No more war impact, govt tells IMF

Lender urges adjustments in Pakistan's exchange rate, interest policies

ISLAMABAD:

Pakistan has apprised the International Monetary Fund (IMF) that the Middle East conflict will no longer impact its economic outlook, with inflation projected to slow down to 7.5% and the external sector remaining stable, but the global lender has urged it to adjust exchange and interest rate policies.

The federal government further informed the IMF that exports would hit $34 billion and foreign remittances would increase to $45.5 billion in the current fiscal year – better than the budget targets with no adverse impact on imports. It said that this would keep the external sector in a stable situation with the current account deficit remaining between $2.5 billion and $3 billion but significantly lower than the budget target of $3.6 billion.

In a briefing on the economic outlook for the current fiscal year, the federal government predicted a stable exchange rate instead of any devaluation and an easing of inflation in the second half of the year, Pakistani authorities told The Express Tribune.

They said that the central bank in separate meetings also predicted a slowing inflation rate, stable exchange rate and a stable external account. The central bank is said to have informed the IMF that its policy rate at 11.5% was already appropriately tight to tame inflation.

The IMF's detailed response to the government and the central bank's macroeconomic forecast is expected in the next few days. But sources said that the global lender again urged the authorities to implement a market-based exchange rate regime and also appropriately tighten the monetary policy to tame inflation.

The sources said that neither the central bank nor the federal government saw any immediate need for adjustments in the exchange rate and interest rate policies.

They said that the IMF was informed that lower reliance on food imports would generate foreign exchange savings, strengthen the external position and reduce reliance on external financing. The lender was further briefed that the exchange rate would remain stable.

The federal government's assessment was that a key factor in its forecast of slowing inflation was the exchange rate stability. The lender was told that during the first quarter of the current fiscal year, the exchange rate remained around Rs278 to a dollar, stronger than the budget assumption of Rs286 per dollar. Supported by a sustainable current account position and historic high foreign exchange reserves, the exchange rate is expected to remain broadly stable and is likely to limit imported inflation, according to the federal government's assessment.

The IMF was informed that if the situation normalised until October 2026 and the average Brent crude price stabilised at $80 per barrel in the current fiscal year, the projected inflation would remain at 7.5%. If the oil price remains at around $100 per barrel till December, the projected inflation may increase to 8.2% for the fiscal year. The government has set the inflation target for this fiscal year at 8.2%, but it said that due to an anticipated moderation in global crude oil prices, improved agricultural output, exchange rate stability, effective administrative measures and a favourable base effect during the second half, the inflation is projected to remain within the 7% to 8% range, with the most likely outcome being around 7.5%.

Its assessment of taming inflation was that price pressures would remain elevated till December, but thereafter, they were expected to moderate gradually over the course of the year, reflecting improving domestic supply conditions and a relatively favourable external outlook. Pakistani authorities were of the view that, supported by resilient remittance inflows, improving export performance and strong reserve buffers, the external sector was expected to remain stable in the current fiscal year. They informed the IMF that the current account deficit was now projected at around $2.5 billion to $3 billion, equivalent to 0.5-0.6% of GDP. The annual target is $3.6 billion.

Federal authorities have projected exports to peak at $34 billion, compared to the $32.5 billion budget target. They are of the view that an increasing trend in global rice prices is expected to support higher export earnings by at least an additional $300 million.

The fund has been apprised that imports of goods are projected at $69-70 billion, which is in line with the annual target and will not have any adverse impact. During the first two months of this fiscal year, the import bill of petroleum crude increased by 40.5%, while petroleum products declined by 26%. Similarly, LPG imports rose by 47%, while LNG declined by 28.6%.

The federal authorities were of the view that the food import bill was expected to remain contained due to higher domestic production of both food and oilseed crops, particularly canola, sunflower and rapeseed. Likewise, remittances are projected to hit $45.5 billion in this fiscal year, which is better than the annual target and will have a positive impact on the external account. Remittances grew by 14.7% during the first two months of this fiscal year.

The IMF was told that despite the Middle East conflict, the government would achieve its annual growth target of 4%. The government's assessment was that the ongoing conflict won't further dent growth, as it had already set a lower target compared to the initial projection of 5% growth in the current fiscal year. But it said that the changing global conditions, particularly the Middle East conflict, higher oil prices, supply disruptions and renewed inflationary pressures, have created downside risks.