ISLAMABAD: Pakistan’s economic recovery gained traction this fiscal year but it remains “highly exposed” to spillovers from the war in the Middle East, the International Monetary Fund (IMF) said on Thursday, days after its executive board okayed $1.32 billion in fresh funding to the South Asian nation.
The IMF board completed the third review of its $7 billion Extended Fund Facility (EFF) and the second review of a $1.4 billion Resilience and Sustainability Facility (RSF), allowing the authorities to draw around $1.1 billion and $220 million, respectively. This brings total disbursements under the two arrangements to about $4.8 billion.
The lender said Pakistan’s gross domestic product (GDP) growth picked up in first half of this fiscal year, which began in July, averaging 3.8 percent year on year (yoy), driven by auto, construction, and garment industries. While headline inflation increased to 7.3 percent yoy in March, core inflation has so far remained contained and the current account broadly balanced.
The impact of the United States-Iran war clouds Pakistan’s near-term outlook and 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, according to the IMF. However, downside risks are high.
“As a net oil and gas importer, Pakistan is heavily reliant on GCC (Gulf Cooperation Council) supplies, with 81 percent of fuel imports coming from the region... In the event of sustained disruptions to the physical availability of fuel imports, impacts on economic activity would likely be even larger than implied by the increase in international prices,” it said in its report.
“Immediate exposures to fertilizer trade disruptions appear manageable, as Pakistan has been largely self-sufficient in urea production in recent years, but a prolonged disruption to DAP supply chains could potentially impact the Kharif planting season in June-July. Food import prices could also be impacted in the event of prolonged fertilizer trade disruptions.”
Islamabad this week extended its austerity measures, originally announced in March, to conserve fuel until June 13 as rising global oil prices continue to strain its economy, amid continued uncertainty in international energy markets linked to prevailing US–Iran tensions.
The war, which began on Feb. 28 and is currently paused since April 8, has disrupted global energy and cargo supplies through the Strait of Hormuz, which supplied a fifth of the global oil and gas cargoes.
The other risks faced by the country included a drop in worker remittances and capital outflows.
“Pakistan receives annual remittances amounting to about 9 percent of GDP, of which 55 percent come from the GCC. A significant disruption to the GCC economies and/or return of migrant workers could weigh on these flows,” the IMF said.
“The deterioration in global financial conditions has already resulted in capital outflows, which are likely to continue to intensify if the crisis extends. Access to short-term commercial financing, which is largely from GCC banks, could also be impacted if risk sentiment deteriorates significantly.”
However, the lender said the impact on Pakistan’s outlook is expected to be moderate under its updated baseline scenario, which projected the GDP growth to slow by 0.2 percent in FY26 and 0.6 percent in FY27.
