The International Monetary Fund has highlighted Pakistan’s tight monetary policy stance and proactive financial sector measures as key pillars supporting macroeconomic stability amid recent flood-related economic challenges. In its staff-level report for the second review under the $7 billion Extended Fund Facility, the IMF described the State Bank of Pakistan’s policy approach as “appropriately tight,” noting that it has played a central role in containing inflation risks and sustaining confidence in the financial system.
According to the report, the SBP has successfully anchored inflation expectations by maintaining the policy rate at 11 percent, even as temporary supply disruptions from floods placed upward pressure on prices. The IMF said this decision reflected a prudent, data-driven approach that balanced the need to control inflation with the objective of supporting economic recovery. Despite short-term shocks, the Fund noted that inflation remains aligned with the SBP’s medium-term target range of 5 to 7 percent.
The IMF commended the central bank’s resilience in managing inflation risks during a period marked by climatic shocks and economic uncertainty. It said the SBP’s ongoing efforts to strengthen its monetary policy framework have enhanced policy credibility and effectiveness. Improvements in central bank communication, including the publication of semi-annual monetary policy reports and updates to consumer inflation expectations surveys, were cited as important steps toward greater transparency and clearer signaling to markets.
At the same time, the IMF stressed that continued vigilance will be essential as flood-related impacts on food prices and external balances continue to unfold. The report said the SBP should remain ready to act decisively if inflation expectations show signs of becoming unanchored, underscoring the importance of a flexible and responsive policy stance in a volatile environment.
On the external front, the IMF highlighted the SBP’s efforts to rebuild foreign exchange reserve buffers and deepen the interbank foreign exchange market. Measures such as the recent revision of Foreign Exchange Exposure Limits for banks were welcomed as steps that provide greater flexibility in managing FX flows while preserving prudent risk management standards. The Fund said these actions contribute to improved market functioning and help absorb external shocks more effectively.
The IMF also encouraged further initiatives to strengthen formal remittance channels, noting their importance in supporting external stability and household incomes, particularly following natural disasters. In addition, the report suggested that certain capital flow measures introduced during periods of stress could be gradually unwound once macroeconomic stability is firmly restored, allowing for a more efficient allocation of capital.
Beyond monetary and exchange rate policy, the IMF welcomed Pakistan’s broader financial sector reform agenda. This includes efforts to develop domestic capital markets, strengthen anti-money laundering and counter-terrorist financing frameworks, and establish regulatory oversight for emerging sectors such as virtual assets. The Fund emphasised that regulating new financial activities should strike a balance between encouraging innovation and safeguarding investor protection, financial integrity, and transparency.
According to the IMF, the authorities’ comprehensive approach to financial sector management, encompassing reserve accumulation, FX market deepening, and regulatory strengthening, has improved Pakistan’s ability to navigate short-term shocks while laying the groundwork for longer-term growth. These measures, combined with fiscal discipline and structural reforms under the programme, are seen as mutually reinforcing elements of the stabilisation strategy.
As Pakistan continues to face economic headwinds, the IMF said maintaining a tight and data-dependent monetary policy, reinforcing financial regulation, and preserving a flexible exchange rate regime will be critical to sustaining macroeconomic stability and investor confidence. The Fund’s assessment underscores the central role of the State Bank of Pakistan in steering the economy through near-term challenges while supporting a more stable and resilient financial system over the medium term.
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