A Nation on the Mend, But Scars Run Deep

May 15, 2026 (MLN): A scene buried in the IMF's 131-page staff report on Pakistan, released today, captures the country's economic condition better than any single number can.

In the letter attached to the document, signed by Finance Minister Muhammad Aurangzeb and State Bank Governor Jameel Ahmad, the authors acknowledge that Pakistan has "weathered significant floods in 2025," that "the economy continues to grow," that "inflation remains stable," and that "external and fiscal buffers are being rebuilt."

And then, almost in the same breath: "However, the conflict in the Middle East has resulted in higher international commodity prices and tighter global financial conditions, making the outlook for the coming period more challenging."

That is Pakistan in 2026. A country perpetually climbing out of one crisis while another crests on the horizon. A country whose officials have, by virtually every quantitative measure in this document, delivered a remarkable fiscal turnaround in a devastatingly short window of time, only to find that the global economy has other plans.

The IMF Executive Board approved the Third Review of Pakistan's 37-month Extended Fund Facility (EFF) and the Second Review under the Resilience and Sustainability Facility (RSF) on May 8, 2026.

This unlocked approximately US$1.1 billion under the EFF and $220 million under the RSF.

This brings total disbursements under both facilities to approximately $4.8 billion (SDR 3,348 billion) since the programme's inception in September 2024.

What follows is a comprehensive, indicator-by-indicator dissection of where Pakistan's economy stands today, where it is headed, and what risks stand between here and stability.

I. GROWTH NARRATIVE: RECOVERY WITH A CEILING

Pakistan's GDP grew at 3.6% in FY2025-26, accelerating from 3.1% in FY25 and representing the country's first genuine post-crisis expansion in years. In the first half of FY26 alone, growth averaged 3.8% YoY, driven by momentum in the auto, construction, and garment industries.

The Medium-Term Macroeconomic Framework (Table 2, Staff Report) presents a steady trajectory, if not spectacular:

At per capita GDP of $1,676.7 (FY2024-25), Pakistan remains one of the poorest large economies in the world. The IMF projects real per capita GDP growth of 1.6% in FY26 and 1.5% in FY27, which is meaningful but still far below what the country needs to reduce its 40% vulnerability rate to poverty.

The Middle East War Shadow

The single most consequential variable for Pakistan's near-term growth outlook is the war in the Middle East. IMF staff estimate that the conflict has shaved 0.2 percentage points off FY26 growth and will trim another 0.6 percentage points from FY27 growth.

 In a scenario where the conflict escalates or fuel supply lines to Pakistan are more severely disrupted, the cumulative GDP hit could reach 1.5 percentage points by FY27, a meaningful drag for an economy operating with limited buffers.

The IMF's baseline for FY27 projects growth at 3.5%, down from the programme's original 4.1% target. The downgrade reflects higher fuel prices, weaker external demand, and reduced private sector confidence.

The Medium-Term Promise

Despite near-term headwinds, the IMF's medium-term outlook for Pakistan is cautiously constructive. The Fund projects growth rising to 4.3% in FY28 and plateauing at 4.5% by FY29, provided the conflict in the Middle East is resolved in a timely manner and structural reforms remain on track.

The report encapsulated the Fund's medium-term vision, stated, "Assuming the conflict is resolved quickly, the implementation of economic policies geared to entrenching macroeconomic stability, boosting external competitiveness, and improving the private sector business environment are expected to support a gradual pickup in medium-term growth to 4½ percent, bolstered by increased investment and exports."

II. INFLATION: THE MONSTER THAT REFUSES TO SLEEP

Pakistan's inflation story over the last four fiscal years is one of the most dramatic in the country's history. Consumer prices surged to a period average of 29.2% in FY23, a peak crisis-era, then collapsed with stunning speed to 4.5% in FY25 following aggressive monetary tightening by the State Bank of Pakistan.

That disinflation is now being unwound.

Headline CPI inflation is projected to average 7.2% for full-year FY26, but the IMF is clear that the end-of-period reading will be considerably more alarming: inflation is expected to exceed 10% in Q4 FY26 (April-June 2026) as higher international commodity prices, particularly oil, pass through to domestic energy prices. In March 2026, core inflation already stood at 7.6% year-on-year.

For FY27, the IMF projects average CPI inflation of 8.4%, with end-period inflation declining to 7.0% as monetary policy remains appropriately tight. The Fund projects a durable return to the SBP's target range only in FY28.

The inflation table from the report tells the full story:

Monetary Policy in a Bind

The Monetary Policy Committee cut the policy rate by 50 basis points in December 2025 as flood-related risks dissipated and inflation appeared contained. But with the Middle East war reigniting commodity price pressures, the MPC held rates steady at its March 9, 2026 meeting.

The IMF's message to Islamabad is pointed: "The SBP should remain ready to tighten policy as needed to ensure inflation remains anchored around its inflation objective."

The Fund warns that failure to act decisively risks deanchoring inflation expectations that would be far more costly to reverse.

III. FISCAL POLICY: THE MOST IMPRESSIVE CHAPTER

If there is one area where Pakistan's economic team has unambiguously delivered, it is fiscal consolidation. The transformation from the primary deficits of FY22 and FY23 to the sustained surpluses being projected today represents one of the most aggressive fiscal consolidations among emerging economies in recent years.

The key metric, the general government underlying primary balance (excluding grants and one-off items), tells the story:

The IMF confirmed that Pakistan's primary surplus reached PRs 4.1 trillion (3.2% of GDP) in the first half of FY26, comfortably exceeding the programme's end-December 2025 performance criterion of PRs 3.3 trillion.

The Revenue Problem

Despite macro-level success, the revenue picture remains mixed. The Federal Board of Revenue (FBR) missed its end-December 2025 indicative target, with net tax revenues reaching Rs6.2 trillion against a targeted Rs6.5 trillion, a shortfall of approximately 0.2% of GDP.

The IMF attributes the shortfall largely to declining collections in the power and oil & gas sectors. To compensate, the authorities have mobilised Rs322 billion (0.3% of GDP) through enforcement of disputed taxpayer obligations on which courts have ruled in favour of the FBR, primarily stemming from the "super tax" ruling.

For FY27, the budget will target an FBR revenue collection floor of Rs7,022 billion by end-December 2026, a performance criterion that will carry real teeth.

Total FY27 FBR revenue target is set at Rs15,264 billion, requiring additional measures yielding 0.3% of GDP through a combination of tax policy changes and the FBR's transformation plan.

Tax-to-GDP: Still Far Below Potential

Perhaps the most sobering fiscal footnote in the report: despite all the consolidation, Pakistan's total revenues (including provincial taxes and the Petroleum Development Levy) reached only 12.3 percent of GDP in FY2025, still below the 25th percentile of peer countries.

The medium-term revenue target stabilises at approximately 15.3% of GDP through FY31. This is a level the IMF considers structurally insufficient given Pakistan's large social and development needs.

Expenditure Profile

The General Government Budget reveals the structural architecture of Pakistan's fiscal adjustment. In FY26, total expenditure (including statistical discrepancy) is projected at Rs25,480 billion (20.2% of GDP) essentially flat as a share of GDP as the government contains primary spending while protecting social transfers.

Health, education, and social protection expenditures are ring-fenced to increase as a share of GDP under programme conditions. BISP (Benazir Income Support Programme) spending is targeted at Rs694 billion in FY26, scaling up to Rs815 billion in FY27, with the quarterly Kafaalat unconditional cash transfer benefit set to rise from PRs 14,500 to Rs18,000 beginning January 2027.

Total federal interest payments are projected at Rs8,225 billion in FY26, representing a staggering 33.4% of total federal expenditure and underscoring the urgent need to reduce the debt stock.

IV. PUBLIC DEBT: THE DEFINING CHALLENGE

Government debt including IMF obligations peaked at 78.5% of GDP in FY23 during the crisis and has been declining steadily. The debt-to-GDP trajectory in the IMF framework:

The medium-term target, reducing debt toward 70% of GDP by FY27 and below 60% by FY31, remains the fiscal anchor for the programme. The IMF's Debt Sustainability Analysis confirms that public debt remains sustainable under the baseline, though vulnerabilities remain under adverse scenarios.

Critically, the composition of debt is also shifting. The domestic debt portfolio is being rebalanced toward longer-term, fixed-rate instruments, with the average time-to-maturity of the local currency domestic debt stock improving from 3.82 years in September 2025 to 3.99 years in December 2025, tracking toward a programme target of 4.2 years by FY27.

The Creditor Decomposition

Pakistan's public debt is split broadly between domestic (approximately 45-48% of GDP) and external (approximately 21-25% of GDP) obligations. Total outstanding contingent liabilities from PPPs were estimated at Rs472 billion as of end-December 2025, and that is now being formally monitored through a new fiscal risk framework.

External gross financing requirements are projected at $19,398 billion in FY26 and $23,302 billion in FY27.

V. BALANCE OF PAYMENTS: TURNING A CORNER

Current Account: From Surplus to Managed Deficit

Pakistan's current account swung from a deficit of 4.7% of GDP in FY22, the trigger of the original crisis, to a near-zero balance of +0.5% of GDP in FY25. This adjustment, while partly driven by import compression during the crisis, is now giving way to a more normalised deficit as the recovery matures.

The full Balance of Payments picture:

The IMF projects the current account deficit stabilising at approximately 1% of GDP over the medium term, a level it considers manageable, provided reserves continue to rebuild and remittances remain robust.

Remittances: The Economy's Lifeline

Workers' remittances, accounting for approximately 9% of GDP, are Pakistan's most critical external inflow and among the most resilient. The IMF projects remittances of $41.5 billion in FY26 (up from $38.3 billion in FY25) and $43.2 billion in FY27. Over the medium term, remittances are forecast to reach $49.7 billion by FY31.

However, the IMF flags a significant risk: tighter immigration policies in labour-destination economies (Gulf states, the UK, and others) could reduce remittances, compress household incomes, and worsen the external balance. This risk is classified as "High" probability in the Risk Assessment Matrix.

Trade: Growing but Imbalanced

Merchandise exports are projected to grow by 11.2% in FY26 and 11.6% in FY27 (in US dollar terms), driven primarily by textiles, still Pakistan's dominant export category at $17.3 billion in FY25.

But imports are growing faster, at 11.1% in FY26, driven by higher energy import costs and a recovering industrial sector.

The terms of trade shifted by +1.0% in FY26, a moderate improvement, but deteriorate in FY27 as energy prices remain elevated.

VI. FOREIGN EXCHANGE RESERVES: THE CRITICAL BUFFER

From the Brink to a Building Site

No single indicator captures Pakistan's economic transformation more viscerally than foreign exchange reserves. At the depths of the crisis in FY23, gross reserves fell to just $4.5 billion,  barely three weeks of import cover.

Today, reserves have been rebuilt to $16.3 billion as of end-February 2026, and the IMF's projections point toward continued, if uneven, improvement:

The IMF's programme floor on net international reserves of the SBP is set at -$4,800 million for end-June 2026 (a floor that accounts for forward positions and reserve liabilities).

 Actual NIR has been substantially outperforming programme floors. At end-December 2025, the SBP's NIR stood at -$5,634 million against a target of -$6,999 million, a significant over-performance.

As a percentage of the IMF's Floating Exchange Rate ARA metric (Assessing Reserve Adequacy), reserves are projected to rise from 64.9% in FY26 to 94.7% by FY31, approaching the 100% threshold considered adequate.

The IMF notes reserves remain below this threshold throughout the projection period, underscoring the continued importance of reserve accumulation.

VII. THE MONETARY SECTOR: CREDIT FINALLY MOVING AGAIN

Credit to the Private Sector

After years of crowding out by government borrowing, credit to the private sector is finally recovering. The monetary survey (covering FY21/22 through FY26/27) shows private sector credit growth averaging 3.7% in FY22 before contracting sharply. In FY26, private sector credit is projected to grow at 3.8%, still modest but accelerating from the trough.

Broad money (M2) growth is projected at 14.7% in FY26 and 14.6% in FY27, in line with nominal GDP growth and broadly consistent with the inflation trajectory.

Net Claims on Government: The Crowding-Out Story

The most structurally important monetary indicator is net claims on government, the measure of how much bank credit is being absorbed by fiscal financing. This ratio has ballooned over years of deficit monetisation.

At 5.3% of initial broad money stock in FY26, the ratio remains elevated but is being contained by the SBP's continuous performance criterion, prohibiting any new direct credit to the government.

VIII. BANKING SECTOR: RESILIENT BUT WATCHFUL

Core Financial Indicators

The banking sector that has emerged from the crisis is broadly sound. The gross non-performing loan (NPL) ratio declined to 6.1% as of end-2025, down from elevated post-crisis levels, as banks implement their NPL reduction plans.

Capital adequacy remains above statutory minimums for the system as a whole. One private sector bank that had been flagged as undercapitalized as of end-March 2025 has since completed a multi-step recapitalisation and is now fully compliant with capital requirements.

However, the IMF flags ongoing vulnerabilities in the microfinance banking sector, where 4 of 11 microfinance banks are undercapitalised, producing a negative sector-wide capital adequacy ratio. The authorities are working with development partners to design solutions for the sector's long-term sustainability.

The sovereign-bank nexus, the heavy concentration of government securities on bank balance sheets,  remains a structural risk flagged by the Fund in the context of fiscal vulnerabilities.

IX. THE PROGRAMME SCORECARD: WHAT PAKISTAN MET AND MISSED

Quantitative Performance Criteria: Near-Perfect Compliance

Pakistan met all six end-December 2025 Quantitative Performance Criteria (QPCs):

Indicative Targets: Two Missed

Of the eight end-of-December 2025 Indicative Targets, Pakistan missed two:

1. FBR Net Tax Revenue Floor: Target was Rs6,490 billion; actual was Rs6,161 billion, a shortfall of Rs329 billion (approximately 0.2% of GDP).
2. Income Tax from Retailers: Target was PRs 366 billion; actual was Rs334 billion, missing by Rs32 billion.

These misses, while concerning, were partially offset by higher PDL collections, provincial revenues, and lower-than-expected flood response costs.

Structural Benchmarks: A Mixed Picture

Pakistan met five of eight structural benchmarks for the review period. The notable misses:

• Sovereign Wealth Fund (SWF) governance amendments — due end-March 2026; submitted to Parliament but not yet enacted due to extensive technical consultations required.
  
• Sugar import tax exemption — a continuous SB was missed when the tax exemption was briefly extended, though it was subsequently repealed with no imports utilising it.
  
• Captive power elimination — a legacy miss from January 2025 that remains under remediation.

X. STRUCTURAL REFORMS: THE LONG GAME

Energy Sector: The Central Vulnerability

Pakistan's energy sector remains the single greatest structural threat to fiscal stability and medium-term growth. Circular debt (CD) — the accumulated unpaid obligations within the power supply chain — stood at Rs3.4 trillion (2.7% of GDP) as of December 2025.

The government's strategy involves:

• Achieving net zero CD flow in FY26 and FY27
• Reducing gross CD flow to a ceiling of Rs300 billion in FY27 (versus a projected zero net flow target)
• Completing arrangements with all IPPs by end-June 2026
• Pursuing private sector participation in three Distribution Companies (DISCOs), IESCO, GEPCO, and FESCO, with the first batch of privatisation expected to be finalised by early 2027

On the gas sector, the government committed to semiannual tariff adjustments in line with cost recovery, with OGRA determinations due July 1, 2026 and February 15, 2027 flagged as new structural benchmarks.

Tax Administration: The FBR Transformation

The FBR's transformation plan is perhaps the most detailed structural reform agenda in the programme. The key pillars:

• Digital invoicing: As of end-March 2026, approximately one-third of registered sales tax filers were issuing live invoices. Full adoption by active sales taxpayers is targeted by July 31, 2026, expected to generate Rs46 billion in additional revenue in FY27.
• Production monitoring: Deployed across sugar, cement, tobacco, and fertiliser sectors (estimated tax gap: Rs160 billion), with textiles and beverages in pilot phase. Expected to generate Rs48 billion in FY27.
• Compliance Risk Management (CRM): Now operational for corporate and non-corporate taxpayers, with 431 auditors hired by end-March 2026 and an additional 396 to be hired by end-June 2026. Expected to generate Rs92 billion in additional FY27 revenues.
• Medium-Term Tax Reform Strategy (MTRS): Under development by the new Tax Policy Office (TPO), targeting revenue neutrality while simplifying the tax code. Deadline: end of December 2026.

SOE Reform: Progress and Risks

Of 27 entities on the privatisation list, meaningful progress has been made:

• PIA privatisation agreement signed January 2026
• First Women's Bank sale completed October 2025
• Roosevelt Hotel joint venture structure under evaluation; new financial advisor to be appointed by end-April 2026
• First batch of DISCO private sector participation delayed due to investor concerns, but continuing in parallel with the second batch

The Sovereign Wealth Fund law amendments, critical for bringing all SOEs under proper governance standards, have been finalised with IMF staff consultation and will be submitted to Parliament shortly.

The SWF's execution is explicitly conditioned on Parliament's approval of the amendments.

Trade Liberalisation: The Tariff Story

Pakistan is implementing its 2025-30 National Tariff Policy (NTP), with a commitment to reduce the weighted average applied tariff from 10.6% in FY25 to 7.4% by FY30.

When combined with duty reductions in the auto sector, the weighted average tariff will fall below 6% by FY30, a fundamental realignment of Pakistan's trade policy.

Of 2,662 non-tariff barriers (NTBs) mapped across 76 HS codes, the government has identified restrictions for removal by the end of May 2026, with the remaining NTBs to be reviewed by the end of September 2026.

XI. RISK ASSESSMENT: WHERE DANGERS LIE

The Balance of Risks: Tilted Downside

The IMF's Risk Assessment Matrix identifies the following as "High" probability risks:

1. Geopolitical tensions and intensification of conflicts — primarily the Middle East war, with expected impact on financing costs, capital flows, and commodity prices, are rated as High.
2. Commodity price volatility — supply/demand imbalances could worsen Pakistan's energy sector position significantly if cost increases are not passed through to prices.
3. Fiscal vulnerabilities and higher long-term interest rates — given Pakistan's still-elevated public debt and sovereign-bank nexus.
4. Labour shortages and remittances — tighter immigration policies in destination economies threatening Pakistan's US$38-43 billion annual remittance inflow.
5. Slippages in policy implementation — political resistance to structural reforms (SOEs, energy tariffs, commodity market liberalisation) rated as "High" probability with "High" impact.
6. Protectionism and trade disruptions — global tariff escalation could undermine Pakistan's export competitiveness.
7. Policy uncertainty — elevated global policy uncertainty weighing on investment and consumption.

The Bottom Line Assessment

The IMF's own words: "The balance of risks is tilted to the downside."

In a more adverse scenario, where the Middle East conflict escalates further, fuel supply to Pakistan is more severely disrupted, and commodity prices remain elevated, the cumulative GDP loss could reach 1.5 percentage points by FY27, with inflation and the current account deficit worsening by 2.5 percentage points and 1.5 percentage points of GDP, respectively.

In such a scenario, the IMF says "further expenditure compression and reprioritisation would be needed to remain within the programme's fiscal envelope and ensure debt sustainability while providing temporary and targeted transfers to protect the most vulnerable."

XII. EXTERNAL FINANCING PROGRAMME: THE NUMBERS BEHIND THE SAFETY NET

Multilateral and Bilateral Architecture

Pakistan's external financing programme for FY26 and FY27 rests on a carefully choreographed structure of multilateral, bilateral, and commercial inflows. Total gross external inflows for FY26 are projected at approximately $21 billion, with the following composition:

For FY27, the programme anticipates a total bond issuance of $1 billion (split between Q1 and Q2 of FY27) and commercial borrowing of $2.5 billion in Q4 FY27, signals of a gradual return to international capital markets as confidence is rebuilt.

Indicators of Fund Credit

The report covered Fund Credit Indicators for 2026-47 and provides the repayment schedule for Pakistan's IMF borrowings. Total outstanding IMF obligations are incorporated into the 70.1% debt-to-GDP figure for FY26.

The EFF arrangement alone runs through FY27 (37 months from September 2024), with repayments extending over the medium term in line with EFF terms.

XIII. SOCIAL PROTECTION: DOING MORE WITH LESS

BISP: Pakistan's Social Anchor

The IMF's most emphatic insistence, repeated throughout the report, is that social spending must be protected even as fiscal consolidation proceeds.

BISP enrolment has reached 10.2 million families for the Kafaalat unconditional cash transfer programme, with a commitment to add another 200,000 families by end-FY26.

The conditional cash transfer (CCT) programmes have also expanded significantly:

• Taleemi (health and education): 11.4 million families, up 700,000 in FY26
• Nashonuma (nutrition): 2.2 million families, up 200,000 in FY26

The Kafaalat quarterly benefit of Rs14,500 will rise to Rs18,000 from January 2027, covering projected inflation and bringing benefits closer to the programme's target of 15% of the bottom quintile's consumption basket.

BISP spending is projected to scale from Rs694 billion in FY26 to Rs815 billion in FY27, a 17.4% increase.

Digital distribution is being accelerated; 7 million Kafaalat beneficiary families now have Social Protection Wallets (SPWs), enabling disbursements through digital accounts starting Q4 FY26.

The IMF is explicit that these programmes are essential: "Poverty remains high, with 40% of the population facing vulnerability, as does unemployment, especially among young people." Pakistan's poverty headcount rate rose to 25.3% in FY24, up from 18.3% in FY22.

This is a reminder of how devastating the crisis years were for ordinary Pakistanis.

XIV. LOOKING AHEAD: WHAT THE FOURTH REVIEW WILL TEST

The Fourth Review of the EFF is scheduled for September 2026 and will assess Pakistan's performance against end-June 2026 quantitative performance criteria. The critical prior tests before that review:

By end-June 2026:

• Parliamentary approval of an FY27 budget targeting 2% of GDP underlying primary surplus
• Finalization of arrangements with all IPPs for CD settlement
• Approval of legislation for the SWF governance framework
• National sugar policy adopted by cabinet
• PKR 7,022 billion FBR revenue target for end-December 2026 (converting from an IT to a QPC)

Key FY27 benchmarks:

• Gas tariff adjustment: July 1, 2026 and February 15, 2027
• Annual power tariff adjustment: January 15, 2027
• Kafaalat benefit increase: end-January 2027
• Targeted electricity subsidy reform (RM12): end-January 2027

The programme is fully financed for the next 12 months, based on existing commitments from bilateral and multilateral partners who have committed to rolling over short-term claims for the duration of the programme.

But the IMF is clear that sustained domestic reform delivery, not external largesse, is the only genuine path to economic sovereignty.

CONCLUSION: HALFWAY UP A VERY LONG MOUNTAIN

Pakistan in May 2026 is a country that has demonstrated, against the scepticism of many, that it can implement serious economic reforms under pressure.

The fiscal numbers are better than almost anyone predicted two years ago. Reserves are back. Growth is positive. The exchange rate is functioning. Banks are not failing.

But the IMF's report, read carefully, is also a document of humility. Pakistan's tax-to-GDP ratio is still below the 25th percentile of peers. Poverty is rising, not falling.

The energy sector remains a structural drain. The Middle East war is complicating every projection. And the institutional reforms, in SOE governance, anti-corruption, trade liberalisation, energy privatisation, are proceeding, but slowly, against powerful vested interests.

The report's most important number may not be in any of its statistical tables. It may be in this sentence from the IMF's assessment: "Shocks emanating from the Middle East war underline the continued importance of maintaining strong policies to continue building resilience and of moving ahead with structural reforms to achieve sustainable long-term growth."

In other words, the work has started. It is nowhere near done.

IMF Projections at a Glance

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