ISLAMABAD: The International Monetary Fund (IMF) said on Wednesday it had reached a staff-level agreement with Pakistan that could unlock about $1.2 billion in financing, while warning that higher energy prices and supply disruptions linked to the Middle East conflict had weakened the country’s economic growth momentum.

The agreement covers the fourth review of Pakistan’s $7 billion Extended Fund Facility (EFF), aimed at supporting economic stabilization and reforms, and the third review of its $1.4 billion Resilience and Sustainability Facility (RSF), designed to strengthen the country’s resilience to climate change and natural disasters.

It comes as the Middle East conflict has driven up global energy prices, forcing Pakistan to raise domestic fuel prices and introduce subsidies to cushion vulnerable consumers against rising costs.

“The IMF team has reached a staff-level agreement with the Pakistani authorities on the fourth review of the 37-month Extended Arrangement under the Extended Fund Facility (EFF) and the third review of the 28-month arrangement under the Resilience and Sustainability Facility (RSF),” IMF mission chief Iva Petrova said in a statement following talks in Karachi and Islamabad from Sept. 23 to Oct. 7.

“The staff-level agreement is subject to approval by the IMF Executive Board. Upon approval, Pakistan will have access to about $1.0 billion (SDR 760 million) under the EFF and about $210 million (SDR 154 million) under the RSF, bringing total disbursements under the two arrangements to about $5.7 billion.”

The IMF said Pakistan’s economic program had remained broadly on track despite the challenging external environment, with authorities committed to maintaining fiscal discipline, controlling inflation, strengthening the energy sector and advancing structural reforms.

“Supported by the EFF, the authorities have successfully navigated the impact of the Middle East conflict, and strong policies have helped preserve macroeconomic stability,” Petrova said.

“Real GDP growth reached 4 percent in the first three quarters of FY26, and although higher energy prices and supply disruptions weakened somewhat the momentum, FY26 growth is estimated at 3.6 percent.”

The IMF’s estimate for the ongoing fiscal year contrasts with Pakistan’s more optimistic outlook for the current fiscal year. Finance Minister Muhammad Aurangzeb said on Wednesday the government expected growth of “north of 4 percent” in FY27, describing the impact of the Middle East conflict on growth and inflation as “manageable.”

FUEL SUPPORT

The IMF also called on Pakistan to promptly phase out its fuel support scheme, warning that its high cost and broad targeting could put pressure on public finances.

“Any future fuel support — should oil prices surprise on the upside — should be limited, timebound, targeted using established social assistance programs, and accommodated within the FY27 budget envelope,” Petrova said.

Pakistan introduced fuel relief measures following sharp increases in petroleum prices linked to intensifying hostilities in the Middle East, including subsidies for motorcycle riders, rickshaw operators and other eligible consumers. The measures were intended to cushion households and transport operators against rising costs but have added to the government’s fiscal commitments.

The IMF stressed the importance of implementing Pakistan’s fiscal year 2026-27 budget, which targets an underlying primary surplus of 2 percent of gross domestic product, supported by tax reforms and stronger revenue collection.

It also urged timely electricity tariff adjustments and measures to prevent the accumulation of circular debt, alongside reforms to improve power distribution and maintain cost recovery in the gas sector.

On the broader economic outlook, the Fund said Pakistan’s headline inflation had moderated to about 10.3 percent in September after peaking in May, while gross foreign exchange reserves had risen to approximately $21.5 billion by the end of September.

The country’s current account remained broadly balanced in fiscal year 2025-26, supported by strong remittances, although the IMF warned that geopolitical tensions, volatile energy prices, tighter global financial conditions and trade disruptions continued to pose significant risks.

The Fund also noted progress on climate-related reforms under the RSF, including efforts to improve the management and pricing of irrigation water and strengthen financing for disaster response.

The staff-level agreement followed discussions under the IMF’s 2026 Article IV consultation, which focused on structural reforms aimed at increasing productivity, attracting private investment, boosting exports and creating jobs.