Conditions imposed under a $6 billion bailout from the International Monetary Fund for Pakistan will upend the government’s promises to improve education, health care and create a welfare state as it instead raises new taxes and cuts spending, experts said.

The deal, details of which were released Monday, is a setback for the political agenda of Prime Minister Imran Khan, who came into office in August promising to create millions of jobs, build millions of low-cost homes, and revamp health and education services.

But he was immediately confronted with an economic crisis as both the balance of payments and budget deficits ballooned out of control and the country risked defaulting on its foreign-loan repayments.

If the IMF’s board approves the pact it will be Pakistan’s 22nd since 1958, and just three years after the last one ended. The repeated recourse to the Washington-based lender has also put pressure on the IMF to show that its policy prescriptions are working.

Mr. Khan sharply criticized Pakistan’s frequent reliance on the IMF when he was in the opposition. Now in power, he reluctantly agreed to the program after putting it off for months, but at the risk that his urban middle-class base would be among the segments of society hit hardest.


Under the program, taxes and the price of electricity and gas will all rise, and economic development projects will shrink. Economic growth is forecast to slow sharply, and inflation is already shooting up.

Questions about the effectiveness of the IMF could have contributed to the tougher-than-expected conditions announced Monday, said Samiullah Tariq, director of research at Arif Habib, a Karachi-based stockbroker.

“The government is in trouble. They’ve made a lot of promises,” said Mr. Tariq. “Nobody was expecting the conditions to be this bad.”

Prime Minister of Pakistan Imran Khan of Pakistan delivered a speech in Beijing last month. He has sought loans from China to help float his troubled economy. Photo: how hwee young/press pool

Pakistan’s financial markets were spooked by the stringent conditions and the possibility of further depreciation in the rupee as the IMF insisted that the currency be freely floated. Pakistan’s benchmark stock-market index fell more than 2% on Monday.


The IMF said Sunday that it wanted to see actions taken in Pakistan’s annual budget due next month before the deal is put to its board in Washington for final approval.

“Decisive policies and reforms, together with significant external financing are necessary to reduce vulnerabilities faster, increase confidence, and put the economy back on a sustainable growth path, with stronger private sector activity and job creation,” the IMF said Sunday, announcing the agreement.

Ahead of agreeing to the IMF loan, Mr. Khan hired a new finance minister, Abdul Hafeez Shaikh, from outside his political party, and new chiefs for the central bank and the tax collection authority.

Mr. Shaikh said Sunday that government aid for the very poorest would be protected. He said that the IMF requirements were policies that Pakistan needed in any case to bring structural change to the economy, such as taxing the rich and stemming losses in state-owned enterprises, to break the cycle of repeated IMF bailouts.


“This is a good opportunity,” Mr. Shaikh said.

Experts said the previous government hadn’t gone to the IMF when the balance-of-payments deficit started to mushroom back in 2017, as it splurged during an election year, leaving Mr. Khan to inherit an economic emergency. That was compounded by what critics see as indecision on how to tackle it, particularly whether to go to the IMF.

The government repeatedly had said an IMF program wasn’t inevitable, or at least not required yet. Mr. Khan toured allies, raising billions of dollars in loans from allies Saudi Arabia, the United Arab Emirates and China in his first months in office, but they proved inadequate.

The government has reduced the current-account deficit in its first few months in office but fiscal policy has been more challenging.


Growth of the $300 billion economy is now forecast to come in at some 3% this year, down from over 5% last year, and far below key Asian competitors. Pakistan needs to grow at around 7% just to absorb the new entrants to the job market each year from its brisk population growth. Given that poor economic outlook, the private-sector investment the government had hoped for hasn’t materialized.

Under the budget strictures laid down by the IMF, some $5 billion will have to be found from new taxes and curtailed spending, said Mohammad Sohail, chief executive of Topline Securities, a Pakistani brokerage.

“There was no alternative to the IMF from day one. The stabilization could have started months ago. Now the pain will be more,” said Mr. Sohail. “If they handle this very tough period effectively, they can be out of this economic mess in 24 months.”

Pakistan has one of the lowest tax bases in the world, with tax revenue amounting to around 13% of gross domestic product. Khaqan Najeeb, adviser and spokesman at the Ministry of Finance, said that they would aim at increasing the tax-GDP ratio by 3-4 percentage points under the three-year program, as special tax concessions for some business sectors were eliminated and more of the population were brought into the tax net.

—Waqar Gillani in Islamabad contributed to this article.

Write to Saeed Shah at saeed.shah@wsj.com