Monitoring Desk
Pakistan and the International Monetary Fund (IMF) began critical policy-level talks in Islamabad on Monday to finalise the federal budget for fiscal year 2025–26, with the goal of aligning fiscal plans with commitments under the Extended Fund Facility (EFF).
The ongoing discussions, which will run until May 23, follow technical-level meetings held last week via video link. The IMF delegation, now in Islamabad, is holding in-depth talks with Pakistani authorities on revenue targets, expenditure controls, and fiscal projections to address growing economic challenges and meet reform benchmarks.
The budget will play a pivotal role in determining whether Pakistan remains on track with IMF programme goals, which include restoring macroeconomic stability, strengthening foreign exchange reserves, and advancing structural reforms to support inclusive growth. The federal budget is expected to be presented on June 2.
Economic Trends Offer Some Relief
Amid mounting fiscal stress, a few positive economic indicators have emerged. Pakistan’s current account, which showed a deficit of 0.5% of GDP in FY24 (July–March), has turned into a surplus of the same magnitude in FY25, driven by recovering remittances and improved political stability.
Inflation has also eased significantly—from a peak of nearly 40% in mid-2023 to just 0.7% by March 2025—allowing the State Bank of Pakistan to slash its policy rate by 10 percentage points since June 2024, bringing it down to 12%. The monetary easing is expected to stimulate investment and domestic consumption.
In parallel, Pakistan’s sovereign credit rating has improved, and international borrowing costs have declined, reflecting increased investor confidence as a result of continued IMF engagement and fiscal discipline.
Major Risks and Gaps Persist
Despite recent gains, Pakistan still faces a substantial external financing gap. The shortfall is projected at $19.75 billion for FY26 and is expected to remain above $19 billion through FY27. By FY28, the gap could surpass Rs8.8 trillion. While forex reserves may rise to $23 billion by then, the IMF has cautioned that “no significant income is expected from privatisation before 2030.”
Remittances are forecasted to remain stable at $36 billion, while the current account deficit is projected around $3.85 billion. However, the IMF has flagged risks from global financial volatility, commodity prices, and escalating geopolitical tensions. The Fund warned that any renewed conflict with India could disrupt financial markets, deter investment, and derail reform progress.
Fiscal Targets and Budget Planning
The IMF projects GDP growth of 3.6% and average inflation of 7.7% for FY26 — higher than the 5.1% average inflation expected this year. To meet programme targets, the Fund wants Pakistan to reduce its fiscal deficit from 5.6% of GDP this year to 5.1% in FY26.
Expenditure is expected to decline from 21.6% of GDP to 20.3%, but in absolute terms could rise to Rs26.57 trillion next year — compared to Rs18.9 trillion in the current budget — due in part to increased security-related costs. The primary surplus (revenues minus non-interest expenditures) must be maintained at around Rs2.1 trillion, which is critical for debt sustainability. This would help reduce Pakistan’s debt-to-GDP ratio from 77.6% to 75.6% in FY26.
Negotiations on final revenue and spending figures are ongoing, with both sides working to reconcile fiscal targets with on-ground realities, including the added strain from regional tensions.
