EDITORIAL: The International Monetary Fund (IMF) has projected Pakistan’s economy to grow by 3.5 percent in FY27, compared with the government’s target of 4 percent. The forecast could prove wrong in a rather more consequential manner than the customary half-percentage-point disagreement suggests.
The IMF may be underestimating economic growth while simultaneously underestimating the external pressure that stronger growth will generate.
The Fund’s projection rests on the assumption that higher commodity prices, tighter financial conditions, and weaker external demand following the Middle East conflict will suppress domestic activity. Its staff report estimates that the conflict will reduce Pakistan’s FY27 growth by 0.6 percentage points, lowering the earlier programme projection from 4.1 percent to 3.5 percent. This is internally coherent, but it may have the direction of Pakistan’s domestic cycle wrong.
The available evidence suggests that growth momentum was already firmly established before the external shock arrived. Pakistan Bureau of Statistics (PBS) estimates show GDP expanding by 3.92 percent in the first quarter of FY26, 4.05 percent in the second, and 3.99 percent in the third. The government’s provisional full-year estimate of 3.7 percent therefore sits below the pace recorded throughout the first nine months and remains susceptible to revision. Recent revisions to national accounts have generally been upward.
The SBP’s own assessment initially pointed in the same direction. Its February Monetary Policy Report raised the FY26 growth range to 3.75-4.75 percent and expected growth to rise further in FY27. Although the Bank subsequently shifted its FY26 assessment towards the lower end of that range following the regional conflict, its underlying diagnosis remained one of sustained momentum in industrial activity, construction, private credit and aggregate demand.
The production data have hardly collapsed. Large-scale manufacturing expanded by 6.44 percent during July-April FY26, with April output still 6.06 percent higher than a year earlier (YoY). Private-sector credit has been expanding across working capital, fixed investment and consumer financing. The SBP reported that credit to private businesses increased by Rs862 billion during the first half of FY26, well above the average recorded over the preceding five years. Its June monetary policy statement subsequently placed private-sector credit growth at around 13 percent.
This is what an economy entering an upswing looks like. Manufacturing output rises, inventories and working-capital requirements increase, consumer financing returns, construction activity strengthens and the services economy follows the commodity-producing sectors. The effects of the 1,150-basis-point monetary easing delivered since June 2024 are also still working their way through credit and investment decisions. Monetary policy operates with lags; economic activity does not conveniently stop accelerating when an external forecast changes.
Inflation may reinforce rather than immediately extinguish this cycle. Headline inflation stood at 11.1 percent in June, while wholesale prices were 10.7 percent higher than a year earlier. With the policy rate at 11.5 percent, the ex-post real policy rate has narrowed almost to zero. Core inflation also remains elevated. Financial conditions are therefore considerably less restrictive than the nominal policy rate suggests, particularly for businesses experiencing higher sales, inventory values and working-capital needs.
This creates a plausible case for FY27 growth exceeding both the IMF’s 3.5 percent forecast and the government’s 4 percent target. If the FY26 estimate is eventually revised above 4 percent, the carryover from manufacturing, credit and services could place FY27 growth above 4.5 percent. Such an outcome would ordinarily be welcomed. In Pakistan’s present circumstances, it should also be treated as an early warning.
The external account is already beginning to reveal the familiar imbalance beneath the reassuring headline. Pakistan recorded a current-account surplus of only $255 million during July-May FY26, down from $1.6 billion during the corresponding period a year earlier. More importantly, the goods and services deficit widened from $27 billion to $32.2 billion. The merchandise deficit alone increased by almost $6 billion - from $24.4 billion to $30.2 billion. A surge in remittances, which reached $38.1 billion during the period and $41.6 billion for FY26, has concealed much of the deterioration in the trade account.
The composition of imports is equally instructive. Automobiles, iron and steel, machinery and other intermediate goods have been among the principal drivers of non-oil import growth. These are precisely the categories that accelerate when domestic production, construction and consumption recover. Higher global energy and commodity prices will now be added to this expanding volume of demand. Pakistan consequently faces both elements of external deterioration at once: a rising quantity of imports and a potentially higher price for them.
The exchange rate is providing little visible adjustment. The rupee averaged Rs278.84 to the dollar in May and remained close to Rs278 in July, despite the return of double-digit inflation and a widening merchandise deficit. Meanwhile, the real effective exchange rate increased from 98.03 in June 2025 to 106.15 in May 2026. A REER above 100 does not, by itself, establish overvaluation, as the SBP correctly cautions. Its direction, combined with domestic inflation and an almost motionless nominal exchange rate, nevertheless indicates that the currency is appreciating in real terms precisely when external pressures are rebuilding.
This is the stage at which Pakistan has repeatedly mistaken exchange-rate stability for macroeconomic stability. The episodes preceding the FY07-08, FY18 and FY22 adjustments differed in their details, but the sequence was depressingly similar. Growth and credit accelerated, imports responded faster than exports, commodity prices enlarged the import bill, and the currency was prevented from adjusting sufficiently early. Reserves were then used to defend the appearance of stability until the external financing gap became impossible to disguise. The eventual adjustment was larger, more inflationary and more destructive than an earlier response would have been.
Pakistan begins FY27 with a stronger reserve position than it had before some previous crises. SBP reserves stood at approximately $18.5 billion in early July 2026. That provides valuable protection against temporary volatility, but reserves are a buffer rather than a substitute for adjustment. A large buffer can even encourage policy complacency by allowing an emerging imbalance to be financed for several months. Once import payments, external debt servicing and private demand begin drawing down reserves simultaneously, confidence can deteriorate with remarkable speed.
If the present combination of accelerating domestic demand, elevated commodity prices, a nearly neutral real policy rate and a rigid nominal exchange rate persists, external pressure is likely to become considerably more visible between March and September 2027. That is not a prediction of inevitable crisis. It is the period in which the cumulative effects of FY27 credit growth, imports and real exchange-rate appreciation are likely to confront the available reserve and financing buffers.
The required response is therefore preventive. Exchange-rate flexibility should be allowed to absorb external pressure before reserve losses become entrenched. Monetary policy must preserve an adequately positive real rate as inflation evolves, while fiscal policy must deliver the promised primary surplus without relying on accounting adjustments or deferred expenditure. Credit growth, consumer imports and the monthly merchandise deficit should be treated as forward indicators of external stress rather than evidence that recovery can safely be left unattended.
Pakistan’s immediate policy risk may no longer be growth falling short of 3.5 percent. It may be growth exceeding 4.5 percent through the same consumption, credit and import channels that have repeatedly produced balance-of-payments crises. A higher growth number would make the IMF forecast look excessively pessimistic, while leaving Pakistan in a far more dangerous position than that forecast implies.
Copyright Business Recorder, 2026