The International Monetary Fund (IMF) has recognized signs of recovery in Pakistan’s economy following the approval of the latest tranche under its loan program. However, it issued a warning that the ongoing conflict in the Middle East presents a significant external risk to the country’s fragile economic outlook.
In its comprehensive review released after authorizing the disbursement, the IMF highlighted that economic activity gained momentum during the first half of fiscal year 2026, with growth indicators improving amid stricter macroeconomic policies. The Fund projects Pakistan’s gross domestic product (GDP) to grow by 3.6 percent by the end of the current fiscal year, while inflation is expected to average around 7.2 percent.
The report credited the State Bank of Pakistan for playing a crucial role in curbing inflation through timely and tight monetary policy measures. Meanwhile, Pakistan’s current account remained broadly balanced, and foreign exchange reserves exceeded expectations, reaching $16 billion by the end of December, with potential to rise to $17.5 billion in the upcoming months.
Despite these positive signals, the IMF identified the Middle East war as one of the most pressing external threats to Pakistan’s economy. It emphasized that the conflict weighs heavily on the near-term outlook, given Pakistan’s high dependence on energy imports and remittances from Gulf countries, along with exposure to global financial conditions.
Notably, 81 percent of Pakistan’s fuel imports come from Gulf Cooperation Council (GCC) countries, while 55 percent of remittances—equivalent to approximately nine percent of GDP—originate from the same region. The report warned that any significant disruption in the GCC economies or the return of migrant workers could severely impact these critical financial flows, which are vital for consumption and the balance of payments.
The economic effects of the Iran war have now been formally factored into Pakistan’s macroeconomic forecasts. Under the IMF’s baseline scenario, Pakistan’s GDP growth could slow by 0.2 percentage points in fiscal year 2026 and by 0.6 percentage points in FY27 due to the conflict. Inflation is expected to increase by about half a percentage point this year and by 1.5 percentage points next year.
Furthermore, disruptions to global supply chains and rising oil prices have raised Pakistan’s import costs and intensified inflationary pressures, thereby reducing consumers’ purchasing power. While the IMF described the direct impact as manageable under the baseline scenario, it stressed that downside risks remain elevated amid ongoing geopolitical uncertainties.
Regarding fiscal performance, the IMF noted that program targets have largely been met, although much of the progress stems from expenditure restraint rather than enhanced revenue collection. The consolidation achieved so far has primarily relied on increased revenue from the formal sector. However, the Federal Board of Revenue fell short of its end-December indicative target by 0.3 percent of GDP.
The report forecasts Pakistan’s public debt at 73.8 percent of GDP in the current fiscal year and anticipates a primary budget surplus equivalent to 1.6 percent of GDP in FY26, which it interprets as a sign of improving fiscal discipline. The IMF also underscored the importance of boosting competitiveness in business and productive sectors to sustain long-term economic growth.
It called for further reforms in the foreign exchange market, adequate bank capitalization, and continued rebuilding of foreign exchange reserves. Additionally, the Fund referenced Pakistan’s 28-month Resilience and Sustainability Facility (RSF) program, designed to help the country address climate-related risks and natural disasters. The report emphasized the need for improved water management, enhanced climate monitoring systems, and stronger coordination between federal and provincial governments to bolster climate resilience.
In a significant development, the IMF noted that Pakistan’s transition toward an interest-free banking system has been formally incorporated into program monitoring following court directives. The strategy must clearly define the implementation path for financial institutions and outline the approach to resolving outstanding conventional liabilities. The government’s financial sector strategy, which sets a roadmap toward a constitutionally mandated “riba-free” economy, is scheduled as a structural benchmark to be completed by the end of June 2026.
Overall, the IMF concluded that the consistent application of robust economic policies has helped stabilize Pakistan’s economy and improve investor confidence. However, it cautioned that ongoing reforms and prudent policymaking will be crucial to navigate the increasingly uncertain global environment.
