The government has accepted the need for a mini-budget if revenues fall short of expectations by the end of December 2025, according to the IMF. Photo: archive
ISLAMABAD:
Pakistan has informed the International Monetary Fund (IMF) that the US-Israel war against Iran would not have a significant impact on its economy, projecting that the current account deficit could remain at around $2 billion and that the impact of rising fuel prices on inflation could hardly be 0.3%.
The government also sees no impact on foreign remittances, which have been projected to grow to $43 billion even after the expansion of the war to the Gulf countries. Saudi Arabia and the United Arab Emirates (UAE) are the largest sources of remittances for Pakistan.
Macroeconomic assumptions are shared with the IMF amid advice to Prime Minister Shehbaz Sharif to increase taxes on imports to limit the bill. However, there were not many who followed the advice.
Although the war has shattered global and regional economies, the Ministry of Finance informed the IMF that its economy can still grow 4% in this fiscal year, only 0.2% less than the pre-war scenario.
The projections were shared with the IMF at a time when the government massively increased diesel, kerosene and gasoline prices. The price of petrol increased by Rs 55 per liter, forcing each user to pay an additional Rs 23 per liter to the government above Platts’ average reference prices.
Sources told The Express PAkGazette that the Finance Ministry held two sessions with the IMF to discuss the implications of war against Iran. The IMF had asked the government to share its projections on 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 that any increase in the oil import bill would be offset by reduced imports of agricultural products due to a better local harvest, the sources said.
The official assessment was that in the pre-war scenario, Pakistan’s current account deficit was projected at $1 billion, which would hardly jump to $2 billion now. The $2 billion current account deficit is based on the assumption of a crude oil price of $100 per barrel.
Brent crude oil prices rose more than $100 a barrel on Monday. That the government claims that the war would increase the current account deficit by only $1 billion seems surprising, since the country has already posted a deficit of $1.1 billion during the first seven months of the current fiscal year.
According to an assessment shared with the Petroleum Committee, at a price of $100 per barrel of crude oil, there will be an additional $300 million monthly impact on the oil import bill. The impact would rise to $500 million a month if prices hit $120 a barrel.
The government has assumed it would save about $800 million by limiting agricultural imports, which should offset the impact of the rising oil import bill.
The IMF team also asked about the impact of the war on economic growth. The Fund was informed that the war would cut only 0.2% of the economy and the nation’s GDP is still expected to grow by 4%. The government believes that if the war ends early, the economy could grow by 4.5%, the sources said.
Sources said the IMF inquired about the flow of remittances after the war in the Middle East region. The Finance Ministry opined that remittance inflows were expected to receive additional support during the Eid periods.
The IMF was told that 14 million Pakistanis were actively working abroad, including some 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 rising oil product prices would have a marginal impact on inflation, ranging between 0.2% and 0.3%. The government was of the view that despite the highly uncertain conditions and possibilities of multiple rounds of fuel price hike, the overall inflation rate in this fiscal year would remain below 6.5% in this fiscal year.
The projection of the low impact of inflation is based on the fact that gasoline has very little weight in the overall inflation basket, so despite the significant impact on people’s lives, the official inflation figure cannot increase dramatically, the sources said.
For the next fiscal year, the IMF was told that inflation could continue to rise, but it would depend on how long the war lasts. According to sources, the IMF said that oil price volatility remains the most important external risk, while Pakistan currently remains in a relatively stable macroeconomic position.
On Monday, the central bank also shared the federal government’s view. “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 projected ranges,” according to the Monetary Policy Committee statement.
However, risks to the macroeconomic outlook have increased significantly, he added.
The central bank said that the macroeconomic fundamentals, especially in terms of inflation and the country’s foreign exchange and fiscal reserves, are better compared to the time of the start of the Russia-Ukraine war in early 2022.
Given the changing nature of events, the MPC noted that the intensity and duration of the conflict will be important determinants of the impact on the national economy. In this regard, the MPC recognized the important role of prudent monetary and fiscal policies in increasing the economy’s resilience to shocks.
