ISLAMABAD: International Monetary Fund (IMF) has said that growth was stronger than anticipated in fiscal year 2025, but the recent floods moderately dampen the outlook for fiscal year 2026, while inflation is expected to increase.
The Fund in its latest report ‘second review under the extended arrangement under the extended fund facility, first review under the resilience and sustainability facility, request for a waiver of non-observance of a performance criterion, and modification of performance criteria’ stated that continued strong policy implementation has helped Pakistan weather several shocks this year.
Despite being weighed down by the floods, growth is projected to increase slightly to 3.2 percent in fiscal year 2026, driven by industrial and services activity and supported by steady reform implementation and progressively improving financial conditions and confidence.
Inflation is expected to increase temporarily, peaking at around 8-10 percent due to higher food prices and adverse base effects before a durable return to target in fiscal year 2027.
The current account is projected to revert to a small deficit in fiscal year 2026. Besides the anticipated negative impact of the floods, imports are also expected to rise following tariff cuts under the new National Tariff Policy (NTP). Remittances are projected to remain resilient, and to a large extent offset the increase in the trade deficit. Over the medium term, the current account is projected to remain in a modest deficit at or below 1 percent of GDP. Access to external commercial financing is expected to gradually improve, including through a modest Panda bond issuance in 2026 and expected market re-entry in 2027.
While accommodating the emergency relief associated with the floods, the primary balance target of 1.6 percent of GDP is projected to be within reach, implying a broadly neutral fiscal stance in fiscal year 2026. Over the medium-term, sustained primary surpluses of around 2 percent will continue to support the gradual decline of public debt to around 60 percent of GDP by FY30. Gross financing needs will remain elevated, although gradually declining, supported by progress on lengthening domestic maturities.
Impact on growth, inflation, C/A by flooding: IMF paints likely grim scenario
While interest costs will continue to absorb a sizeable part of budgetary resources, the interest bill is projected to fall below 5 percent of GDP over the medium-term. The authorities’ initial estimate of damages is around Rs 800 billion (about 0.6 percent of GDP), mostly due to damages to housing, infrastructure, cropland, and livestock. So far, these are substantially lower than the damage of the 2022 floods, though the final cost may be revised as a more comprehensive damage assessment is completed.
Based on the initial damage assessment, the economic impact of the floods is expected to be moderate: GDP Growth is expected to be around ½ percentage point lower in FY26, mostly reflecting damage to key Kharif crops and direct spillovers to industrial and services activity. Inflation is expected to increase by around ½ percentage point on average in FY26 relative to a scenario with no flood impact—but still lower than projected under the program—with recent increases in the price of flour and perishable food items projected to partially subside.
Fiscal Revenues are expected to decline by around Rs 110 billion due to the weaker outlook for activity. The current account is expected to deteriorate by around USD1 billion due to the floods, reflecting the impact on agricultural exports, import needs to cover supply gaps from flood-damaged crops, and expected higher remittance flows in the post-flood period. The authorities’ policy response is expected to focus on a mix of immediate relief and broader reconstruction efforts.
Financial conditions and external balances have remained favourable, with Pakistan posting its first current account surplus in 14 years in fiscal year 2025 and reserve rebuilding continuing. Headline inflation has been contained despite some flood-related food price increases.
The 37-month Extended Arrangement under the Extended Fund Facility (EFF), approved on September 25, 2024, is on track.
It further stated that the recent floods underscore the urgency of maintaining timely program implementation to continue to build resilience and support sustainable growth. The fiscal year 2026 primary surplus target remains achievable while accommodating flood-related spending needs. The fiscal effort will be supported by continued progress on fiscal reforms to boost revenue mobilization, reduce debt, and create fiscal space for needed social, health, and education spending.
Monetary policy has helped contain inflationary pressures and should remain appropriately tight and data-dependent to keep inflation within the SBP’s target range, while allowing exchange rate flexibility to absorb shocks and support continued rebuilding of reserves.
Copyright Business Recorder, 2025
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