Impact on growth, inflation, C/A by flooding: IMF paints likely grim scenario

ISLAMABAD: The International Monetary Fund (IMF) has warned that severe flooding in Pakistan during the third quarter of 2025 may have more adverse effects on growth, inflation, and the current account than currently estimated, although these impacts remain highly uncertain.

The Fund, in its latest report “Regional Economic Outlook, Middle East and Central Asia, Resilience amid Uncertainty: Will it Last?”, stated that while inflation in Pakistan has decelerated significantly this year thanks to lower food and energy prices, it is expected to increase in 2026 on the account of the normalization of these prices and the phasing out of short-term electricity subsidies.

Pakistan’s growth is projected to increase to 3.6 percent in 2026, supported by steady reform implementation and the improving financial conditions and confidence, it added.

3.5-4pc growth likely despite flood damages

The Fund has projected an increase in exports of goods and services from USD 40.7 billion in 2025 to USD 42.1 billion in 2026. Further significant increase has been projected in imports of goods and services for Pakistan from USD 70.1 billion in 2025 to USD 74 billion in 2026.

The Fund has projected the government fiscal balance for Pakistan at -4.1 percent of GDP for 2026, compared to -5.3 percent in 2025.

The Fund has projected an increase in total gross external debt from USD 30.1 billion in 2025 to USD 30.6 billion in 2026. Gross official reserves are projected to increase from USD 14.5 billion in 2025 to USD 17.7 billion in 2026.

The Fund stated that higher borrowing costs may exacerbate fiscal and financial vulnerabilities across the two regions, particularly in economies with elevated projected government gross financing needs and banking sectors that hold relatively large shares of sovereign bonds on their balance sheets (Algeria, Egypt, Pakistan).

In the Middle East, North Africa, Afghanistan, and Pakistan region (MENAP), oil importers, cyclically adjusted primary fiscal balances are projected to improve, as tax policy and tax administration reforms help mobilize tax revenues (Egypt, Jordan, Morocco, Pakistan) and energy subsidy reforms help contain spending (Egypt, Morocco, Pakistan).

Building resilience against future shocks and seizing opportunities in the evolving global trade landscape would also require an acceleration of structural reforms. Recent reforms have played a significant role in sustaining growth across the MENAP and the Caucasus and Central Asia (CCA) regions. Reforms have included tax and energy sector measures in Pakistan, energy price reform in Uzbekistan, and diversification agendas in Jordan, Morocco, and Saudi Arabia. These initiatives have strengthened resilience and supported durable, private-sector-led growth. Nonetheless, further progress is needed in several longstanding and emerging areas.

Economic performance in MENAP and CCA has remained generally robust in 2025 as both regions largely avoided the direct fallout from higher US tariffs and global trade disruptions, whereas recent regional geopolitical tensions had only a limited and short-term impact.

THE Fund stated that despite ongoing global uncertainty and renewed geopolitical tensions, including a short-lived conflict between the Islamic Republic of Iran and Israel in June, economies in MENAP and CCA have shown resilience so far in 2025.

The expiration of the 90-day pause on US tariffs, announced on April 2, led to a relatively moderate increase in tariff rates for most MENAP and CCA economies. By the end of September, effective US tariff rates for most countries in these regions had converged to a range of 10–15 percent, with some notable exceptions (Algeria, Iraq, Kazakhstan, Pakistan, Tunisia).

Although these rates remain significantly higher than in 2024, the overall impact on merchandise exports is expected to be limited. This reflects the regions’ low exposure to the US market— which accounts for only about 4.5 percent of their total merchandise trade—and the exemption of oil products from the new tariffs.

In the MENAP region, remittances continued to accelerate in 2025, particularly in Egypt and Pakistan, contributing to improvements in current account balances. Among MENAP oil importers, growth in 2025 benefited from strong tourism inflows (Egypt, Morocco, Tunisia), a rebound in agricultural production (Jordan, Morocco, Tunisia), rising infrastructure investment (Morocco), and resilient remittances (Egypt, Jordan, Pakistan).

The economic resilience observed so far in 2025 has led to an upward revision of growth projections compared to May. GDP growth in the MENAP region is now projected to reach 3.2 percent in 2025, up from 2.1 percent last year, an upgrade of 0.6 percentage points compared to May.

This revision reflects the factors that have sustained economic activity amid high global uncertainty: increased oil production and robust domestic demand among oil exporters; continued positive impacts from reform efforts (Jordan); further macroeconomic stabilization efforts (Egypt); stronger investment (Morocco); and a rebound in agricultural production because of favorable climatic conditions (Morocco, Pakistan, Tunisia) and expanded arable land (Sudan).

However, growth projections for some MENAP low-income countries (LICs) have been revised down because of lower gold production (Mauritania) and cuts in foreign aid (Somalia). Growth projections for the CCA region have been raised to 5.6 percent for 2025, slightly above last year’s 5.5 percent, and 0.7 percentage points higher than the May projection.

Addressing a press conference, Jihad Azour, Director of the Middle East and Central Asia Department, IMF, said that despite the year marked by trade tensions and regional conflict, the economies of the Middle East, North Africa, Pakistan, and the Caucasus in Central Asia have shown resilience. The growth has held better than expected, and the impact of higher U.S. tariffs and geopolitical tensions has been short-lived.

He said that economic activity in the MENA region and Pakistan has been stronger than expected. We now project growth of 3.2 percent in 2025, up from 2.1 percent in 2024, and higher than our April forecast. Oil exporters have benefited from higher oil output following the faster unwinding of OPEC+ cuts.

Oil importers and Pakistan have gained from low energy prices, strong remittances, and a vibrant tourism sector, all supporting domestic demand. In MENA and Pakistan, growth should continue to strengthen, supported by reforms and resilient domestic demand, Azour added.

Copyright Business Recorder, 2025