Pakistan 2026: The Sharif Coalition, the Military, and the Political Economy of Stabilization

The political starting position in 2026 #

The February 2024 general election left no party with a majority and the result itself contested. Independent candidates aligned with Pakistan Tehreek e Insaf, which had been stripped of its electoral symbol by the Election Commission days before the vote, won the largest single bloc of National Assembly seats on a count that PTI, the European Union observation mission, and major domestic monitors flagged as procedurally compromised. The Pakistan Muslim League Nawaz under Shehbaz Sharif and the Pakistan Peoples Party under Bilawal Bhutto Zardari assembled a coalition with the Muttahida Qaumi Movement Pakistan and a cluster of smaller parties to take the federal government, with Asif Ali Zardari returning to the presidency. This is the political base on which the IMF program rests.

The opposition track has hardened. Imran Khan remains in detention on a stack of convictions covering the cipher case, the Toshakhana references, the Iddat marriage case, and the May 9 2023 riots. PTI street mobilization through 2024 and 2025 was met with Section 144 orders, mobile internet shutdowns, and prosecutions of party workers under the Peaceful Assembly and Public Order Ordinance. The October 2024 26th Constitutional Amendment reorganized the higher judiciary by carving a Constitutional Bench out of the Supreme Court, fixing a three year term for the Chief Justice, and reshaping the Judicial Commission of Pakistan that operates under Article 175A. The amendment passed with the bare two thirds in the National Assembly that the coalition had assembled with defections and PPP votes.

The civil military settlement #

The army is the second pillar of the current settlement. Chief of Army Staff Syed Asim Munir received a statutory extension to a five year term in November 2024 under amendments to the Army Act, the Air Force Act, and the Navy Act passed in tandem with the constitutional package. The three service chiefs now share a uniform tenure architecture that aligns retirement cycles with the federal political calendar. The Special Investment Facilitation Council, chaired by the Prime Minister with the Army Chief as a permanent member, remains the executive vehicle through which Gulf and Chinese capital is channeled into mining, agriculture, information technology, and energy projects.

The institutional consequence is that fiscal and structural decisions, from agricultural income tax to the privatization of Pakistan International Airlines, are negotiated inside a triangle of the Prime Minister's Office, the General Headquarters in Rawalpindi, and the IMF resident representative. The civilian opposition is largely outside the room. For external creditors and ratings agencies, this concentration of decision rights has reduced short term execution risk on program benchmarks. For the medium term, it raises the cost of any future political reset, since reforms identified with the army will be politically expensive to defend if the coalition's parliamentary base erodes.

Provincial politics complicate the picture. Khyber Pakhtunkhwa is governed by PTI under Chief Minister Ali Amin Gandapur, who has used provincial resources to mount a parallel political and legal campaign against the federal government, including through unilateral grant releases and provincial police actions. Punjab and Sindh are run by PML N and PPP respectively. The federal coalition therefore controls the National Finance Commission negotiations and the Council of Common Interests but cannot count on uniform provincial cooperation on tax harmonization, which the IMF program treats as a critical structural benchmark.

The IMF program and the fiscal trajectory #

The 7 billion dollar Extended Fund Facility approved by the IMF Executive Board on 25 September 2024 is structured as a 37 month arrangement with disbursements of roughly 1 billion dollars per review. The program is anchored by a primary surplus path, a market determined exchange rate, an inflation targeting reaffirmation by the State Bank of Pakistan, and a structural agenda covering tax base expansion, energy tariff pass through, state owned enterprise reform, and anti corruption framework strengthening. Saudi Arabia rolled over a 5 billion dollar deposit with the SBP in August 2024 ahead of the IMF board, the United Arab Emirates rolled 2 billion dollars, and China rolled 4 billion dollars in SAFE deposits plus a separate 4 billion dollar commercial bank facility. These rollovers are prior actions in everything but name.

The fiscal arithmetic for fiscal year 2026 is tight. The federal budget targets a primary surplus of 2.0 percent of GDP and an overall deficit near 5.9 percent of GDP, with debt service alone consuming roughly 8.5 trillion rupees against a federal revenue base of about 12.9 trillion. The Federal Board of Revenue collection target of 12.97 trillion rupees implies a year on year growth above 30 percent and a tax to GDP ratio rising toward 10.6 percent in the current year, with a program endpoint of 13.5 percent. Provincial cash surpluses are budgeted at 1.2 trillion rupees, a number that has historically been missed and that the Centre cannot enforce without National Finance Commission renegotiation.

Energy, circular debt, and the NEPRA framework #

Power sector circular debt sat at roughly 2.6 trillion rupees at the close of fiscal year 2025, a level the Cairo policy team would call a slow motion sovereign event. The Circular Debt Management Plan agreed with the IMF prescribes a glide path to zero net flow through quarterly tariff adjustments under the National Electric Power Regulatory Authority, monthly fuel cost adjustments, the Quarterly Tariff Adjustment mechanism, and a separate program of independent power producer contract renegotiation. The 1.275 trillion rupee bank financing arranged in early 2025 to clear part of the legacy stock was structured as a twenty four bank syndicated facility against a debt servicing surcharge embedded in consumer tariffs, capped at 3.23 rupees per unit and recovered over six years.

The retail tariff structure now embeds three layers above the energy charge: the debt servicing surcharge, the financing cost charge, and the Quarterly Tariff Adjustment, alongside the General Sales Tax. Average end consumer tariffs for the residential protected slab remain politically capped, with cross subsidy financed by industrial, commercial, and unprotected residential consumers. Captive power generation by industrial users on the gas network has been disincentivized through a steep gas tariff differential, with the explicit aim of forcing industrial load back onto the grid. The political cost is that small and medium enterprises in Punjab face simultaneous increases in grid tariffs, gas tariffs, and Federal Board of Revenue compliance burden.

Tax mobilization, FBR reform, and the agricultural income question #

The FBR Reform Plan announced in 2024 sits at the centre of the program's revenue track. Its operational pillars are the Tajir Dost retailer registration scheme, sales tax on previously exempt categories, the integration of digital invoicing with the Synchronized Withholding Administration and Payment System, the rollout of track and trace on tobacco, sugar, cement, and fertilizer, and a structural overhaul of the customs and inland revenue cadres. The Public Procurement Regulatory Authority is being used to enforce mandatory invoicing on government contractor payments. The agricultural income tax, long a constitutional preserve of the provinces, has finally been brought into a uniform framework under the program, with all four provinces legislating rates that align with personal income tax brackets effective from January 2025.

Implementation has lagged design. Retailer registration through Tajir Dost has fallen short of target, the 2024 finance act was followed by mid year revenue measures including a 10 percent surcharge on incomes above 10 million rupees per month, and the use of advance taxes and withholding regimes continues to substitute for direct taxation of property and capital. Pakistan Bureau of Statistics data on household income show that the top quintile still accounts for less than 30 percent of declared direct tax, a structural anomaly that suggests the 13.5 percent tax to GDP target will require either deeper enforcement against high net worth non filers or a politically costly extension of consumption taxes to currently exempt categories.

Security, CPEC Phase 2, Reko Diq, and external balance support #

The security ledger weighs on every fiscal projection. Tehrik i Taliban Pakistan attacks in Khyber Pakhtunkhwa and the merged tribal districts and Balochistan Liberation Army operations across central and southern Balochistan have raised the cost of protecting Chinese personnel and CPEC sites, with insurance premiums on Chinese contractor crews repriced after the 2024 Bisham and 2025 Karachi airport incidents. Pakistan has formally requested deployment of Chinese private security companies under bilateral arrangement, a negotiation that touches sovereignty sensitivities on both sides. Iran Pakistan border tensions have not produced a war but the Iran Pakistan gas pipeline remains stalled under the United States sanctions regime, and Pakistan continues to face arbitral exposure on the project.

CPEC Phase 2 is being repositioned around Special Economic Zones, fiber optic backbones, agricultural value chains, and a slimmer power pipeline. The Reko Diq copper and gold project in Chagai district, restructured in 2022 as a 50 50 joint venture between Barrick Gold and the federal and Balochistan governments, is the single largest greenfield mining commitment in the country, with a 2028 first production target and a financing package anchored by international financial institutions and Saudi Arabia's Manara Minerals, which agreed in 2024 to acquire a 15 percent stake from the Pakistan side. The bilateral deposit cycle continues alongside: Saudi Arabia, the United Arab Emirates, and China together hold roughly 16 billion dollars of SBP linked deposits and bank facilities that are functionally permanent, rolled at each IMF review.

Three scenarios for 2026 to 2028 #

The base case, to which we assign roughly 55 percent probability, has the EFF reaching its scheduled completion in late 2027, fiscal year 2027 tax to GDP rising to 11.5 percent, the rupee crawling to 295 to 305 against the dollar, and headline inflation averaging in the 6 to 8 percent band. SBP gross reserves rebuild toward 18 billion dollars, the circular debt stock stabilizes around 2.4 trillion rupees, and Reko Diq reaches financial close. PTI remains a constitutional opposition without recovering federal office, and a successor IMF arrangement, smaller and more surveillance oriented, is negotiated for the post program period.

The upside case, at 20 percent probability, requires a political accommodation that brings PTI back into the parliamentary mainstream, an unfreezing of agricultural income tax enforcement at full provincial scale, and a clean Reko Diq construction phase. In this state, growth accelerates toward 4.5 percent by fiscal year 2028, S and P, Fitch, and Moody's lift the sovereign ratings by one notch each from current low single B levels, and the Eurobond market reopens at sub 10 percent yields for new five year paper. The downside case, at 25 percent probability, combines a renewed political crisis around the higher judiciary, a programmatic disagreement with the IMF over the agricultural income tax or NEPRA tariff path, and a security shock that interrupts Chinese capital deployment. Reserves slip below 10 billion dollars, the rupee tests 320, and the next program cycle begins inside the current one. Across all three states, the actionable variables for the Sharif coalition are the same: the tax to GDP slope, the net flow on circular debt, and whether the political settlement holds long enough for the structural agenda to compound.

Sources #

• IMF Pakistan country page and Article IV reports
• State Bank of Pakistan statistics and policy
• Ministry of Finance Pakistan budget and debt
• Federal Board of Revenue revenue statistics
• Pakistan Bureau of Statistics
• NEPRA State of Industry Report
• World Bank Pakistan Development Update
• Asian Development Bank Pakistan economic outlook
• S and P, Fitch, and Moody's Pakistan sovereign rating actions
• Dawn newspaper national and economy desks