IMF sees weak external position

Estimates financing needs at 22-25% of GDP, CAD at $4.5b against official $2.5b

ISLAMABAD:

The International Monetary Fund (IMF) said on Thursday that Pakistan's external financial position may weaken due to rising imports and moderating remittances, urging exchange rate flexibility to preserve foreign exchange reserves and tighter monetary policy to deal with rising inflation.

The global lender made these observations in its Middle East and Central Asia region report, released on Thursday, a week after the World Bank-IMF annual meetings.

"Over the medium term, external positions should strengthen in Egypt, Jordan and Morocco, supported by lower commodity prices and export diversification, but weaken in Pakistan as imports rise and remittances moderate," according to the IMF.

The fund's remarks came days after it reached a staff-level agreement for disbursement of the $1 billion fifth loan tranche, subject to the government fulfilling prior actions.

The government has projected imports reaching $70 billion this fiscal year and remittances growing to $45.5 billion. The country is struggling to enhance exports, which have not grown despite years of incentives to handpicked exporters.

The IMF has projected Pakistan's current account deficit at 1% of gross domestic product (GDP), or around $4.5 billion, which is also far higher than official estimates of around $2.5 billion. The lender sees Pakistan's gross financing needs at around 22% to 25% of GDP, well above peer countries and carrying risks.

The report points to a very deep nexus between the government and commercial banks, estimating banks' 63% exposure to public debt, also well above typical emerging market levels.

Concerns about rising government debt could lead to higher borrowing costs than in the baseline, heightening fiscal sustainability concerns in countries with large gross financing needs, such as Egypt and Pakistan, the IMF said.

"Exchange rate flexibility can help preserve reserves and facilitate external adjustment (Egypt, Pakistan) but may also increase inflationary pressures through higher import prices," the lender said.

The government remains sensitive to any advice to allow the rupee to depreciate, citing inflationary impacts and no real positive impact on exports. The rupee appreciated by one paisa to Rs276.85 to the dollar on Thursday.

Inflationary pressures have risen most sharply in Egypt, to 14.5%, and in Pakistan to 11.1% year on year in August, reflecting higher food and energy-related prices and, in Egypt, also exchange rate depreciation, the IMF said.

The IMF has projected inflation to rise to 9.9% in Pakistan, 1.5% higher than its previous forecast.

"Countries should stand ready to tighten monetary policy, particularly where inflation is already above target and the policy stance appears accommodative, with ex-ante policy rates below estimated neutral levels, a combination most evident in the Kyrgyz Republic and Pakistan."

The IMF's report comes days before the Monetary Policy Committee meeting, which may review the possibility of raising interest rates from the current level of 11.5%.

During recent review talks, the central bank had termed the monetary policy appropriately tight.

Policy-rate responses since the start of the conflict have differed across exchange-rate regimes, and among countries with flexible exchange rates, Pakistan was the only one to raise interest rates after the conflict began, it added.

Financial supervisors should continue to monitor bank liquidity and funding conditions, asset quality in the sectors most exposed to the conflict – tourism, transport and trade-related activities – and sovereign-bank linkages where public debt is elevated and banks hold large stocks of government securities, such as in Egypt, Pakistan and Tunisia, the lender advised.

The IMF has kept its economic growth forecast for Pakistan unchanged at 3.5%, lower than the official target of 4% and also less than the World Bank's projection.

During the review talks, Pakistani authorities had tried to convince the IMF that the annual growth target of 4% would be achieved.

Countries insulated from the conflict, such as Egypt, Morocco, Tunisia and Pakistan, have recorded stable or even higher hotel occupancy rates in 2026 compared with last year, the IMF said.

On the fiscal front, fiscal policy stances are expected to turn accommodative in 2026 in many regional economies, with consolidation resuming from 2027. The stance in 2026 is projected to be restrictive in countries with limited fiscal space such as Bahrain, Iraq and Pakistan, but also in Qatar and Saudi Arabia, it added.