IMF warns Pakistan’s external position may weaken as imports rise and remittances slow

ISLAMABAD: The International Monetary Fund (IMF) has warned that Pakistan’s external financial position may weaken because of rising imports and slower growth in remittances.

According to a media report, the IMF has urged Pakistan to maintain exchange rate flexibility to protect foreign exchange reserves. It has also called for tighter monetary policy to curb rising inflation.

These observations were made in the IMF’s regional report on the Middle East and Central Asia. The report was released yesterday, a week after the annual meetings of the World Bank and the IMF held last week.

The report says the external positions of Egypt, Jordan and Morocco are expected to improve over the medium term because of lower commodity prices and export diversification. However, Pakistan’s external position may weaken, as imports are expected to rise and remittances to fall.

The IMF has projected Pakistan’s current account deficit at one per cent of gross domestic product, or about $4.5 billion. This is far higher than the government’s official estimate of about $2.5 billion.

Financing needs and borrowing

Pakistan’s gross external financing needs are likely to remain between 22 and 25 per cent of GDP. This is significantly higher than in peer countries and could pose various financial risks.

The report also mentions the close link between the government and commercial banks. According to the IMF’s estimate, banks’ exposure to government debt stands at 63 per cent of their total assets or investments. This is far above the usual level in emerging economies.

The IMF warned that rising government debt could push the government’s borrowing costs above baseline estimates. This could worsen financial stability problems in countries such as Egypt and Pakistan.

Interest rate and the rupee

The government is wary of any proposal to allow the rupee to lose value, as it could push up inflation. It is also unclear whether exports would gain any real benefit.

In the interbank market, the Pakistani rupee gained one paisa against the US dollar to close at Rs276.85.

According to the report, countries where inflation is already above target and policy is relatively loose should be ready to tighten monetary policy. Central bank policy rates are estimated to be below the neutral level, which is more pronounced in Kyrgyzstan and Pakistan.

The IMF said that after the conflict began, different countries took interest rate measures in line with their exchange rate systems. Among countries with flexible exchange rates, Pakistan was the only one to raise its interest rate after the conflict began.

The IMF has kept its forecast for Pakistan’s economic growth at 3.5 per cent. This is below the government’s official target of four per cent and also lower than the World Bank’s estimate.

On the fiscal front, the IMF said fiscal policy in several economies of the region is expected to remain relatively loose during 2026. Fiscal consolidation and spending restraint may resume from 2027.