Monitoring Desk
Pakistan and the International Monetary Fund (IMF) launched high-level policy discussions in Islamabad on Monday to finalise the federal budget for fiscal year 2025–26, a crucial step toward meeting the targets under the Extended Fund Facility (EFF).
The negotiations, scheduled to continue until May 23, follow last week’s technical-level discussions held virtually. The talks are taking place amid heightened regional tensions and are focused on aligning Pakistan’s budgetary framework with the IMF’s reform agenda, including fiscal discipline, macroeconomic stability, and structural improvements.
According to officials, the deliberations cover revenue targets, expenditure rationalisation, and overall budget projections as Pakistan continues to face considerable fiscal and external financing pressures. A successful agreement on the macroeconomic framework will pave the way for the formal announcement of the federal budget on June 2.
IMF staff have urged Pakistan to align its budget priorities with the goals of restoring stability, building foreign exchange reserves, and pursuing inclusive, sustainable growth. The Fund expects a fiscal deficit reduction from 5.6% of GDP in FY25 to 5.1% in FY26, and a primary surplus of around Rs2.1 trillion — critical to ensuring debt sustainability.
Economic Trends and Outlook
Pakistan’s economic indicators have shown some positive signs. The current account balance, previously in deficit, has shifted to a surplus of 0.5% of GDP in FY25 due to a rebound in remittances and relative political calm. Inflation, which had soared to nearly 40% in mid-2023, dropped sharply to 0.7% by March 2025, enabling the State Bank of Pakistan to slash its policy rate by 10 percentage points to 12% since June 2024. This monetary easing is expected to support both investment and consumption.
These improvements have bolstered investor sentiment. Pakistan’s sovereign credit rating has been upgraded, and borrowing spreads in global markets have narrowed.
Persistent Challenges
Despite the encouraging signs, Pakistan faces significant financing challenges. The external financing gap is projected at $19.75 billion in FY26 and will likely remain above $19 billion through FY27. The shortfall could exceed Rs8.8 trillion by FY28. While foreign reserves are expected to rise to $23 billion by then, the IMF has flagged that no meaningful privatisation proceeds are anticipated before 2030.
Remittances are projected to hold steady at $36 billion, and the current account deficit is estimated at $3.85 billion. However, global economic uncertainties and regional tensions, particularly with India, pose risks to Pakistan’s outlook. The IMF has warned that renewed hostilities could disrupt financial markets and distract from the reform agenda.
The Fund also forecasts GDP growth at 3.6% and average inflation at 7.7% in FY26 — a notable increase from the 5.1% average in the current year. To meet the fiscal targets, Pakistan will be expected to cut overall expenditures from 21.6% of GDP to 20.3%, translating to an estimated Rs26.57 trillion in FY26, up from Rs18.9 trillion in the current budget.
Final revenue and expenditure figures are still being negotiated, especially in light of additional security-related costs that have emerged recently.
