Pakistan's external financial position feared to weaken, IMF

Current account deficit predicted to reach one percent of total GDP

Islamabad: IMF has warned that Pakistan's external financial position may weaken due to increase in imports and slowdown in pace of remittances.

Global financial institution has emphasized maintaining flexibility in exchange rate to keep foreign exchange reserves safe and further tightening monetary policy to control rising inflation.

IMF presented these observations about Pakistan in its regional report related to Middle East and Central Asia which was released on Thursday, a week after annual meetings of World Bank and IMF last week.

According to report, external financial position of Egypt, Jordan and Morocco is expected to improve during medium term, due to low commodity prices and diversification in exports.

However, Pakistan's external financial position may weaken, because increase in imports and decrease in remittances is expected, IMF has predicted Pakistan's current account deficit to reach one percent of GDP i.e. about 4.5 billion dollars.

This estimate is much higher than government's official estimate of about 2.5 billion dollars. According to global financial institution, Pakistan's total external financial needs are likely to remain 22 to 25 percent of GDP, which is significantly higher compared to peer countries and can cause various financial risks.

Report also mentions deep connection between government and commercial banks. According to IMF estimates, exposure related to government debts in banks' total assets or investments is 63 percent, which is much higher than general level of emerging economies.

IMF warned that as result of concerns related to increase in government debts, cost of borrowing for government may be higher than basic estimates.

Government is adopting cautious attitude regarding any proposal to allow depreciation of rupee, because there is fear of increase in inflation and possibilities of real benefit to exports are also not clear.

On Thursday, in interbank market, value of Pakistani rupee against US dollar remained at Rs 276.85 after increase of one paisa.

Report said that countries should be prepared to further tighten monetary policy, especially where inflation is already higher than set target and current style of policy appears relatively soft.

In such situation, central bank's policy interest rate is less than estimated neutral level. This situation is more prominent in Kyrgyzstan and Pakistan.

IMF said that after start of conflict, various countries took different measures related to interest rate according to their exchange rate system. Among countries with flexible exchange rate, Pakistan was only country which increased interest rate after start of conflict.

IMF has maintained Pakistan's economic growth forecast at 3.5 percent. This rate is lower than government's official target of four percent and also below World Bank's estimate.

On fiscal front, IMF has said that fiscal policy is expected to be relatively soft in several economies of region during 2026, while fiscal stability and policy of restraint in expenditures may resume from 2027.