IMF is all for maintaining prudent policies

ISLAMABAD: In the face of an uncertain global environment, Pakistan needs to maintain prudent policies to further entrench macroeconomic stability, while accelerating reforms necessary to achieve stronger, private sector-led and sustainable medium-term growth. This was stated in a statement issued by the International Monetary Fund (IMF) following the Executive Board meeting on Pakistan.

Nigel Clarke, Deputy Managing Director and Acting Chair, issued the statement which noted that Pakistan’s reform implementation under the EFF arrangement has helped preserve macroeconomic stability in the face of several recent shocks. Real GDP growth has accelerated, inflation expectations have remained anchored, and fiscal and external imbalances have continued to moderate.

Following the Executive Board discussion, Nigel Clarke, Deputy Managing Director and Acting Chair, issued a statement which noted that Pakistan’s reform implementation under the EFF arrangement has helped preserve macroeconomic stability in the face of several recent shocks.

Real GDP growth has accelerated, inflation expectations have remained anchored, and fiscal and external imbalances have continued to moderate. “The authorities’ commitment to the fiscal year 2026 primary balance target while accommodating urgent relief needs in response to the recent severe floods is a strong signal of their commitment to build fiscal policy credibility.

In parallel, advancing reforms to raise revenues via tax policy simplification and base broadening is key to achieving fiscal sustainability and building the fiscal space necessary to boost climate resilience, social protection, human capital development, and public investment.

“An appropriately tight monetary policy stance has been pivotal in reducing inflation and should be maintained to ensure inflation remains anchored within the SBP’s target range. Further improvements in central bank communication will support effective monetary policy implementation. The SBP should continue efforts to deepen the interbank foreign exchange market, while allowing exchange rate flexibility to absorb shocks.

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Decisive financial regulation enforcement is necessary to maintain a sound and adequately capitalized financial sector. At the same time, promoting capital market development will help expand the public and private sectors’ financing options”, it added. “Accelerating reforms in the energy sector is critical to safeguarding its viability and improving Pakistan’s competitiveness.

Timely implementation of power tariff adjustments has helped reduce the stock and flow of circular debt. Subsequent efforts need to focus on sustainably reducing electricity production and distribution costs and addressing inefficiencies in the power and gas sectors.

“Efforts to advance structural reforms should continue to unlock growth potential and attract high-impact private investment. To this end, the publication of the Governance and Corruption Diagnostic report is a welcome step in accelerating governance reforms. Additional efforts should focus on SOE governance reforms and privatization, enhancing the business environment, and improving economic data and statistics.

“Reducing Pakistan’s vulnerability to extreme weather events, which has been underscored by the recent floods, will enhance macroeconomic and fiscal sustainability. The RSF arrangement is supporting efforts to strengthen natural disaster response and financing coordination, improve the use of scarce water resources, raise climate considerations in project selection and budgeting, and improve the information on climate-related risks in financing decisions.” The Fund has estimated GDP growth at 3 percent in fiscal year 2025 and projected at 3.2 percent for 2026. The unemployment rate is expected to gradually decline from 8.3 percent to 7.5 percent over the same period.

Average consumer price inflation fell from 23.4 percent in 2024, to 4.5 percent in 2025, before edging up to 6.3 percent in 2026. End-period inflation is projected at 8.9 percent for 2026.

The overall budget deficit is expected to narrow only gradually—from -6.8 percent of GDP in 2024 to -5.4 percent in 2025, reaching -4 percent by 2026. Tax and grant-to-GDP ratio is estimated at 15.9 percent in 2025 and 16.3 percent in 2026. The primary balance, is projected to remain in surplus at 2.5 percent of GDP in 2026.

Total general government debt excluding IMF obligations is estimated to increase to 70.6 percent of GDP in 2025, before easing slightly to 69.6 percent in 2026. External government debt remains stable at around 22.5 percent of GDP.

Broad money growth is estimated at 13.7 percent in 2025 and projected at 14.6 percent in 2026, while private sector credit is projected to rebound strongly to 15 percent in 2026 from 12 percent in 2025.

The current account deficit, is projected to turn into a small surplus of 0.5 percent of GDP in fiscal year 2025 before shifting back to a modest deficit of 0.6 percent in 2026. Gross foreign exchange reserves are set to rise—from USD9.4 billion in 2024 to USD14.5 billion in 2025, reaching USD17.8 billion in 2026. This would boost import coverage from 1.6 months to 2.7 months.

The country’s export sector remains anchored by textiles, which generated USD17.3 billion in 2024-25, with key markets in the European Union, United States, and UAE. With a population of 240.5 million and per-capita GDP of USD1,676, Pakistan continues to grapple with development challenges, including a 21.9 percent poverty rate. Foreign direct investment is projected at 0.5 percent of GDP in 2026 compared to 0.6 percent in 2025.

The statement further noted that Pakistan’s 37-month EFF was approved on September 25, 2024, and aims to build resilience and enable sustainable growth. Key priorities include (i) entrenching macroeconomic stability through consistent implementation of sound macro policies, including rebuilding international reserve buffers and broadening the tax base; (ii) advancing reforms to strengthen competition and raise productivity and competitiveness; and (iii) reforming SOEs and improving public service provision, developing human and physical capital, and restoring energy sector viability.

Pakistan’s policy efforts under the EFF have delivered significant progress in stabilizing the economy and rebuilding confidence amid a challenging global environment and recent severe floods. Fiscal performance has been strong, with a primary surplus of 1.3 percent of GDP achieved in fiscal year 2025, in line with targets. Inflation has increased, reflecting the impact of the floods on food prices, but this is expected to be temporary. Gross reserves stood at USD14.5 billion at end-fiscal year 2025, up from USD9.4 billion a year earlier, and are projected to continue to be rebuilt in fiscal year 2026 and over the medium term.

The 28-month RSF was approved on May 9, 2025, and is supporting the authorities’ efforts to reduce vulnerabilities to natural disasters and to build economic and climate resilience. The authorities’ program: (i) prioritizes building resilience to natural disasters and strengthening public investment processes at all levels of government; (ii) making scarce water resource usage more efficient, including through better pricing; (iii) strengthening federal-provincial coordination of natural disaster response; (iv) improving the information architecture for, and disclosure of, climate-related risks by banks and corporates; and (v) supporting Pakistan’s efforts to meet its mitigation commitments and reduce related macro-critical risks.

The Fund Executive Board completed the second review of the Extended Arrangement under the Extended Fund Facility (EFF), allowing the authorities to draw the equivalent of about USD1 billion, and the first review of the arrangement under the Resilience and Sustainability Facility (RSF), allowing the authorities to draw the equivalent of about USD200 million. The press release to this effect was issued in the early hours of December 9.

Copyright Business Recorder, 2025