The Institute of International Finance (IIF) has raised concerns over Pakistan’s economic recovery, noting that while progress has been made, the country’s path to sustainable growth remains uncertain due to the absence of bold reforms.
In its latest report, the IIF stated that Pakistan’s economic recovery has outperformed expectations, yet key structural issues—particularly in tax reform, privatisation, and the energy sector—remain unresolved. The report warned that without comprehensive structural reforms, including addressing the circular debt issue, the recent economic gains may not be sustained.
While inflation has decreased significantly, allowing the State Bank of Pakistan (SBP) to cut its policy rate to 11% since June 2024, and Pakistan achieved its first current account surplus since FY11, the IIF cautioned that Pakistan’s long-term economic outlook remains vulnerable. The country recorded a primary balance surplus of 2.4% of GDP in FY25, the highest in over two decades, contributing to improved credit ratings and sustained multilateral support.
Despite these positive developments, geopolitical tensions, both regional and global, along with domestic political instability, continue to pose risks. The relationship between Pakistan’s military establishment and the opposition party PTI remains strained, contributing to ongoing uncertainty.
The IIF emphasized that while fiscal and external buffers have provided short-term relief, they remain limited. Although Pakistan’s reserve assets have increased by $5 billion, providing 2.4 months of import coverage, the country’s public sector debt remains high at around 67% of GDP.
The IIF also discussed the recently signed trade agreement with the United States, predicting that it could provide modest support to Pakistan’s textile industry. However, agriculture, which accounts for nearly a quarter of Pakistan’s GDP and employs 40% of the workforce, is likely to continue facing challenges. The kharif season, affecting key crops like rice, sugarcane, and cotton, has been disrupted by water shortages and heavy monsoon rains, potentially impacting harvests.
Additionally, the country has experienced flash floods, exacerbating economic challenges, including the impact on growth and fiscal and external balances. While inflation has improved, the floods have driven up food prices, contributing to a 2.9% month-on-month increase in headline inflation in July. Core inflation remains sticky, hovering around 7% in urban areas and 8% in rural regions. Energy price adjustments and new tax measures are expected to keep inflation high in the near term.
On the external front, the IIF forecasts that Pakistan’s current account deficit will remain modest, around 0.5% of GDP, as imports normalise. Exports are likely to depend on the progress of the US-Pakistan trade deal, though the IIF remains cautious about its impact on export growth.
Despite fiscal improvements, the IIF warned that the country’s fiscal deficit could face challenges. Though the deficit narrowed to 5.4% of GDP in FY25 and revenues grew by 35.6%, much of this growth came from one-off factors, such as record profits from the SBP. The Federal Board of Revenue (FBR) fell short of its target by 1% of GDP, and the tax-to-GDP ratio remains stuck at around 10%.
The IIF expressed concerns that the ambitious fiscal targets for FY26, including a 3.9% deficit and 2.4% primary surplus, may be difficult to meet given the high tax burden on the formal sector and the exclusion of the retail sector from the tax net. The reliance on domestic financing also remains a concern, and the IIF warned that fiscal performance will be a critical factor in the success of Pakistan’s IMF programme.