IMF cuts growth forecast to 3.5%

Inflation projection raised to 8.4% for next year as CAD expected to hit $5b

ISLAMABAD:

The International Monetary Fund (IMF) on Tuesday lowered Pakistan's economic growth forecast to 3.5% and raised its inflation projection to 8.4% for the next fiscal year due to the Middle East conflict, as it does not see any major adverse impact of the war this year.

In its flagship World Economic Outlook report, the IMF has also cut the global growth forecast for two years, basing its projections on $100 per barrel to $120 per barrel oil prices in adverse and severe war case scenarios.

The report, which the global lender released on Tuesday on the sidelines of the spring meetings, showed that Pakistan's economic growth would slow down to 3.5% in the fiscal year 2026-27, down from the earlier forecast of 4.1%. For this fiscal year, the IMF has retained the economic growth projection at 3.6%, which is in line with the projections of the Asian Development Bank and Fitch rating agency.

The global lender raised the inflation forecast to 8.4% for the next fiscal year – up from 7% during the second review of the programme. The forecast, thus far, is the highest by any international financial institution, which can bring Pakistan's central bank under pressure to raise the interest rates. For the current fiscal year, the IMF has given a 7.2% inflation projection, which is higher than the earlier 6.3% rate.

Likewise, the IMF has more than doubled the current account deficit projection to 0.9% of the GDP or about $5 billion for the next fiscal year. For this fiscal year, it has retained the projection around 0.4%, showed the IMF report.

Pakistan is among those countries that are directly impacted because of the Middle East conflict, as it sources 90% of the total energy imports from the region. The country has been at the forefront to broker a peace deal between the United States and Iran and has already hosted both nations.

The IMF has given three different scenarios of world economic growth and inflation, basing these assumptions on the war ending soon, the adverse scenario and the severe case of protracted conflict with energy pricing significantly increasing from the second half of this year.

The IMF said that the global economy is threatened with being thrown off course – this time by the outbreak of war in the Middle East. It added that over the past year, headwinds from higher trade barriers and elevated uncertainty were offset by tailwinds from technology-related investment, accommodative financial conditions including a weaker US dollar, and fiscal and monetary policy support. The Middle East conflict presents a significant counterforce to these tailwinds through its impact on commodity markets, inflation expectations and financial conditions, according to the World Economic Outlook.

Reference forecast

Under the reference forecast, the IMF has projected global growth at 3.1% in 2026 and 3.2% in 2027, slower than its recent pace of about 3.4%. Global headline inflation is expected to increase to 4.4% in 2026 and decline to 3.7% in 2027, marking upward revisions for both years.

Adverse scenario

Under an adverse scenario with larger and more persistent increases in energy prices, global growth would slow further to 2.5% in 2026, and inflation would reach 5.4%, said the IMF. In the adverse scenario, oil prices are assumed to increase by 80% starting in the second quarter of 2026 relative to the January 2026 WEO Update baseline, before falling back to around 20% above baseline in 2027 and dissipating in 2028. The IMF has corresponded to an average petroleum spot price index of around $100 per barrel in 2026 and around $75 in 2027. Gas prices for Europe and Asia have been assumed to increase by 160% in the second quarter relative to baseline, before also mostly unwinding in 2027.

Severe cost of conflict

Under a more severe scenario in which there is more damage to energy infrastructure in the conflict region, the impact would be even larger: global growth would be cut to only about 2% in 2026, while headline inflation would be just above 6% by 2027. The impact on emerging markets and developing economies would be almost twice that on advanced economies, it added.

In the severe scenario, the shock to commodity prices is more severe and persistent, with oil prices increasing by 100% starting in the second quarter of 2026, relative to the January 2026 WEO Update baseline but also staying at that level in 2027, before dissipating in 2028. The IMF has assumed an average petroleum spot price index of around $110 per barrel in 2026 and around $125 in 2027, while gas prices for Europe and Asia increase by 200% over the same period.

The IMF said that global growth slipping below 2% rate "would mean a close call for a global recession, which has happened only four times since 1980, with the latest two occasions corresponding to the global financial crisis and the Covid-19 pandemic."

The IMF said that given the current situation, governments all over the world should – as appropriate for their country-specific circumstances – mobilise revenues, reprioritise expenditures, make spending more efficient and manage windfalls prudently. A second priority is addressing domestic imbalances, especially when doing so also helps reduce excessive external imbalances, said the lender.

The IMF said that trade restrictions play a limited role in correcting imbalances but can worsen output. Instead, countries should cooperate and take coordinated actions to restore stability in international economic relations. They should seek opportunities to enhance trade integration, supported by predictable, transparent and well-communicated trade policy frameworks.

According to the World Economic Outlook, prices for energy commodities are expected to rise by 19% in 2026, as opposed to the small decline projected in the October 2025 WEO report.

Oil prices are expected to increase by 21.4% on account of disruptions to production and transportation in the Middle East, corresponding to the average petroleum spot price index averaging $82 per barrel.

It said that natural gas prices are expected to be affected more than oil prices because of the technical complexity of restarting production and the comparatively lower level of reserves to fall back on.

Food prices are expected to increase as well, more than projected in October 2025, on account of higher energy and fertiliser prices, disrupted shipping routes and increased transport costs. Industrial and precious metal prices are projected to maintain the gains experienced in 2025.