The International Monetary Fund (IMF) has stated that Pakistan's economic recovery is gaining momentum this fiscal year, but the country remains highly vulnerable to spillovers from the ongoing conflict in the Middle East. This warning came on Thursday, shortly after the IMF executive board approved $1.32 billion in fresh funding for the South Asian nation.
IMF Board Approves New Funding
The IMF board completed the third review of Pakistan's $7 billion Extended Fund Facility (EFF) and the second review of a $1.4 billion Resilience and Sustainability Facility (RSF). This approval allows Pakistan to draw approximately $1.1 billion from the EFF and $220 million from the RSF. Total disbursements under these two arrangements now stand at about $4.8 billion.
Economic Performance and Risks
According to the IMF, Pakistan's gross domestic product (GDP) growth averaged 3.8 percent year-on-year in the first half of the fiscal year starting July, driven by the auto, construction, and garment industries. Headline inflation rose to 7.3 percent in March, but core inflation remained contained, and the current account was broadly balanced.
However, the US-Iran war clouds the near-term outlook. The IMF expects upward pressure on inflation and a drag on growth and the balance of payments, though the overall impact is expected to be contained. Downside risks remain high.
Exposure to Fuel Import Disruptions
As a net oil and gas importer, Pakistan relies heavily on Gulf Cooperation Council (GCC) supplies, with 81 percent of fuel imports coming from the region. The IMF warned that sustained disruptions to fuel imports could have a larger impact on economic activity than implied by rising international prices.
Fertilizer trade disruptions appear manageable for now, as Pakistan is largely self-sufficient in urea production. However, prolonged disruption to DAP supply chains could affect the Kharif planting season in June-July, potentially impacting food import prices.
Austerity Measures Extended
Islamabad extended its austerity measures, initially announced in March, to conserve fuel until June 13. This comes as rising global oil prices strain the economy amid ongoing US-Iran tensions. The war, which began on February 28 and is currently paused since April 8, has disrupted global energy and cargo supplies through the Strait of Hormuz, which supplied a fifth of global oil and gas cargoes.
Remittances and Capital Outflows
Pakistan receives annual remittances amounting to about 9 percent of GDP, with 55 percent coming from the GCC. A significant disruption to GCC economies or the return of migrant workers could weigh on these flows. The deterioration in global financial conditions has already led to capital outflows, which could intensify if the crisis extends. Access to short-term commercial financing, largely from GCC banks, could also be impacted if risk sentiment deteriorates.
Moderate Impact Under Baseline Scenario
The IMF noted that the impact on Pakistan's outlook is expected to be moderate under its updated baseline scenario, projecting GDP growth to slow by 0.2 percent in FY26 and 0.6 percent in FY27.
