By Dr Hafiz A Pasha

Copyright brecorder

The IMF Staff Mission is arriving shortly in Pakistan to undertake the second review of the on-going IMF Extended Fund Facility of USD 7 billion. Successful completion of this review will lead to the release of USD 1 billion by the IMF.

This review is of critical importance for a number of reasons. It will see the extent to which the quantitative performance criteria, indicative targets and structural conditionalities of June 2025 have been met. In effect, this will be an examination of the performance over the year, 2024-25. It will also require an evaluation of the state of the economy in 2024-25 in relation to the projections made for the year.

The impending review will also have to contend with the impact of the devastating floods on the economy. There will be need for the IMF to access the projections made following the first review of May 2025 of the key components of the economy in 2025-26.

The inevitable scaling down of projections and incorporation of risk factors will also require rationalization of the quantitative performance criteria magnitudes and indicative targets for 2025-26. Given the enhanced risk of a deterioration in the balance of payments, the IMF will have to work with the Ministry of Finance and the SBP (State Bank of Pakistan) on a feasible external financing strategy, which will ensure that Pakistan does not move into a near default situation as in 2022-23 after the 2022 floods.

The objective of the article is to examine the following:

(i) The macroeconomic outcome in 2024-25 in relation to the projections for the year by the IMF;

(ii) Extent to which the quantitative performance criteria, indicative targets and structural conditionalities of June 2025 have been met;

(iii) Revision of the macroeconomic targets and magnitudes in public finances and balance of payments in 2025-26, especially in light of the damage caused to the economy by the floods;

(iv) Consequential impact on the magnitudes of the quantitative performance criteria, indicative targets and structural conditionalities in 2025-26, which were originally set after the first review up to December 2025; and

(v) Revised estimates of the external financing requirements and the strategy for fulfilling these requirements.

Macroeconomic outcome in 2024-25

The IMF projections for 2024-25 were made in May 2025 as part of the first review. Therefore, they were unlikely to diverge from the actual outcome in June 2025.

However, there are some deviations of the actual outcome from the IMF projections, as follows:

(i) The projected and the actual growth rate are both close to each other at 2.5 percent.

(ii) The rate of inflation has been 4.5 percent in 2024-25, whereas the IMF projection was of 5.1 percent.

(iii) The projected balance of the current account was of negative 0.2 billion USD. The actual outcome is a surplus of USD 2.1 billion.

(iv) Gross reserves at the end of June were estimated at USD 13.9 billion, whereas they actually were at USD 14.5 billion.

(v) The budget balance was projected at 5.6 percent of the GDP, whereas it actually was 5.4 percent of the GDP.

(vi) The primary surplus was 0.3 percent of the GDP higher than the IMF projection.

Overall, it is abundantly clear that the Pakistan economy performed better than the IMF expectations. This must be duly recognized by the IMF.

Achievement of quantitative performance criteria and indicative targets

There are 9 quantitative and continuous performance criteria and 9 indicative targets. Information is not publicly available on some of these magnitudes in a timely fashion.

Examination of the quantitative/continuous performance criteria reveals that the floor on net international reserves of the SBP, ceiling on net domestic assets of the SBP and floor on BISP (Benazir Income Support Programme) cash transfers have been met. The primary budget surplus has a shortfall of only 2.8 percent in relation to the target.

There is the likelihood that the floor on new tax returns of 850,000 has not been met. Information is not available with regard to the performance related to currency swaps and government guarantees.

Turning to indicative targets, there is lack of information here also on some of the magnitudes. It is likely that the floors on education and health spending and net provincial taxes have not been violated. However, there are a number of shortfalls related to the size of the provincial cash surplus and FBR revenues from retailers under the Tajir Dost scheme. Information is not available with respect to the accumulation of tax refund arrears and power sector payment arrears.

There are some serious shortfalls with regard to the implementation of the structural conditionalities by June 2025. The governance conditionality not met relates to the amendment of the Civil Secretariat Act related to the filing of asset declarations by high-level public officials. Also, the full Governance and Corruption Diagnostic Assessment Report was to be published by July 2025. This has not happened. A 5 percent excise duty was not introduced on fertilizer and pesticides in the 2025-26 Federal Budget.

Overall, there has been a mixed performance with regard to meeting the performance criteria, indicative targets and structural conditionalities. Pakistan may need to seek some waivers from the IMF for successful completion of the second review of the IMF Programme.

Macroeconomic projections for 2025-26

The first review report of the IMF also contains some key macroeconomic projections for 2025-26, as follows:

(i) GDP growth rate of 3.6 percent;

(ii) Rate of inflation at 7.7 percent;

(iii) Gross capital formation at 14.3 percent of the GDP and gross national saving at 13.9 percent of the GDP;

(iv) Current account deficit of USD 1.5 billion, Net capital inflows of USD 3.4 billion, leading to a balance of payments surplus of USD 1.9 billion;

(v) Gross reserves to rise to USD 17.7 billion by June 2026;

(vi) Total revenues as percent of GDP at 15.2 percent of the GDP and total expenditure at 20.3 percent of the GDP, implying a budget deficit of 5.1 percent of the GDP and a primary surplus of 1.6 percent of the GDP; and

The budgets for 2025-26 presented by the federal and the provincial governments are more ambitious as they envisage a budget deficit of 3.9 percent of the GDP and a primary surplus of 2.4 percent of the GDP.

This brings us to the likely impact of the recent floods in Pakistan. An initial assessment has been made of the impact by the Monetary Policy Committee of the SBP on the 15th of September, as follows:

(i) GDP growth rate is projected to be at the lower end of the range of 3.25 percent to 4.25 percent;

(ii) Inflation may cross the upper bound of the range of 5 percent to 7 percent;

(iii) Current account to remain in the earlier projected range of 0 to 1 percent of the GDP; and

(iv) Foreign exchange reserves to rise to USD 15.5 billion by December 2025.

Therefore, the SBP does not anticipate a large damage to the economy due to the floods as was the case in 2022-23 after the floods. The GDP growth rate turned negative, the rate of inflation jumped to over 29 percent, the current account deficit was USD 3.2 billion and reserves fell to a critically low level of USD 4.2 billion.

The IMF mission will need to make a judicious assessment of the impact of the floods on the economy of Pakistan. Fortunately, in the realm of public finances there is some ‘fiscal space’. The IMF projection of the fiscal deficit is 5.1 percent of the GDP, whereas the budgets for 2025-26 by the federal and provincial governments imply a consolidated budget deficit of 3.9 percent of the GDP. This will provide the ‘fiscal space’ for some lower level of the tax revenues due to lower GDP growth and for enhancement of expenditure to provide relief and support rehabilitation of the flood-affected population.

External financing requirements

There will be need for the second review of the IMF to focus especially on the external financing requirements in 2025-26, in view of the likelihood of a significant increase in the current account deficit from a surplus of over USD 2 billion in 2024-25 to a deficit of up to USD 4 billion in 2025-26, as projected by the SBP. Appropriate policies will need to be formulated in the next three quarters to prevent a drawdown of foreign exchange reserves, with the external financing requirement in 2025-26 approaching USD 22 billion.

Overall, the impending mission is of greater importance than normal IMF periodic reviews. There is a failure to meet some of the quantitative performance criteria, indicative targets and the structural conditionalities of June 2025. Further, the impact on the economy of the floods will have to be carefully assessed and how the larger external financing requirements will be met.

Top priority will also have to be given henceforth to implementation of the timely IMF Resilience and Sustainability Facility, which became operative in 2024-25, with funding of USD 1.4 billion to Pakistan. The investments under this facility will help build economic resilience to climate vulnerabilities and natural disasters.

Copyright Business Recorder, 2025