The International Monetary Fund has cautioned that Pakistan’s economic outlook for FY26 will remain fragile unless reforms continue without interruption, as updated projections reflect slower growth, a temporary rise in inflation, and renewed pressure on the external account following the 2025 monsoon floods. In its latest assessment, the Fund said the floods have significantly altered the short-term economic landscape, despite the government’s ongoing reform programme under the $7 billion Extended Fund Facility.
According to the IMF, the floods affected nearly 7 million people and caused damage estimated at Rs800 billion, placing additional strain on agricultural output, public finances, and external balances. While the Fund acknowledged that the disaster has weakened near-term prospects, it said consistent implementation of programme reforms could help stabilise growth, strengthen the fiscal position, and support the accumulation of foreign exchange reserves over the medium term.
The IMF has revised its GDP growth projection for FY26 to 3.2 percent, down from earlier estimates. The downgrade reflects extensive damage to Kharif crops, with knock-on effects across agro-based industries and the services sector. The Fund expects growth to recover gradually in subsequent years as reconstruction activity gathers pace and business confidence improves, supported by better macroeconomic stability.
Inflation is projected to rise to between 8 and 10 percent in FY26, driven primarily by higher food prices and base effects following recent disinflation. However, the IMF expects inflation to decline durably toward target levels in FY27, aided by a tight monetary policy stance and easing supply-side pressures as agricultural production recovers.
On the external front, the IMF expects the current account deficit to widen to 0.6 percent of GDP in FY26. In addition to crop losses and higher import requirements, the Fund noted that tariff reductions under the new National Tariff Policy are likely to push imports higher. These pressures are expected to be partly offset by resilient remittance inflows, as overseas Pakistanis increase support to families affected by the floods. Over the medium term, the current account deficit is projected to remain below 1 percent of GDP, supported by improved export competitiveness, better financing conditions, and a gradual return to international capital markets by FY27.
Despite increased disaster-related spending, the IMF said Pakistan remains on track to achieve a primary surplus of 1.6 percent of GDP in FY26. The fiscal stance is described as broadly neutral, with provinces expected to reprioritise spending and the federal government relying on contingency reserves. Over the medium term, sustained primary surpluses of around 2 percent of GDP are expected to reduce public debt to about 60 percent of GDP by FY30, from nearly 73 percent currently.
Gross official reserves are projected to rise to $17.8 billion in FY26, supported by gradual improvements in financing inflows, modest Panda bond issuance, and a planned return to international markets in FY27. However, the IMF noted that reserve coverage would remain below three months of imports, falling short of recommended adequacy levels.
The Fund estimated that the 2025 floods will lower GDP growth by around half a percentage point, raise inflation by 0.5 percentage point, reduce revenues by Rs110 billion, and worsen the external account by about $1 billion. The government’s emergency response, estimated at Rs400 billion or 0.3 percent of GDP, is expected to be financed through contingency reserves and the reprioritisation of provincial development spending.
The IMF highlighted several downside risks, including further crop losses, commodity price shocks, tighter global financial conditions, weaker remittances, heightened geopolitical tensions, and domestic policy slippages driven by fiscal pressures. It warned that any relaxation of policies or politically motivated concessions could undermine stabilisation gains and derail medium-term projections.
Overall, the IMF said Pakistan can stabilise its economy and return to a gradual growth path, but only if reform momentum is maintained, fiscal discipline is preserved, and governance reforms across state-owned enterprises, commodity markets, and public institutions are implemented without delay.
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