ISLAMABAD: The International Monetary Fund (IMF) has warned that Pakistan’s external financial position could weaken as imports increase and remittance growth slows, projecting the country’s current account deficit to reach approximately $4.5 billion, or one percent of gross domestic product (GDP).
The projection is significantly higher than the government’s official estimate of around $2.5 billion, highlighting potential pressure on Pakistan’s external accounts despite ongoing efforts to stabilise the economy.
In its latest regional economic outlook for the Middle East and Central Asia, released on Thursday following the IMF and World Bank annual meetings, the Fund called for greater exchange rate flexibility to protect foreign exchange reserves and tighter monetary policy where inflationary pressures remain elevated.
The report noted that while countries such as Egypt, Jordan and Morocco are expected to experience improvements in their external positions over the medium term, Pakistan could face a deterioration due to stronger import demand and slower growth in workers’ remittances.
External financing requirements remain elevated
According to the IMF, Pakistan’s gross external financing requirements are projected to remain between 22 and 25 percent of GDP, substantially higher than those of comparable economies.
The Fund cautioned that such elevated financing needs could expose the country to financial vulnerabilities, particularly if borrowing conditions become less favourable or external inflows fall short of expectations.
The report also highlighted the close financial relationship between the government and commercial banks, noting that banks’ exposure to sovereign debt accounts for approximately 63 percent of their total assets or investments.
This level of exposure is considerably higher than the average for emerging market economies, raising concerns about the potential transmission of sovereign debt risks to the banking sector.
The IMF warned that growing concerns over government debt could push sovereign borrowing costs above baseline projections, creating additional financial stability challenges for countries such as Pakistan and Egypt, where financing requirements are already substantial.
IMF calls for exchange rate flexibility
The Fund reiterated the importance of maintaining exchange rate flexibility to absorb external shocks and safeguard foreign exchange reserves.
However, Pakistani authorities have remained cautious about allowing further depreciation of the rupee, amid concerns that a weaker currency could increase inflationary pressures without necessarily delivering significant improvements in export competitiveness.
On Thursday, the Pakistani rupee recorded a marginal gain of one paisa against the US dollar in the interbank market, closing at Rs276.85.
The IMF’s recommendations reflect the challenge facing policymakers as they attempt to balance exchange rate stability, inflation control and the need to maintain adequate external financing.
Further monetary tightening may be needed
The IMF also advised countries to remain prepared to tighten monetary policy further, particularly where inflation exceeds official targets and existing policy settings appear relatively accommodative.
According to the report, this situation is particularly evident in Pakistan and Kyrgyzstan, where central bank policy rates are estimated to be below their respective neutral levels.
The Fund noted that countries adopted different interest rate responses following the outbreak of regional conflict, depending on their exchange rate arrangements and domestic economic conditions.
Among economies operating flexible exchange rate regimes, Pakistan was the only country identified in the report as having raised interest rates following the start of the conflict.
The IMF indicated that additional monetary tightening could become necessary if inflationary pressures persist or intensify.
Pakistan’s growth forecast remains at 3.5 percent
Despite the concerns surrounding external financing and monetary conditions, the IMF maintained its economic growth projection for Pakistan at 3.5 percent.
The forecast remains below the government’s official growth target of four percent and is also lower than the World Bank’s estimate.
On the fiscal outlook, the Fund said several regional economies are expected to adopt relatively accommodative fiscal policies during 2026, with fiscal consolidation and tighter expenditure management likely to resume from 2027.
The IMF’s assessment underscores the challenges confronting Pakistan as it seeks to sustain economic growth while managing external financing pressures, inflation risks and substantial government borrowing requirements.