Pakistan’s economy is slowly stabilizing, though its recovery remains fragile. As the country’s financial indicators improve, attention is now focused on the upcoming biannual review of the $7 billion funding program with the International Monetary Fund (IMF). This review, expected towards the end of this month or early March, will be a key determinant in Pakistan’s economic trajectory, with the release of the next $1 billion tranche contingent on a positive evaluation.
According to Finance Minister Muhammad Aurangzeb, the IMF mission is expected to arrive soon, though the dates have yet to be confirmed by the lender. The review will assess Pakistan’s progress under the ongoing 37-month Extended Fund Facility (EFF), which consists of six reviews. The success of this first biannual review is critical for the disbursement of the next tranche, which is essential for maintaining the country’s fiscal health and avoiding a debt crisis.
In a recent post-monetary policy briefing, State Bank of Pakistan (SBP) Governor Jameel Ahmed expressed optimism that the review will proceed as scheduled, with most analysts hopeful that Pakistan has met the IMF’s performance targets. Key benchmarks such as international reserves, the primary budget surplus, and net domestic assets of the SBP are expected to be met. A Topline Securities analyst noted that the government remains in compliance with the majority of the IMF targets, although some data, like the cash transfers under the Benazir Income Support Programme, is yet to be released.
However, challenges remain. Certain targets, particularly related to tax revenue collection, are expected to fall short. For instance, the Federal Board of Revenue (FBR) has missed its tax collection target by a significant Rs468 billion in the first seven months of the current fiscal year. Similarly, the Tajir Dost scheme, aimed at improving tax compliance among traders, has yielded only limited success. The hope is that these shortfalls will not derail the outcome of the IMF review.
Despite these hurdles, analysts are optimistic about Pakistan’s economic recovery, which is gradually turning a corner. A significant reduction in inflation, particularly the consumer price index, and improved external account stability have allowed the SBP to reduce interest rates by 1,000 basis points since June 2024. This rate reduction, which includes a 100 basis point cut in the most recent policy meeting, has been largely driven by the decrease in inflation, which is mainly attributed to a high base effect and better supply-side dynamics.
While inflation remains a concern, with core inflation still elevated, the SBP’s rate cuts are expected to support economic activity in the months ahead. However, the bank has indicated that it must remain cautious, as external risks, including global commodity price volatility, protectionist policies in major economies, and fluctuations in food prices, could still disrupt the fragile recovery. The SBP’s statement suggests that, although the rate cuts are necessary to stimulate growth, future adjustments will need to be carefully calibrated to maintain price stability.
The latest economic projections show promising signs of recovery. The SBP has revised its outlook for key macroeconomic indicators, forecasting a current account surplus of 0.5% of GDP and a rise in international reserves to $13 billion, thanks to higher remittances and modest export growth. These developments have reduced the government’s financing requirements, which were initially projected at $11.3 billion, now revised down to $8.7 billion.
Inflation projections have also improved, with the SBP lowering its forecast for the fiscal year from 11.5-13.5% to a range of 5.5-7.5%, bringing it closer to the target range of 5-7%. With inflation at 4.1% in December, the SBP has room to continue its monetary easing cycle, as real interest rates remain high at 790 basis points, much higher than the historical average. GDP growth projections are also maintained at 2.5-3.5% for the year.
Encouraged by these positive signs, the government has outlined its long-term vision through a five-year economic transformation plan, “Uraan Pakistan.” The plan aims to achieve 6% GDP growth by 2028, primarily through public-private partnerships and enhanced export growth. The target is to raise exports to $60 billion by the end of the decade, positioning Pakistan as a more resilient and competitive economy on the global stage.
Despite the optimism surrounding these plans, experts caution that the government must tread carefully. Many argue that pushing for rapid growth without addressing the structural imbalances within the economy could jeopardize the fragile recovery. The IMF program remains a crucial anchor, ensuring that policy reforms are implemented in a sustainable manner, without compromising long-term stability. The emphasis must remain on achieving gradual, well-managed economic progress rather than a fast-paced, unsustainable growth model. The government’s ability to balance these factors will determine whether the current recovery is built on solid foundations or remains vulnerable to future shocks.