister Rajnath Singh, has brought geopolitical considerations to the forefront. Singh’s remarks, including his warning that “Pakistan will never forget” India’s response to terrorism, as stated during a visit to Srinagar after Operation Sindoor, highlight the intersection of security and economic issues. His earlier comments on Pakistan’s “probation” status and the risk of ceasefire breaches further underscore India’s stance against the bailout.
The IMF’s decision to impose 11 new conditions on Pakistan for its bailout tranche reflects a cautious approach amid the country’s economic fragility and rising regional tensions. The requirements, ranging from fiscal reforms to energy sector adjustments and agricultural tax implementation, aim to enforce structural changes but face challenges given Pakistan’s track record with IMF programs.
