IMF cuts Pakistan’s growth forecast to 3.6% on flood impact

Pakistan’s economic growth is expected to slow this financial year due to the devastating impact of recent floods, with inflation and current account deficits likely to rise, the International Monetary Fund (IMF) said in its latest report.

The IMF estimates Pakistan’s gross domestic product (GDP) growth at 3.6% for the current fiscal year, down from earlier projections. The report highlights that the floods have inflicted significant economic damage, straining the country’s fiscal and external balances.

“Flood-related disruptions have adversely affected GDP growth, inflation is expected to increase, and there is a risk of a widening current account deficit,” the IMF said.

The Fund warned that budgetary targets may not be met due to the financial strain caused by the floods. In response, the IMF urged Pakistan to implement structural reforms in its tax system and energy sector to restore macroeconomic stability.

The IMF report has come a week after it reached a staff-level agreement with Pakistan on the next tranche of the three-year loan program. The deal was reached following a second review of the $7 billion Extended Fund Facility (EFF) and the first review of the Resilience and Sustainability Facility (RSF), paving the way for the release of about $1.2 billion in new financing.

The money will be disbursed after the IMF’s Executive Board approves the agreement.

Earlier this month, the IMF allowed Pakistan to revise its tax revenue target downward by PKR 166 billion, bringing the new target for the current fiscal year to PKR 13.97 trillion, down from the earlier target of PKR 14.13 trillion, sources told Nukta.

The downward revision is primarily due to two key factors: a PKR 80 billion loss caused by recent floods, which severely disrupted economic activity in the affected regions, and a PKR 86 billion shortfall resulting from lower-than-expected inflation during the first quarter (July-September) of the current fiscal year.

Reforms

The IMF report has painted an optimistic outlook of Pakistan’s long-term economic future.

The Fund’s report said that despite economic and climate challenges, Pakistan’s GDP growth could reach 4.5% by the fiscal year 2030, assuming sustained reforms and economic discipline.

Remittances from overseas Pakistanis have played a key role in helping to contain the current account deficit, the IMF noted, adding that the government is taking steps to achieve a positive current account balance. The report also stated that inflation rates have declined this year compared to previous years.

However, the IMF emphasized that Pakistan must phase out short-term subsidies across various sectors to ensure fiscal sustainability.

Among middle-income countries, Pakistan is projected to post the third-highest GDP growth this fiscal year, behind Egypt and Morocco.

For the broader Middle East, North Africa, Afghanistan, and Pakistan region, the IMF forecasted a collective GDP growth rate of 3.7% and a budget deficit of 2.8%. Inflation across the region is expected to average 9%.

Climate shocks

Pakistan has faced a series of climate-related disasters in recent years, with floods in particular taking a heavy toll on infrastructure, agriculture, and livelihoods.

In 2022, catastrophic flooding submerged a third of the country, affecting over 30 million people and resulting in economic losses exceeding $30 billion. Since then, the country has struggled with inflation, currency depreciation, and fiscal imbalances.

The IMF has continued to push for fiscal reforms as part of its bailout programs for Pakistan, linking financial assistance to performance benchmarks such as improved revenue collection, removal of energy subsidies, and tightening of monetary policy.