On 9 May 2025 the Executive Board of the International Monetary Fund completed the first review of Pakistan's 37-month Extended Fund Facility and approved a separate arrangement under the Resilience and Sustainability Facility, the IMF's lending window for long-term structural challenges such as climate change. The RSF arrangement gives Pakistan access to about $1.4 billion, equivalent to SDR 1 billion.
The completed review released an immediate disbursement of about $1 billion, bringing total disbursements under the Extended Fund Facility, approved on 25 September 2024, to about $2.1 billion. No RSF money was disbursed immediately. Under the facility's design, funds are released as specific reform measures are completed.
Why Pakistan
Pakistan is among the countries most exposed to climate-related disasters. The 2022 floods, which covered roughly a third of the country at their peak, caused large losses to housing, agriculture, transport and power infrastructure, and pushed millions of people into poverty. A post-disaster needs assessment led by the government with the World Bank, Asian Development Bank, European Union and UN agencies estimated damages of $14.9 billion and economic losses of $15.2 billion, with reconstruction needs of at least $16.3 billion. Recurring heatwaves place stress on public health and on the electricity system, and the country depends heavily on the Indus river system for irrigation and hydropower.
These exposures have direct macroeconomic consequences. Disasters damage public assets, reduce agricultural output and exports, and force unplanned spending on relief and reconstruction, which in turn affects the fiscal position and the balance of payments. The IMF's stated rationale for the RSF is that reducing vulnerability to natural disasters supports macroeconomic stability and fiscal sustainability.
What the RSF arrangement targets
The IMF's press release lists five areas that the authorities' RSF programme prioritises:
- Building resilience to natural disasters and strengthening public investment processes at all levels of government.
- Making the use of scarce water resources more efficient, including through better pricing.
- Strengthening coordination of natural disaster response and financing between the federal and provincial governments.
- Improving the information architecture for, and disclosure of, climate-related risks by banks and corporates.
- Supporting Pakistan's efforts to meet its mitigation commitments and reduce related macro-critical risks.
Each area is linked to reform measures that must be completed before tranches are released. The structure is typical of RSF arrangements, which run alongside a conventional IMF programme and require the country to be meeting the macroeconomic conditions of that main programme.
The macroeconomic backdrop
The first review came at a point of improvement in Pakistan's macroeconomic indicators. The IMF reported that inflation fell to 0.3% in April 2025, which it described as a historic low. Gross reserves stood at $10.3 billion at end-April, up from $9.4 billion in August 2024, and were projected to reach $13.9 billion by end-June 2025. The primary fiscal surplus reached 2.0% of GDP in the first half of fiscal year 2025, on track for the full-year target of 2.1%.
The IMF also flagged elevated risks from global policy uncertainty, geopolitical tensions and domestic vulnerabilities, and urged the authorities to maintain tight monetary policy and accelerate structural reforms.
The energy sector link
Energy sector reform runs through both arrangements. The IMF board called for timely implementation of power tariff adjustments to reduce the stock and flow of circular debt, and for faster cost-side reforms to safeguard the viability of the energy sector. Circular debt, the accumulated arrears in the power sector arising from tariffs that do not cover costs and from losses and non-payment, has been a recurring constraint on Pakistan's public finances.
The RSF adds a climate dimension to that picture. Water pricing reform affects agriculture and hydropower operations. Disaster resilience in public investment affects how new power and transmission projects are designed and sited, including in flood-prone areas. Climate risk disclosure by banks will shape how lenders assess exposure to sectors such as power generation, agriculture and real estate.
Pakistan's power system includes significant hydropower from the Tarbela and Mangla dams and newer projects in the north, alongside imported LNG, domestic gas, coal including Thar lignite, nuclear, and a fast-growing base of solar, much of it installed by households and businesses behind the meter. Each source has a different climate exposure: hydro output depends on glacial melt and monsoon rains, thermal plants face efficiency losses in extreme heat, and distribution networks face flood damage.
Mitigation commitments
The fifth RSF priority refers to mitigation commitments. Pakistan's nationally determined contribution sets targets for the share of renewable energy in the power mix and for emissions reductions, much of it conditional on international finance. Reforms in this area are likely to involve the power sector, given that it is the main area where Pakistan's mitigation targets are defined in practice.
How RSF arrangements have worked elsewhere
The IMF created the RSF in 2022 and has approved arrangements for a number of countries, including Bangladesh, Jamaica, Rwanda, Costa Rica, Barbados and others. In several cases, the arrangements have been used to anchor reforms such as climate budget tagging, green public investment management and fossil fuel subsidy reform. RSF loans have long maturities and a grace period, making them cheaper than standard IMF lending.
RSF financing is modest relative to the investment needs it addresses. Its role is mainly to support policy reforms and to signal to other lenders, including the World Bank and Asian Development Bank, that a country has a credible framework for climate-related spending.
What it means for energy markets
For international energy markets, the direct effect is small. For Pakistan's energy sector, the combination of the Extended Fund Facility and the RSF sets the policy framework for the next few years. The key variables are power tariffs, circular debt, the treatment of capacity payments to independent power producers, gas pricing, and the pace at which renewable energy, particularly solar, is integrated into the grid.
What to watch
The next review of the Extended Fund Facility, and the first RSF review, will indicate whether reforms are on schedule. Budget decisions for fiscal year 2026, due in June, will show how disaster resilience and climate spending are funded. The monsoon season beginning in late June will again test flood preparedness, and the summer heat will test the power system's ability to meet peak demand.