ISLAMABAD
The International Monetary Fund (IMF) has warned that the updated macroeconomic projections reflect the more challenging outlook as a result of the Middle East war, which is expected to push up inflation and weigh on growth and the balance of payment.
The Fund in its report “Third Review under the Extended Fund Facility and Second Review under the Resilience and Sustainability Facility Arrangement” stated that the outlook is clouded by significant risks.
Key downside risks include geopolitical tensions and intensification of conflicts (including a more extended war in the Middle East), commodity price volatility, tightening in global financial conditions (including higher long-term interest rates and rising risk premia), lower remittances due to economic disruptions or tighter immigration policies in key destination countries, and escalating global protectionism and trade disruptions.
The risk of policy, including fiscal, slippages also remains high. There are also upside risks for a faster recovery benefiting from the consistent implementation of policies and strengthening confidence, and from reaping economic dividends from Pakistan’s enhanced relations with bilateral partners.
It further noted that Pakistan’s economy is highly exposed to spillovers from the war in the Middle East.
Under the updated baseline scenario, which follows the April 2026 World Economic Outlook reference scenario assumptions for the duration of the war, the impact on Pakistan’s outlook is expected to be moderate: GDP growth is projected to slow by 0.2 percent in fiscal year 2026 and 0.6 percent in fiscal year 2027, due to the drag on external and domestic demand.
Consumer Price Index (CPI)Inflation (average) is pushed up by about ½ pp in fiscal year 2026 and 1½ pp in fiscal year 2027, mostly though pass through to consumer energy prices, with more modest impacts expected on food and core inflation.
The current account is projected to worsen by around 0.2 pp in 2026 and 0.4 pp in 2027, as higher fuel imports are expected to be partially offset by compression of non-oil imports, particularly in fiscal year 2027.
With fiscal space very limited, the authorities plan to offset the cost of absorbing the delayed adjustment of fuel prices and targeted relief to households by constraining primary expenditures.
The outlook would deteriorate further under an adverse scenario. Under the April 2026 WEO adverse scenario, the cumulative hit to GDP would rise to around 1½ pp by F2027, while the FY2027 projected impact for inflation and the current account deficit would increase by around 2½ pp and 1½ percent of GDP, respectively, relative to a pre-conflict baseline.
Sound policies should anchor the response to any adverse scenario to safeguard economic and financial stability.
With government revenues impacted by lower domestic demand and non-oil imports, further expenditure compression and reprioritization would be needed to remain within the program’s fiscal envelope and ensure debt sustainability while providing temporary and targeted transfers to protect the most vulnerable. The exchange rate should remain the primary shock absorber, while the SBP should maintain appropriately tight monetary policy to prevent deanchoring of inflation expectations.
GDP growth is projected to reach 3.6 percent in FY26, reflecting strong activity through February. However, growth in FY27 is revised down due to higher commodity prices and weak external demand resulting from the Middle East conflict. Amid higher commodity prices, CPI inflation is expected to exceed 10 percent in Q4, and to reach8.4 percent in FY27, before returning to the SBP target range in FY28.
The current account is projected to record a small deficit in FY26, with an acceleration in import growth over the remaining months due to the spike in global energy prices. The current account is expected to further deteriorate in FY27 on account of elevated oil and gas prices, although lower domestic demand is expected to mitigate the impact on the trade deficit from energy imports.
Over the medium-term, the current account deficit is expected to remain around 1 percent of GDP, reflecting an expected normalization of non-oil import demand and tariff cuts under the National Tariff Policy (NTP). Remittances are expected to remain an important source of inflows. Access to market financing is expected to continue following the recent market re-entry.
Under the baseline, public debt remains sustainable over the medium-term. Medium-term risks remain high, reflecting Pakistan’s large gross financing needs and challenges in obtaining external financing (including high-quality foreign investment).
As a net oil and gas importer, Pakistan is heavily reliant on GCC supplies, with 81 percent of fuel imports coming from the region, and is being impacted by both higher international prices and the rise in regional price premia over Brent/WTI, particularly for refined products. 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.
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.
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, a major source of financing for consumption and the BOP.
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.
