Pakistan has been hit recently by major floods and the impact in addition to loss of life is likely to be huge — reported initial estimates hover around half a percentage point decrease in economic growth for the current fiscal year, with likely increase as more information is internalized — as pointed out in the recently released October edition of International Monetary Fund’s (IMF’s) Regional Economic Outlook (REO) for Middle East and Central Asia, and titled ‘Resilience and uncertainty: will it last?’ as follows: ‘The 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.’
IMF’s October 14 dated press release no. 25/345 called for continuation of fiscal consolidation and a tight monetary policy stance, which means continuation of seeing an over-board role of austerity policies.
The press release titled ‘IMF Reaches Staff-Level Agreement on the Second Review for the 37-month Extended Arrangement under the Extended Fund Facility (EFF) and the First Review for 28-month Arrangement Under the Resilience and Sustainability Facility (RSF) – Pakistan’ indicated in this regard: ‘The State Bank of Pakistan (SBP) remains committed to a prudent monetary policy stance, guided by incoming data, including the impact of recent floods and the evolving economic recovery, to ensure inflation remains durably within its target range of 5-7 percent.
While the floods are likely to have a temporary impact on prices, the SBP stands ready to adjust its policy stance should price pressures intensify or inflation expectations become unanchored.’ In sharing this economic commitment of authorities, and not going against it – something in any way is reflected through the conditionalities of the current EFF programme – the IMF has agreed with this policy direction.
This is totally uncalled for, and in fact is detrimental to both macroeconomic stability and economic growth, given inflation in developing countries, including Pakistan, has traditionally been at least equally a fiscal/supply-side phenomenon, and especially in the wake of aggregate supply affecting catastrophic flooding and also, given the country needs much-greater investments into building up resilience since firstly inflation as a consequence of floods is clearly an aggregate supply-side phenomenon, and does not require squeezing aggregate demand through raising policy rate.
Moreover, the range of 5-7 percent should anyways be an undesirable target for inflation, given economic growth anyways is projected be a little better than population growth rate, and also the rising poverty, and unemployment rate after a number of years of aggregate demand squeeze policies, call for higher inflation target, and in fact a slight negative real interest rate.
Also, in particular given the urgent needs of dealing with flood related damages – including improving financial conditions of farmers to support them in sowing wheat, and other crops – there is also a need for the IMF to reverse current IMF programme conditionalities on reaching primary surplus.
Secondly, on the contrary, both the floods and the high vulnerability of country overall to climate change catastrophe – for instance, the country has topped the Global Climate Risk Index 2025 – calls for lowering policy rate – real interest rate is needlessly still at a high of positive 4 percent– to lower cost-push inflationary channel, and also to enable greater public- and private sector investments through both lower cost of capital, and reduced interest payment needs, positively impacting, in turn, fiscal space.
The extent of climate vulnerability, faced by the country can be gauged from the extensive scope of coverage of the Climate Risk Index, as indicated by its producers as ‘The Climate Risk Index (CRI)’, published since 2006, is one of the longest running annual climate impact-related indices. The CRI analyses climate-related extreme weather events’ degree of effect on countries.
In doing so, it measures the consequences of realised risks on countries. This backward-looking index ranks countries by their economic and human impacts (fatalities as well as affected, injured, and homeless) with the most affected country ranked highest.’ This clearly shows how extremely vulnerable the country is with regard to climate change. Unfortunately, the appropriate response needed is neither reflected much in the policy mindset of authorities, or by the though process of the IMF’s EFF programme.
Moreover, there appears to be a lack of notes sharing internally by IMF as well, whereby while the press release calls for continuing with fiscal consolidation, and tight monetary policy stance to rein in build-up of inflationary pressures – which are otherwise likely to come from aggregate supply shock, making in turn such advice unwarranted – while the REO report clearly indicates the difficulties higher interest rate will create, indicating as follows ‘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 broader context also, as per the recently released IMF’s flagship World Economic Outlook (WEO) report, Pakistan’s economic growth rate during ten years period of 2007-16 saw an average real GDP growth rate of 3.5 percent, while economic growth during the next ten years, that is during 2017-26 (with growth projections for fiscal years 2025-26, and 2026-27) is likely to be not much different at 3.4 percent! During all this time, and mostly even earlier, since the late 1980s the country has been following, neoliberal, over-board, and pro-cyclical policy stance – both in and outside of the IMF programme, and virtually without any policy break as such – while there has been neither sustained- economic growth, nor macroeconomic stability, while resilience has also continued on an overall diminishing path.
Copyright Business Recorder, 2025
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7