Pakistan tells IMF Middle East conflict no longer drags on its outlook

Pakistan has told the International Monetary Fund that the Middle East conflict will no longer affect its economic outlook, projecting inflation slowing to about 7.5% and a stable external sector for the current fiscal year, according to Pakistani authorities. The authorities said the central bank, in separate meetings, also forecast slowing inflation, a stable exchange rate and a stable external account. The IMF's detailed response to the government and central bank forecasts is expected within days.

According to the briefing given to the Fund, exports are projected to reach $34bn against a budget target of $32.5bn, with higher global rice prices expected to add at least $300m in earnings. Remittances are seen at $45.5bn, above the annual target, after growing 14.7% in the first two months of the fiscal year. The current account deficit is projected at $2.5bn to $3bn, or 0.5-0.6% of GDP, well below the $3.6bn target, while goods imports are put at $69-70bn, in line with the annual target. The government told the IMF it expects to meet its 4% growth target despite the conflict.

On prices, the government's assessment rests heavily on exchange rate stability. It told the Fund the rupee averaged around Rs278 to the dollar in the first quarter, stronger than the budget assumption of Rs286, and said sustainable current account position and record foreign exchange reserves should keep the rate broadly stable, limiting imported inflation. It projected 7.5% inflation if conditions normalise by October 2026 and Brent averages $80 a barrel this fiscal year, rising to 8.2% if oil stays near $100 a barrel until December. The annual inflation target is 8.2%, with the government expecting an outcome in the 7% to 8% range. Price pressures are expected to stay elevated until December before moderating.

Sources said the IMF again urged the authorities to implement a market-based exchange rate regime and to tighten monetary policy appropriately to tame inflation. The central bank is said to have told the Fund that its policy rate of 11.5% was already appropriately tight. According to the sources, neither the central bank nor the federal government sees an immediate need to adjust exchange rate or interest rate policy.

The government also briefed the Fund on food imports, which it expects to stay contained on higher domestic output of food and oilseed crops including canola, sunflower and rapeseed, reducing reliance on external financing. In the first two months of the fiscal year, the petroleum crude import bill rose 40.5% while petroleum products fell 26%; LPG imports rose 47% and LNG fell 28.6%. The authorities acknowledged that changing global conditions, higher oil prices, supply disruptions and renewed inflationary pressures pose downside risks to the outlook.