IMF Lowers Pakistan’s Growth Forecast to 2.6%

ISLAMABAD: The International Monetary Fund (IMF) has adjusted Pakistan’s GDP growth forecast for the fiscal year 2024–25, bringing it down to 2.6% from its previous estimate of 3.2%.

This downgrade reflects a subdued economic performance during the first half of the year and continued global uncertainties.

According to the IMF’s latest evaluation titled “First review under the Extended Fund Facility (EFF) arrangement, requests for modification of performance criteria, and request for an arrangement under the Resilience and Sustainable Facility (RSF)”, the economy grew only by 1.3% in Q1 and 1.7% in Q2 year-on-year.

This was primarily due to weaker yields from major Kharif crops and low industrial output.

Inflation Trends and Future Outlook

Inflation dropped to 0.7% (yoy) in March due to tight monetary policy and lower food and energy prices. However, core inflation is still high at around 9%. The IMF expects inflation to rise temporarily in the coming months. It should return to the 5–7% target range by fiscal year 2026 if strict policies continue.

Current government expenditure is holding steady at 18.9% of GDP, as per program expectations. However, achieving the FY2025–26 projection of 17.8% hinges on meeting a targeted GDP growth of 3.6%. Meanwhile, the Public Sector Development Program has been revised upwards from 2.3% to 2.5% of GDP, but actual disbursements by the Planning Ministry may not fully justify this revision.

Defence spending, initially budgeted at 1.7% of GDP, is now forecasted to rise to 1.9% in the next fiscal year. As for privatization, the IMF has projected zero proceeds for this and the next four years.

External Sector and Current Account

Pakistan’s current account deficit is expected to remain low at $0.2 billion (0.1% of GDP). This is supported by steady exports and rising remittances. Better macroeconomic stability and improved foreign exchange management are key factors.

Exports for FY2025 have been slightly revised down to $31.305 billion from $31.751 billion, while imports are projected to increase marginally to $57.634 billion, up from the earlier forecast of $57.180 billion.

Over the medium term, the CAD is expected to gradually expand to 1% of GDP due to a rebound in import demand.

Gross international reserves are set to improve, bolstered by committed financing from multilateral and bilateral partners, along with anticipated RSF disbursements of $1.3 billion. However, access to external commercial markets remains constrained. A modest “Panda” bond issuance is expected in FY2026, with a more comprehensive return to Eurobond and Global Sukuk markets projected for FY2027, dependent on regaining policy credibility.

IMF’s Policy Assessment and Future Recommendations

Following the Executive Board’s discussions, Nigel Clarke, Deputy Managing Director and Chair, commended Pakistan’s stabilization efforts:

“Pakistan has made important progress in restoring macroeconomic stability despite a challenging environment. Since the approval of the Extended Fund Facility, the economy continues to recover, with inflation sharply lower and external buffers notably stronger.”

However, he warned of elevated risks stemming from global economic uncertainties, regional geopolitical tensions, and internal structural weaknesses.

To safeguard economic gains and ensure long-term growth, Clarke emphasized:

• The “steadfast implementation of the FY2025 budget”
• Introduction of fiscal reforms like the “Agricultural Income Tax”
• Broadening the tax base to include non-compliant and undertaxed sectors
• Sustained fiscal discipline across federal and provincial levels
• Enhancing private sector access to credit through reduced public borrowing

Energy and Structural Reforms

The IMF acknowledged efforts in tackling the energy sector’s circular debt, attributing early progress to timely power tariff adjustments and cost-side reforms, which must now be accelerated.

It further encouraged the State Bank of Pakistan to maintain its tight monetary stance, which has played a central role in curbing inflation. A flexible exchange rate regime and proactive steps to support financial sector stability were also highlighted as priorities, along with continued strengthening of AML/CFT frameworks.

Climate Resilience and Long-Term Stability

Through the Resilience and Sustainability Facility, the IMF aims to help Pakistan reduce its vulnerability to climate shocks. These reforms include:

• Improving public investment frameworks
• Promoting efficient water resource use
• Coordinating disaster response mechanisms
• Enhancing climate risk information
• Supporting Pakistan in fulfilling its international environmental commitments

The IMF’s latest review portrays a mixed picture of Pakistan’s economy: one that is showing signs of recovery but remains vulnerable to shocks. With determined policy execution and structural reforms, the country may navigate its current challenges and lay the groundwork for more resilient and inclusive growth.