OPINION: IMF projections for FY2025-26

The Staff Report of the IMF after the completion by the Executive Board of the second review of the IMF Programme contains a set of macroeconomic projections of Pakistan for 2025-26. The objective of this article is to highlight and analyse these projections.

GDP growth rate: The IMF projection for 2025-26 is of a GDP growth rate of 3.2 percent. However, this does not reflect the large negative impact of the floods in the earlier months of 2025-26.

The last floods of 2022-23 had led to a precipitate a fall in the GDP growth to negative 0.2 percent. This was due particularly to the devastation of crops, leading to a fall of 1.2 percent in crop outputs. There is likely to have been a similar impact this year. Already, the fall in cotton output is estimated at over 5 percent.

The manufacturing sector may show a modest recovery, with the growth rate rising to 3 percent. Services will show an intermediate growth rate of 2 to 2.5 percent. Overall, the GDP growth rate in 2025-26 is more likely to be in the range of 2 to 2.5 percent, somewhat below the IMF projection of 3.2 percent.

Unemployment rate: This is a technically questionable projection by the IMF. There are two problems respectively with the level and trend.

The unemployment rate is shown as 8 percent in 2024-25 and declining to 7.5 percent in 2025-26. However, the Population and Housing Census of 2023 has revealed that the unemployment rate was as high as 22 percent. More recently, the 2024-25 Labour Force Survey has estimated it at 7.1 percent. There is, therefore, a wide divergence in the estimates of the unemployment rate in Pakistan.

Also, a GDP growth rate of 3 percent in 2024-25 is highly unlikely to have led to a fall in the unemployment rate, as projected by the IMF. A minimum GDP growth rate of 5 percent is necessary for the unemployment rate to show some decline. It is more likely that there will be double-digit unemployment rate in 2025-26, partly as a consequence of the policy measures sought by the IMF for stabilization of the economy.

Rate of inflation: Here again the IMF projection is on the conservative side. The rate of inflation is projected at the average monthly rate of 6.3 percent in 2025-26, ranging from 3.2 percent in June 2025 to 8.9 percent in June 2026.

There is evidence already of rising prices of food items like wheat flour, sugar and vegetables in the first half of 2025-26, partly due to the floods. Consequently, the average actual rate of inflation has risen to 5 percent.

The rate of inflation in the second half of the year will depend on the change in the value of the rupee, rate of monetary expansion and the extent of escalation in electricity and gas tariffs. The size of the forthcoming wheat and other crop outputs will determine the rate of inflation in food prices. Overall, there is the likelihood that the rate of inflation could reach double digit by June 2026. As such, the average rate of inflation could be 7 percent in 2025-26.

We turn now to the deficit in the consolidated budget of the federal and the provincial governments in 2025-26 and the likely outcome of the balance of payments.

Public finances: The IMF expects a continuation of the state of improvement in public finances, which started in 2024-25. The consolidated budget deficit was brought down sharply from 6.8 percent of the GDP in 2023-24 to 5.4 percent of the GDP in 2024-25.

The projected size of the deficit in 2025-26 is 4 percent of the GDP and very close to the government target. This is to be achieved by 0.4 percent of the GDP increase in the revenues-to-GDP ratio and by 1 percent of the GDP reduction in the expenditure-to-GDP ratio. In particular, the debt servicing cost is expected to come down by a significant 1.3 percent of the GDP.

The implied growth rate of revenues in 2025-26 of the IMF projection is close to 13 percent. The first quarter has witnessed an actual growth of only 6.3 percent. There is already a shortfall of almost Rs 500 billion in the first quarter.

Turning to expenditures, the IMF envisages a growth rate of only 4.8 percent in 2025-26. This includes the expectation that there will be containment in the cost of debt servicing by 3.5 percent. This will, of course, hinge on the trend in interest rates. The first five months have witnessed no change in the policy rate of the SBP. Expenditures, other than debt servicing, are projected to show a growth rate of less than 10 percent in 2025-26. Fortunately, the increase has been limited to 3 percent in the first quarter of 2025-26.

Therefore, achievement of the budget deficit target given by the IMF of 4.0 percent of the GDP will require some acceleration in revenue growth and continuation of the control that has been exercised by the federal and provincial governments over expenditures in the first quarter of 2025-26.

The IMF is also optimistic about the containment of the increase in public debt. It is projected to decline from 76.6 percent of the GDP in 2024-25 to 76.0 percent of the GDP in 2025-26. The implied growth rate in the level of public debt is 9 percent. This is likely to be achieved if the budget deficit target is met.

Balance of payments: The projection of the balance of payments of Pakistan 2025-26 is perhaps the most critical set of projections. These projections are based on the value of the nominal GDP at close to USD 405 billion in 2025-26, with the exchange rate of the rupee falling to Rs 311 per USD by end-June 2026.

The first projection relates to the current account. Realistically, the IMF expects a transformation from a surplus of approximately USD 2 billion in 2024-25 to a deficit of close to USD 2.5 billion in 2025-26. The first four months have seen a deficit of USD 0.7 billion. If this level is maintained then the IMF target for the year will be achieved.

The real issue is with regard to the size of implied surplus due to net inflows into the balance of payments plus the net inflow from the IMF. This is estimated from the IMF projections at USD 3.3 billion in 2025-26, as compared to USD 5.2 billion in 2024-25. As such, it appears to be an achievable target.

However, the first four months have witnessed a near zero inflow into the build-up of reserves. In fact, there has been a negligible balance in the net inflows and a small net repayment to the IMF. As such, unless the inflows increase the rise in foreign exchange reserves from USD 14.5 billion at the end of 2024-25 to USD 17.8 billion by the end of 2025-26 appears currently to be an optimistic projection by the IMF. If, however, it does happen then this will provide a safe import cover of 2.7 months and the on-going IMF programme will be considered as a successful programme in reducing the external vulnerability of Pakistan.

The IMF has also given a separate projection within the balance of payments of the likely level of foreign direct investment in 2025-26 at USD 2 billion. During the first four months the inflow has been USD 640 million. At this rate, FDI will come close to the target level of USD 2 billion.

The final estimated magnitude given is of the incidence of poverty in Pakistan. IMF has given the magnitude at only 21.9 percent in 2019. This relates to the last Household Integrated Economic Survey (HIES) by the PBS (Pakistan Bureau of Statistics) in 2018-19, when it was possible to derive the extent of poverty from this type of survey. However, the World Bank has released an estimate of poverty incidence at close to 45 percent in recent years. Perhaps, IMF wants to avoid the perception that its External Fund Facility requires the implementation of reforms, which worsen the state of poverty in a country. This is a common allegation.

Overall, the IMF projections expect minor enhancement in the growth process in the country, continuation of a single-digit rate of inflation, declining unemployment, significant improvement in the state of public finances and a positive outcome in the external balance of payments with the reserve cover of imports rising to a near safe level.

Copyright Business Recorder, 2025