The government has accepted the need for a mini-budget if revenues do not meet expectations by the end of December 2025, according to the IMF. Photo: file
ISLAMABAD:
Pakistan has informed the International Monetary Fund (IMF) that the US-Israel war against Iran will not significantly affect the country’s economy, estimating that the current account deficit may remain around $2 billion and that the impact of fuel prices on inflation is unlikely to be 0.3%.
The government also sees no impact on foreign remittances, which have been projected to grow to $43 billion even after war expansion into the Gulf states. Saudi Arabia and the United Arab Emirates (UAE) are the major sources of remittances to Pakistan.
The macroeconomic assumptions are shared with the IMF amid advice to Prime Minister Shehbaz Sharif to increase import duties to contain the bill. However, not many took the advice.
Although the war has crushed the global and regional economies, the Treasury informed the IMF that its economy may still grow by 4% this fiscal year, just 0.2% less than the pre-war scenario.
The projections were shared with the IMF at a time when the government massively increased the prices of diesel, kerosene and petrol. Petrol price was hiked by Rs55 per litre, forcing each user to pay Rs23 per liter extra to the government over and above the benchmark average Platts prices.
The sources told The Express Pakinomist that the finance ministry held two sessions with the IMF to discuss the consequences of the war against Iran. The IMF had asked the government to share its projections regarding the impact of the war on the current account deficit, economic growth, remittances and inflation.
The government told the IMF that rising international oil prices were a key risk, but any increase in the oil import bill would be offset by reduced agricultural imports due to better local harvests, sources said.
The official assessment was that in the pre-war scenario, Pakistan’s current account deficit was projected at $1 billion, which was now unlikely to jump to $2 billion. The $2 billion current account deficit is based on the assumption of $100 per barrel of crude oil price.
Brent crude oil prices jumped above $100 a barrel on Monday. The government’s claim that the war would increase the current account deficit by just $1 billion seems surprising since the country has already posted a $1.1 billion deficit in the first seven months of the current fiscal year.
According to an assessment shared with the Petrol Committee, at 100 dollars per barrel of crude oil be a monthly $300 million additional impact on the oil import bill. The effect will increase to 500 million dollars per month if prices touch 120 dollars per month. barrel.
The government has estimated it would save about $800 million by limiting agricultural imports, which should offset the impact of an increase in the oil import bill.
The IMF team also asked about the impact of the war on economic growth. The Foundation was advised that the war would only shave 0.2% off the economy and the country’s GDP was still expected to grow by 4%. The government believes that if the war ends earlier, the economy could instead grow by 4.5%, the sources said.
The sources said the IMF asked about the remittances after the war in the Middle East. The Ministry of Finance was of the view that remittances were expected to receive additional support during the Eid periods.
The IMF was told that 14 million Pakistanis were actively working abroad, including about 4.5 million in the Middle East, many of whom are employed in semi-skilled and skilled essential services. Based on these assumptions, remittances are expected to rise to $43 billion this fiscal year, the sources said.
The IMF was informed that the increase in the prices of petroleum products would have a marginal impact on inflation, ranging from 0.2% to 0.3%. The government was of the view that despite highly uncertain conditions and chances of several rounds of fuel price hikes, the overall inflation rate for this fiscal year would remain below 6.5% this fiscal year.
The projection of the low inflation effect is based on the fact that petrol has very little weight in the overall inflation basket and despite significant impact on people’s lives, the official inflation figure may not rise dramatically, the sources said.
In the next fiscal year, the IMF was told that inflation may remain on the rise, but that will depend on how long the war continues. According to the sources, the IMF said oil price volatility remains the main external risk while Pakistan is currently in a relatively stable macroeconomic position.
The central bank also shared the federal government’s view on Monday. “The MPC’s initial assessment of the evolving geopolitical situation indicates that the outlook for key macroeconomic variables for fiscal year 2026 is within previously expected ranges,” according to the monetary policy committee statement.
But risks to the macroeconomic outlook have increased significantly, it added.
The central bank said macroeconomic fundamentals, particularly with regard to inflation and the country’s currency and fiscal buffers, are better compared to the time of the start of the war between Russia and Ukraine in early 2022.
Given the evolving nature of the events, the MPC noted that the intensity and duration of the conflict will both be important determinants of the impact on the domestic economy. In this regard, the MPC recognized the important role of prudent monetary and fiscal policy in enhancing the economy’s resilience to shocks.
