Pakistan has received approval from the International Monetary Fund for a $1 billion loan disbursement, which would help boost the country's finances amid an escalating conflict with its neighbour India.
The decision also unlocks an additional $1.4 billion funding under the IMF's sustainability programme that will aid Pakistan's economic resilience against climate vulnerabilities and natural disasters, although it has yet to be disbursed, the Washington-based fund said in a statement on Friday.
The IMF stated that authorities in Islamabad have demonstrated "strong" implementation of conditions under a $7 billion bailout package approved in 2024, which have resulted in an improvement in fiscal conditions and a continuing economic recovery.
The country's real gross domestic product grew 2.5 per cent in 2024 and is projected to inch up to 2.6 per cent this year and further increase to 3.6 per cent in 2026, according to IMF estimates.
“Pakistan has made important progress in restoring macroeconomic stability despite a challenging environment … the economy continues to recover, with inflation sharply lower and external buffers notably stronger," Nigel Clarke, the IMF's deputy managing director, said in the statement.
The decision did not make any mention of Pakistan's continuing and growing conflict with India. The nuclear-armed neighbours fired missiles at each other on Saturday, escalating tensions that stemmed from an April 22 terror attack in the tourist spot Pahalgam that killed 26 people.
"Moving forward, policy priorities will include advancing reforms to strengthen competition, raise productivity and competitiveness, reform SOEs [state-owned enterprises], improve public service provision and energy sector viability and build climate resilience," the IMF said.
Debt burdens, inflation, rising energy costs, youth unemployment and climate vulnerability have taken a toll on Pakistan’s economy over the past decade. Yet in the past year, there have been some indications of improvement.
Inflation, in particular, has seen a steady decline: after soaring to nearly 40 per cent in May 2023, it has gradually slowed down and hit 0.28 per cent last month, the lowest since the index began in 2017, Pakistan's Bureau of Statistics announced last week.
Pakistan's Finance Minister Muhammad Aurangzeb last month in Washington said the country is on the right track, especially after Fitch upgraded its credit rating to "B-" – still non-investment grade but out of "substantial risk" territory, according to the New York-based agency's scale.
However, he did acknowledge that efforts on privatisation had fallen short. Generating revenue through enforced taxation and privatisation is a major component of Pakistan’s bailout deal with the IMF.
Risks to Pakistan's outlook, however, remain elevated, particularly from global economic policy uncertainty, rising geopolitical tensions and persistent domestic vulnerabilities, the IMF said.
"Against this backdrop, the authorities need to maintain sound macroeconomic policies and accelerate reforms to safeguard the macroeconomic gains and underpin stronger and sustainable, private sector-led medium-term growth," it added.
The IMF also noted that the State Bank of Pakistan's tight monetary policy stance has been "pivotal" in reducing inflation to historic lows, and that a more flexible exchange rate would be able to facilitate the adjustment to external and domestic shocks, aiding the rebuilding of reserves.
"Prompt action to address undercapitalised financial institutions and vigilance over the financial sector are necessary for financial stability. Strengthening of AML/CFT [anti-money laundering/combating the financing of terrorism] frameworks is also needed," the fund added.
