IMF says only reforms can save Pakistan’s FY26

December 12, 2025 (MLN): The International Monetary Fund (IMF) has warned that Pakistan’s FY26 economic outlook will remain fragile unless reforms continue uninterrupted, as updated projections show slower growth, temporarily rising inflation and renewed pressure on the current account following the 2025 monsoon floods.

In its latest report, the IMF said the floods, affecting nearly 7 million people and causing PRs 800 billion in damage, have tilted the short-term economic landscape.

However, consistent implementation of reforms under the $7 billion Extended Fund Facility could stabilise growth, strengthen the fiscal position and support the buildup of reserves over the medium term.

The IMF now projects GDP growth of 3.2% in FY26, lower than earlier estimates due to extensive damage to Kharif crops and spillovers to industries and services.

Growth is expected to recover gradually in later years as the reconstruction cycle begins and business confidence improves.

Inflation is expected to rise to 8–10% in FY26, driven mainly by costlier food items and base effects, but the Fund expects a durable decline back toward target in FY27, supported by tighter monetary policy and easing supply pressures.

The Fund projects the current account deficit to widen to 0.6% of GDP in FY26.

Besides crop losses and higher import needs, the IMF notes that tariff cuts under the new National Tariff Policy (NTP) will also push imports higher.

The impact will be partly offset by resilient remittances, expected to grow as families support relatives affected by the floods.
Over the medium term, the current account deficit is expected to remain contained at below 1% of GDP, supported by improved export competitiveness, better financing conditions and a gradual return to international markets by FY27.

Despite disaster-related spending, the IMF says that Pakistan can still achieve the FY26 primary surplus target of 1.6% of GDP.

The Fund said the fiscal stance is broadly neutral, with provinces expected to reprioritize spending while the federal government uses contingency reserves.

Over the medium term, the IMF expects sustained primary surpluses of around 2% of GDP, which would help reduce public debt to about 60% of GDP by FY30, down from nearly 73%.

Gross official reserves are projected to rise to $17.8 billion in FY26, supported by gradual improvement in financing inflows, modest Panda bond issuance and planned market re-entry in FY27.

However, reserves will still cover less than three months of imports, remaining below the IMF’s recommended adequacy threshold.

According to the IMF, the 2025 monsoon floods will lower GDP growth by about half a percentage point, raise inflation by 0.5 percentage point, reduce revenues by Rs110 billion, and worsen the external account by around $1 billion.

The government’s emergency response, estimated at Rs400 billion (0.3% of GDP), will be funded through contingency reserves and reprioritisation of provincial development budgets.

The IMF listed a long set of risks, including greater-than-expected crop losses, commodity price spikes, global financial tightening, weaker remittances, rising geopolitical tensions, and domestic policy slippages due to fiscal pressures. 

The Fund warned that any easing of policies or politically driven concessions could undermine stabilization gains and derail medium-term projections.

Flood Impact: 2022 vs 2025