Middle East war clouds Pakistan’s economic outlook, warns IMF

The International Monetary Fund (IMF) has warned that the Middle East war is expected to put more pressure on Pakistan with particular focus on inflation, weigh on growth and the balance of payments, reported 24NewsHD TV channel.

The Fund said this in its Staff Country Report issued on Friday regarding Pakistan’s third review under the extended arrangement under the Extended Fund Facility and second review under the Resilience and Sustainability Facility Arrangement, and the statement by the Executive Director for Pakistan.

The IMF report said strong policy implementation has continued to support Pakistan’s economic recovery, build confidence, and bolster its resilience to shocks. GDP growth accelerated in FY26H1, while inflation remained contained, the current account was broadly balanced, and reserve rebuilding exceeded earlier projections.

“However, the impact of the war in the Middle East clouds Pakistan’s near-term outlook and there is great uncertainty about how developments will unfold. Under the baseline scenario, the war is expected to put upward pressure on inflation and weigh on growth and the balance of payments, but the overall impact is expected to be contained. However, downside risks are high,” the Fund maintained.

The IMF maintained that the inflation is expected to rise during the next financial year and feared that it would touch 8.4 percent mark. During the previous year, the inflation was recorded at 4.5 percent.

The Fund also feared that the Pakistan’s economic growth is also expected to remain below the target set by the government. It would hover around 3.6 percent this year and 3.5 percent during next fiscal, though Pakistan has set target for economic growth at 4.2 percent during the current fiscal year.

The IMF report further said that during next year Pakistan’s current account is expected to be minus 0.9 percent.

The Fund also forecast a reduction in the unemployment rate during the current year which would be at 6.9 percent which was 7.1 percent during the previous year.

The IMF also predicted rise in the foreign exchange reserves which are expected to stay at Rs17.53 billion during the current year and in the next financial year the forex reserves are expected to touch Rs20.91 billion mark.

The IMF said Pakistan’s steady policy execution has helped preserve economic stability and improve financing conditions, even as the fallout from the Middle East conflict tests the broader outlook, stressing that maintaining disciplined policies and accelerating structural reforms will be critical for the country to build resilience and secure sustainable long-term growth.

The global lender said that Pakistan had made “significant progress” under its reform programme supported by the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF).

"Pakistan’s policy efforts under the EFF arrangement have delivered significant progress in stabilising the economy and rebuilding confidence amid a challenging global environment, including the ongoing Middle East war," the Fund said.

"Fiscal performance has been strong, with a primary surplus of 1.6 percent of GDP expected to be achieved in FY26, in line with targets. Inflation has increased as higher global commodity prices have passed through to domestic energy prices."

The IMF said that total disbursements under both programmes now stand at roughly $4.8 billion.

The lender said the programme has played a central role in restoring macroeconomic stability, improving confidence, and rebuilding external buffers in an environment of continued global uncertainty.

According to the IMF, Pakistan’s growth momentum picked up in the first half of the current fiscal year, inflation remained contained, and the current account stayed broadly balanced. Foreign exchange reserves also improved more than earlier projections, reaching about $16 billion by the end of December, up from $14.5 billion mid-year, it said. 

However, the Fund cautioned that the conflict in the Middle East has introduced fresh uncertainty into Pakistan’s economic outlook. 

"Amid a more challenging and highly uncertain external environment since the onset of the war in the Middle East, Pakistan needs to maintain strong macroeconomic policies while accelerating reform efforts, which are critical to managing further shocks and fostering higher sustainable medium-term growth," it noted.  

The IMF stressed that continued fiscal discipline will be critical, particularly efforts to maintain primary surpluses and broaden the tax base. It also urged improvements in public financial management and spending efficiency to support long-term stability.

The State Bank of Pakistan (SBP) was praised for maintaining a tight monetary stance aimed at anchoring inflation expectations, with the Fund emphasising the need for continued vigilance against potential price pressures.

On external accounts, the IMF reiterated that exchange rate flexibility should remain the primary buffer against shocks, alongside ongoing efforts to deepen foreign exchange markets and rebuild reserves.

Structural reforms were also highlighted as essential for sustained growth, including reforms of state-owned enterprises, improvements in governance, and measures to enhance the business environment and attract private investment.

Climate resilience featured prominently in the RSF review, with the IMF noting progress in strengthening disaster response systems, improving water resource management, and integrating climate risks into financial and budgetary planning.

Nigel Clarke, Deputy Managing Director and Acting Chair at the IMF, said Pakistan’s programme implementation had remained strong, helping stabilise the economy despite a “highly uncertain external environment”.

He added that maintaining reform momentum would be crucial to safeguarding fiscal sustainability, strengthening financial stability, and supporting inclusive long-term growth.

"Under the baseline scenario, the war is expected to put upward pressure on inflation and weigh on growth and the balance of payments, but the overall impact is expected to be contained. However, downside risks are high," the report concluded. 

Reporter Waqas Azeem