The International Monetary Fund (IMF) has warned that Pakistan’s external financial position could weaken over the medium term as imports increase and remittance growth moderates, putting additional pressure on the country’s external accounts. In its latest Middle East and Central Asia regional report released on Thursday, October 22, the global lender highlighted the need for exchange rate flexibility to help preserve foreign exchange reserves and tighter monetary policy to address rising inflation. The assessment comes as Pakistan continues to manage external financing requirements, inflationary pressures and the challenge of increasing export earnings. The IMF also highlighted vulnerabilities arising from the country’s substantial financing needs and the close relationship between the government and commercial banking sector.
According to the IMF, Pakistan’s current account deficit could reach approximately $4.5 billion, equivalent to around 1% of gross domestic product (GDP). This projection is considerably higher than the government’s official estimate of approximately $2.5 billion. The difference highlights the uncertainty surrounding Pakistan’s external payments position, particularly as import demand rises and remittance growth moderates. The government has projected imports of $70 billion during the current fiscal year, while remittances are expected to reach $45.5 billion. However, export performance remains a concern, as the country continues to face difficulties in achieving sustained growth in overseas sales despite incentives provided to selected exporters.
The IMF has estimated Pakistan’s gross external financing needs at approximately 22% to 25% of GDP, a level it considers high compared with those of peer economies. Large financing requirements can leave a country more exposed to changes in international financial conditions, borrowing costs and the availability of foreign currency. If external inflows fall short of expectations or import payments increase more quickly than anticipated, pressure on foreign exchange reserves and the balance of payments could intensify. The lender’s assessment therefore places emphasis on maintaining external stability while ensuring that the country can meet its international payment obligations without creating additional economic pressures.
Exchange rate flexibility was identified as one measure that could help Pakistan manage its external position. The IMF stated that greater flexibility can support reserve preservation and facilitate adjustments in external accounts, although it may also increase inflation through higher import prices. Pakistani authorities have remained cautious about allowing the rupee to depreciate, citing concerns about inflation and questioning whether currency depreciation would generate a meaningful improvement in exports. On Thursday, October 22, the rupee appreciated by one paisa to close at Rs276.85 against the US dollar, according to the report. The currency’s relative stability, however, does not eliminate the broader risks associated with rising imports and the country’s financing requirements.
Inflation remains another significant concern for policymakers. The IMF reported that inflation in Pakistan reached 11.1% year on year in August, driven partly by higher food and energy-related prices. The lender has projected Pakistan’s inflation rate at 9.9%, which is 1.5 percentage points higher than its previous forecast. The report recommended that countries should be prepared to tighten monetary policy, particularly when inflation remains above target and interest rates appear insufficiently restrictive. Pakistan’s policy rate stood at 11.5% at the time of the report, with the State Bank of Pakistan’s Monetary Policy Committee scheduled to meet on October 26. The meeting is expected to consider economic developments and the implications of persistent inflation for the policy outlook.
The IMF also highlighted the close relationship between Pakistan’s government and commercial banks, estimating that banks have 63% exposure to public debt. This level is high compared with typical emerging market economies and creates a potential link between sovereign borrowing risks and the financial sector. When banks hold substantial amounts of government securities, concerns about public debt sustainability can affect financial institutions through changes in asset values, funding conditions and borrowing costs. The IMF warned that rising government debt concerns could push borrowing costs above baseline projections, increasing fiscal sustainability risks in countries with large gross financing needs, including Pakistan and Egypt. It advised financial supervisors to monitor bank liquidity, funding conditions, asset quality and exposure to sectors affected by regional conflict.
The report also maintained the IMF’s economic growth forecast for Pakistan at 3.5%, below the government’s official target of 4%. Pakistani authorities had sought to persuade the lender during recent review discussions that the higher growth target could be achieved. The IMF’s projection remains below the government’s ambition and the World Bank’s forecast, indicating continued uncertainty over the pace of economic recovery. The lender also noted that Pakistan was among the countries in the region that recorded stable or higher hotel occupancy rates in 2026 compared with the previous year, despite regional conflict. This suggests that some domestic economic activities have remained resilient, although it does not remove the challenges facing external accounts and overall growth.
The IMF’s assessment comes shortly after it reached a staff-level agreement with Pakistan for the disbursement of a $1 billion fifth loan tranche, subject to the government completing the required prior actions. The report further projected that fiscal policy in Pakistan would remain restrictive in 2026 because of limited fiscal space, while several regional economies were expected to adopt more accommodative policies before resuming fiscal consolidation in 2027. For Pakistan, the combination of high external financing needs, rising inflation, public debt exposure in the banking sector and growth below the official target presents several interconnected policy challenges. The IMF’s recommendations place emphasis on preserving foreign exchange reserves, controlling inflation, monitoring financial sector risks and maintaining policies that support external and fiscal stability.
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