IMF says $7.2 billion programme critical as Middle East war hits Pakistan’s outlook

The International Monetary Fund (IMF) has said its $7.2 billion Extended Fund Facility (EFF) programme with Pakistan remains critical as the country faces economic pressures from the Middle East conflict, which has weakened growth outlook and increased financial risks.

In its latest Regional Economic Outlook update, the IMF said the programme focuses on restoring macroeconomic stability, rebuilding external buffers, and advancing reforms in fiscal management, energy pricing, and governance.

The Fund revised Pakistan’s growth outlook downward by 0.6 percentage points cumulatively for 2026 and 2027 due to the commodity supply shock triggered by the war.

The report noted that the conflict, which began on February 28, 2026, disrupted energy supply chains, with Brent crude prices rising above $100 per barrel and prices of gas, fertilizers, and metals also increasing.

These developments have raised production costs and tightened supply chains across the region, affecting economies including Pakistan.

The IMF said sovereign bond yields in Pakistan increased from around 8% before the conflict to above 9% by the end of March, reflecting heightened investor risk perception.

It added that sovereign spreads widened by over 50 basis points, indicating increased borrowing costs amid global financial uncertainty.

The Fund warned that higher oil prices could reduce output by about 0.5 percentage points and increase inflation by around 1 percentage point for oil-importing countries in the region.

For Pakistan, inflation is projected to reach 5.5% in 2026, with risks from higher food and energy prices.

The report also highlighted potential pressure on Pakistan’s external and fiscal balances, with current account deterioration estimated at around 0.3 percentage points and fiscal impact at 0.1 percentage points.

The IMF said countries like Pakistan remain exposed due to reliance on energy imports and financial inflows from Gulf economies, as well as remittances, which account for about 5% of GDP.

It warned that prolonged conflict could lead to lower trade and remittance flows, increasing external vulnerabilities.

The Fund added that while financial market reactions have so far remained contained, risks include tighter global financial conditions, capital outflows, and exchange rate pressures, which could raise refinancing risks for highly indebted economies.

The IMF said central banks may need to respond to inflationary pressures, but policy actions should be calibrated based on country-specific conditions and supported by clear communication to anchor expectations.

The report noted that a ceasefire announced on April 7 could support de-escalation, but uncertainty remains high and economic outlook will depend on stability in the region.