IMF support bolsters Pakistan amid Middle East war risks

May 15, 2026 (MLN): Pakistan has spent the better part of two years doing everything right tightening its fiscal stance, rebuilding its reserves, and staying the course on painful reforms. The results have been visible.

GDP growth accelerated in the first half of fiscal year 2026, inflation stayed contained, the current account was broadly balanced, and foreign reserves were rebuilt at a pace that exceeded the IMF's own projections.

For a country that was not long ago teetering on the edge of a balance-of-payments crisis, these were numbers worth celebrating.

Then the Middle East went to war. And suddenly, the fragility underneath Pakistan's recovery became harder to ignore.

The IMF has been direct about the threat. The conflict is expected to put upward pressure on inflation, weigh on growth, and strain the balance of payments.

The Fund's baseline scenario holds that the overall impact will remain contained but it adds, with unusual candour, that downside risks are high and that there is great uncertainty about how developments will unfold.

For an economy still carrying elevated poverty rates and subdued growth, that uncertainty is not a distant concern. It is an immediate one.

What makes the situation harder is that Pakistan did not create this shock and cannot control it.

The war's pressure arrives through channels the country is already stretched on energy costs, import prices, and the broader regional environment on which Pakistani trade and remittance flows depend.

The government has committed to keeping fuel and energy tariffs in line with actual cost recovery, a policy designed to prevent unaffordable subsidies from reopening the fiscal wounds that took years to close.

But that commitment becomes politically and economically more difficult to hold when global energy prices are being driven upward by conflict rather than by market cycles.

Targeted support for vulnerable consumers remains part of the framework, but with poverty still elevated, the margin between a manageable adjustment and a social pressure point is thin.

On the monetary side, the State Bank of Pakistan is maintaining an appropriately tight policy stance specifically to keep inflation expectations anchored at a moment when commodity prices are volatile.

The logic is sound: once inflation psychology embeds itself, dislodging it requires far more pain than preventing it. But tight monetary policy also means that growth, already subdued, receives no domestic stimulus to offset what the external environment is taking away.

The exchange rate is the third line of defence. Authorities have committed to maintaining a flexible rupee as the primary shock absorber allowing the currency to adjust rather than burning through reserves defending an artificial level.

This is the correct policy response to an external terms-of-trade shock, and the IMF has been consistent in requiring it.

But currency flexibility, while economically rational, is immediately felt by households and businesses through higher import costs, and it adds to the inflationary pressures already building from the Middle East conflict.

Against all of this, Pakistan's IMF programme itself is holding firm. The 37-month Extended Fund Facility, approved in September 2024, passed its third review with all seven Quantitative Performance Criteria met at end-December and six of eight Indicative Targets cleared.

Most structural benchmarks were also delivered. Completion of the review unlocks SDR 760m approximately $1.1bn bringing total EFF disbursements to SDR 3,040m.

The 29-month Resilience and Sustainability Facility, approved in May 2025, is similarly on track, with both reform measures due under the second review met, releasing a further SDR 153.8m, or roughly $220m.

That financing matters not just as a number but as a signal to markets, to other creditors, and to the Pakistani public — that the reform effort is credible and being honoured.

The authorities have reaffirmed their commitment to the full range of programme policies: the gradual fiscal consolidation plan, the drive to broaden the tax base and generate resources for social and development spending, improvements to public financial management, and the deeper structural reforms that take longer to deliver but matter most for sustained growth.

These include strengthening anti-corruption institutions, advancing the privatisation of state-owned enterprises, and eliminating the regulatory distortions that have long suppressed private sector dynamism.

Running alongside the EFF is the RSF arrangement, which addresses a dimension of vulnerability that traditional IMF programmes rarely touch directly.

Pakistan is among the world's most climate-exposed economies, and the RSF policies are designed to reduce that exposure improving the country's climate information architecture, reducing economic vulnerability to climate shocks, and creating the conditions for climate-focused investment to flow more readily into the economy.

With both review measures met, this strand of the programme is keeping pace with the broader fiscal effort.

The picture that emerges from all of this is of a country that has genuinely done the hard work and now finds itself facing an external storm it did not invite.

Pakistan's reserves are stronger than they were. Its fiscal position is more disciplined. Its reform commitments are intact.

The IMF has said clearly that strong policy and steadfast reform efforts remain paramount to safeguarding stability and supporting higher growth and that framing, amidst a very uncertain international environment, carries an implicit acknowledgement that what has been built is real, but not yet invulnerable.

Whether Pakistan's rebuilt resilience is deep enough to absorb what the Middle East war may yet deliver is a question no review document can answer.

What the documents do confirm is that the country enters this period of uncertainty in considerably better shape than it has faced previous crises  and that, for now, is the most honest thing that can be said.

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