Money in the Bank, Trust on the Table

May 16, 2025 (MLN): This week, Pakistan received a $1 billion tranche from the International Monetary Fund (IMF), as confirmed by the State Bank of Pakistan (SBP). Normally, such inflows are part of routine financial commitments, which is a quiet nod in the background of economic management. But this time, the context made it anything but routine.

The country had just emerged from the global spotlight, not for its economy, but for a brief yet intense military escalation.

In the midst of this, India, the traditional rival, took the unusual step of urging the IMF to rethink its financial support to Pakistan. And yet, the IMF released the funds.

This development carried a subtle yet powerful message that Pakistan, even amid heightened geopolitical tensions, continues to inspire confidence in both its economic direction and diplomatic approach.

It showed that leading institutions and the global community trust not only in our economic policies but also in our foreign policy stance. In other words, both fiscal and foreign policies are being taken seriously on the global stage.

“Pakistan has made important progress in restoring macroeconomic stability despite a challenging environment,” Nigel Clarke, Deputy Managing Director and Chair of IMF Board said.

On May 9, 2025, when Pakistan was making headlines on war zone amidst escalating conflict, the IMF Executive Board completed the first review under the Extended Fund Facility (EFF) Arrangement, allowing the authorities to draw the equivalent of about $1bn (SDR 760 million).

In addition, the IMF Executive Board also approved the authorities’ request for an arrangement under the Resilience and Sustainability Facility (RSF), with access of about $1.4bn (SDR 1bn).

The IMF is of the view that since Pakistan’s 37-month EFF was approved on September 25, 2024, the economy has continued to recover, with inflation sharply lower and external buffers notably stronger.

Risks to the outlook remain elevated, however, particularly from global economic policy uncertainty, rising geopolitical tensions, and persistent domestic vulnerabilities.

Against this backdrop, the authorities need to maintain sound macroeconomic policies and accelerate reforms to safeguard the macroeconomic gains and underpin stronger and sustainable, private sector-led medium-term growth.

Driven by fiscal consolidation, inflation control, and external stability, the fund is expected to see gradual improvement in the coming years, according to the latest IMF projections for FY2024–FY2026.

The IMF anticipated real GDP growth to increase from 2.5% in FY2024 to 3.6% in FY2026, indicating cautious optimism that requires deeper structural reforms to ensure long-term resilience.

A sharp decline in inflation is projected, with consumer prices falling from an average of 23.4% in FY2024 to 5.1% in FY2025, attributing this decline to tight monetary policies, controlled government spending, and efforts to stabilise currency fluctuations.

On the fiscal front, the country’s budget deficit is set to shrink from -6.8% of GDP in FY2024 to -5.1% in FY2026, driven by expected tax reforms and revenue measures. The total government debt, excluding IMF obligations, will peak at 71.2% in FY2025 before declining to 69.2% in FY2026, mainly due to progress in debt management.

The fund also underscored the importance of sustaining fiscal discipline, stating that the successful implementation of tax policies and efficiency in public spending will be crucial in maintaining a stable financial outlook.

A significant improvement in foreign exchange reserves is expected as it has increased from $9.39bn in FY2024 to $17.68bn in FY2026.

The current account deficit is projected to remain manageable at -0.1% of GDP in FY2025. However, the foreign direct investment (FDI) outlook remains modest at 0.5%-0.6% of GDP.

Despite improving indicators, the IMF has warned of risks tied to global economic shocks, domestic political stability, and energy sector inefficiencies.

Thus, effective governance and sustained structural reforms will be critical in realising projected fiscal and economic improvements.

Lately, a report by Barron’s made headlines in the news wherein the experts claim that “Pakistan is a good story, so good that it is no longer risky enough for distressed market investors.

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