The government has recognized 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-Israeli war on Iran would not have a significant impact on its economy, forecasting that the current account deficit could remain 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 are expected to reach $43 billion even after the expansion of the war in the Gulf countries. Saudi Arabia and the United Arab Emirates (UAE) are Pakistan’s main sources of remittances.
Macroeconomic assumptions are being shared with the IMF amid advice to Prime Minister Shehbaz Sharif to increase import taxes to limit the bill. However, not many people followed this advice.
Although the war has destroyed the global and regional economies, the Ministry of Finance has informed the IMF that its economy can still grow by 4% this fiscal year, only 0.2% less than the pre-war scenario.
These projections were communicated to the IMF at a time when the government was massively increasing the prices of diesel, kerosene and gasoline. The price of petrol has been increased by Rs 55 per litre, requiring each user to pay Rs 23 per liter more to the government on top of the Platts average benchmark prices.
The sources told The Express PK Press Club that the Finance Ministry held two meetings with the IMF to discuss the implications 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 posed a major risk, but any increase in the oil import bill would be offset by reduced imports of agricultural products thanks 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 could hardly reach $2 billion today. The current account deficit of $2 billion is based on the assumption of a crude oil price of $100 per barrel.
Brent prices jumped more than $100 a barrel on Monday. The government’s claim that the war would swell the current account deficit by just $1 billion seems surprising, given that the country has already recorded a deficit of $1.1 billion in the first seven months of the current fiscal year.
According to an assessment shared with the Petroleum Committee, at $100 per barrel of crude oil, there will be an additional monthly impact of $300 million on the oil import bill. The impact would increase to $500 million per month if prices hit $120 per barrel.
The government has assumed it would save about $800 million by limiting agricultural imports, which is expected to offset the impact of the increased oil import bill.
The IMF team also questioned the impact of the war on economic growth. The Fund was told that the war would only wipe out 0.2% of the economy and that the country’s GDP was expected to grow by another 4%. The government estimates that if the war ends sooner, the economy could grow by 4.5%, the sources said.
The sources said the IMF had asked questions about post-war remittance flows in the Middle East region. The Ministry of Finance was of the view that remittances should receive additional support during the Eid period.
The IMF has learned that 14 million Pakistanis are actively working abroad, including around 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 reach $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, of between 0.2% and 0.3%. The government was of the view that despite highly uncertain conditions and risks of several waves of fuel price increases, the overall inflation rate this fiscal year would remain below 6.5% this fiscal year.
The projection of a small impact on inflation is based on the fact that gasoline has very little weight in the overall inflation basket. So, despite a significant impact on people’s lives, the official inflation figure may not increase dramatically, the sources said.
For the next financial year, the IMF was told that inflation could continue to rise, but this would depend on the duration of the war. According to the sources, the IMF said that oil price volatility remains the most significant external risk, while Pakistan currently remains 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 FY 2026 is within the previously projected ranges,” according to the Monetary Policy Committee statement.
However, risks to the macroeconomic outlook have increased significantly, the statement added.
The central bank said that macroeconomic fundamentals, particularly in terms of inflation and the country’s foreign exchange and fiscal reserves, are better than at the start of the Russo-Ukrainian war in early 2022.
Given the evolving nature of events, the MPC observed that the intensity and duration of the conflict will both 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.
