OPINION: The positive scenario by IMF

The IMF Second Review Staff Mission Report contains a set of positive macroeconomic projections of Pakistan from 2025-26 to 2029-30. These five-year projections are considered as feasible and achievable with the appropriate set of policies and reforms.

The objective of this article is to describe the key aspects of these projections and their likelihood, given the outlook over the five years.

The projections postulate the achievement simultaneously of growth and stability as follows:

(i) The GDP growth rate is expected to accelerate at a moderate pace from 2.7 percent in 2024-25 to 3.2 percent in 2025-26, 4.1 percent in 2026-27, 4.5 percent in 2027-28, and stay thereafter at 4.5 percent. It is surprising, however, that the IMF does not expect a growth rate of 5 percent by the fifth year.

(ii) Despite the significantly rising GDP growth rate, the rate of inflation is expected to remain moderate and single-digit. It is projected to rise from only 4.5 percent in 2024-25 to 6.3 percent in 2025-26 and to 7 percent in 2026-27. Thereafter, it is expected to remain constant at 6.5 percent. Therefore, the ‘Philip’s Curve’ will not operate in Pakistan, whereby higher GDP growth rate is accompanied by demand-pull pressures which lead to more inflation.

(iii) Pakistan external vulnerability will simultaneously be reduced substantially. The current account deficit in the balance of payments will remain below or at 1 percent of the GDP over the next five years. It will rise somewhat from a deficit of 0.6 percent of the GDP in 2025-26 to 1.0 percent of the GDP in 2029-30.

There will be increasing net inflows into the financial account of the balance of payments, from USD 2.5 billion in 2024-25, to USD 3.8 billion in 2025-26, to USD 5.9 billion in by 2026-27 and approach USD 10 billion by 2029-30.

The result is likely to be exponential growth in foreign exchange reserves. From USD 14.5 billion in 2024-25, they are projected to rise to USD 17.8 billion in 2025-26 and to USD 23.3 billion in 2026-27. Therefore, Pakistan will have attained the safe reserves cover of over three months by the end of the present IMF programme. As such, there will be no need to go into another Programme.

The task is to determine the combination of exogenous factors, policies and reforms, which will remove the trade-off between stabilization and growth. As highlighted above, over the next five years IMF expects to see acceleration in GDP growth, continuation of moderate inflation and strengthening of Pakistan’s external position, with relatively high foreign exchange reserves.

The global environment is characterized by the terms of trade that Pakistan is likely to face in coming years. From a worsening by 10.5 percent in 2024-25, they are projected by the IMF to improve by 2.7 percent in 2025-26 and by 1.7 percent in 2026-27. Thereafter, they are likely to remain, more or less, unchanged for Pakistan. Also, remittances are projected to increase by USD 5 billion by 2029-30, above the higher level of USD 38 billion attained in 2024-25. These trends will facilitate control over the size of the current account deficit.

The rising level of fixed investment projected by the IMF is based on the assumption; first, that there will continue to be political stability in Pakistan. Second, that the country will face no major natural disasters, like the floods of 2022-23 and 2024-25. Third, there will no escalation in conflicts across the borders and terrorism will be brought increasingly under control. Consequently, the level of fixed investment is expected to rise significantly from 12 percent to 14 percent of the GDP in five years.

The macroeconomic projections have also to be achieved on basis of the magnitudes chosen of the policy variables impacting on growth and stabilization. The IMF has indicated the following:

(i) The rupee is expected to depreciate by 5.9 percent in 2025-26, 6.3 percent in 2026-27, 4.5 percent annually from 2027-28 to 2029-30.

(ii) The nominal policy rate is expected to fall by 1 percent point in 2025-26 and 2026-27. Thereafter, the fall is expected annually of 0.5 percent point.

(iii) The overall tax-to-GDP ratio is expected to increase from 12.3 percent in 2024-25 to 13.3 percent of the GDP and to 13.7 percent of the GDP in 2026-27. Thereafter, it is expected to remain constant at 13.9 percent of the GDP.

(iv) Perhaps surprisingly, the level of development spending is expected to remain constant at close to 2.5 percent of the GDP. It appears that IMF does not indicate the need for a larger and faster expansion of infrastructure to facilitate the process of growth.

What are the consequences of a favorable external environment of global trade and domestic stability, along with the intensity and range of policies described above?

We first look at the impact on the public finances. The overall budget deficit is expected to be curtailed substantially over the next five years, from 5.4 percent of the GDP n 2024-25 to only 2.8 percent of the GDP by 2029-30. Bulk of this decline is anticipated from containment of expenditure, from 21.2 percent of the GDP in 2024-25 to 18.7 percent of the GDP in 2029-30.

The level of revenues is expected to remain, more or less, unchanged at close to 16 percent of the GDP. Tax revenues will increasingly substitute for non-tax revenues. The latter will fall from 3.5 percent to 2 percent of the GDP due especially to the big fall in SBP profits, with the fall in interest rates.

Second, the bottom line is the impact on the balance of payments. The sizes of the current account deficit and financial account surplus projected by the IMF have already been highlighted above. Within the current account, exports are expected to show an average growth rate of 7.1 percent over the five years, while imports are projected to increase at a somewhat slower growth rate of 6.7 percent. The liabilities under primary income outflows are anticipated to grow by a marginal 1.2 percent. However, there is the expectation of significant increase in remittances as highlighted above.

The projected financial account of the balance of payments contains an increase of as much as 28 percent annually, with the level rising from USD 2.4 billion in 2024-25 to almost USD 10 billion by 2029-30. This will be due primarily to a diversification of inflows. Net borrowings from multilaterals and governments will be lower due to higher level of amortization. Foreign direct investment will rise to USD 3 billion.

The big jump will be in inflows from private sources. They were negative USD 1.8 billion in 2024-25. Improved perceptions of Pakistan’s external position are expected to lead to an increase in inflows from international commercial banks and by bond flotations to over USD 6 billion by 2029-30.

Overall, the IMF medium-term projections of Pakistan’s economy are positive in nature. Thanks are due to IMF for having confidence in the process of economic management in the country, such that by end of the present programme, Pakistan will emerge as an economy characterized by both growth and stabilisation.

However, there is need to emphasize that many of the projections are very optimistic in nature, including, first, that Pakistan will achieve a significant degree of export-led growth and remittances will continue growing from the big jump in 2024-25. This is anticipated despite the likelihood that the Real Effective Exchange Rate (REER) index will be rising with limited nominal depreciation of the rupee. Already, the index stands at 105. It is not surprising that exports have fallen by 6.2 percent in the first five months of 2025-26.

Further, imports are likely to rise faster than projected by the IMF because of the overvalued exchange rate and significant fall in interest rates. This effect is already visible. Imports have gone up by 13.6 percent in the first five months of 2025-26 in the presence of nominal stability of the rupee. Overall, there is a big risk that the current account deficit could be significantly larger than the level projected by the IMF over the next few years.

Second, the IMF projections indicate that the Provincial governments will be successful in raising the tax-to-GDP ratio from 0.6 percent to 1.6 percent of the GDP in the next five years. The largest ‘tax gap’ at the provincial level is in the agricultural income tax. However, the powerful lobby of large farmers will continue to prevent substantially larger collections from this tax.

Third, there is the expectation of a very large reduction of 3 percent of the GDP in the debt servicing burden, due to the fall in interest rates. The fall in interest rates it will also facilitate a rise in the level of gross fixed capital formation, mostly by the private sector, from under 12 percent of the GDP in 2024-25 to 14 percent of the GDP by 2029-30. However, this will hinge on the end in the investment slump in the industrial sector since 2022-23.

Fourth, contrary to the IMF projection that development spending can remain unchanged at 2.4 percent of the GDP over the next five years without creating infrastructure constraints to faster growth, there will be the need for raising especially the Federal PSDP significantly as a percentage of the GDP. This will be necessary to facilitate increase in water resources, improvement in the electricity transmission and distribution network and the expansion of the network of highways.

Overall, Pakistan stands at a critical juncture. Up till now, efforts at stabilization of the economy have implied lower economic growth, and a rise in unemployment and poverty. The IMF expects Pakistan to be able to raise the GDP growth rate to 4.5 percent by 2027-28 after the end of the Programme and maintain a high level of foreign reserves equivalent to an import cover of over three months. We hope and pray that this happens.

Copyright Business Recorder, 2026