The government has agreed to the need for a mini-budget if revenues fall short of expectations by end-December 2025, according to the IMF. Photo: file
ISLAMABAD:
Pakistan has informed the International Monetary Fund (IMF) that the US-Israel war against Iran would not significantly impact its economy, projecting that the current account deficit may remain around $2 billion and fuel price hike impact on inflation could hardly be 0.3%.
The government also does not see any impact on foreign remittances, which have been projected to grow to $43 billion even after war expansion to Gulf countries. Saudi Arabia and the United Arab Emirates (UAE) are the largest sources of remittances for Pakistan.
The macroeconomic assumptions are shared with the IMF amid an advice to Prime Minister Shehbaz Sharif to increase import taxes to limit the bill. However, there were not many takers of the advice.
Although the war has shattered the global and regional economies, the Finance Ministry informed the IMF that its economy can still grow by 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 the prices of diesel, kerosene oil and petrol. The petrol price was increased by Rs55 per litre, forcing every user to pay Rs23 per litre extra to the government over and above the benchmark Average Platts prices.
The sources told The Express Tribune that the Finance Ministry held two sessions 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 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 compensated by the reduced imports of agriculture products due to better local harvesting, sources said.
The official assessment was that in the pre-war scenario, Pakistan current account deficit was projected at $1 billion, which would now hardly jump to $2 billion. The $2 billion current account deficit is based on the assumption of $100 per barrel crude oil price.
The Brent Crude prices jumped over $100 per barrel on Monday. The government claims that the war would balloon the current account deficit by only $1 billion seems surprising, as the country has already booked a $1.1 billion deficit during the first seven months of the current fiscal year.
According to an assessment shared with the Petrol Committee, at $100 per barrel crude price, there will be a monthly $300 million additional impact on the oil import bill. The impact would increase to $500 million per month, if the prices touch $120 per barrel.
The government has assumed that it would save about $800 million by limiting agricultural imports, which should offset the impact of increase in oil import bill.
The IMF team also asked about the impact of war on economic growth. The Fund was briefed that the war would shave off 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 earlier, the economy may instead grow by 4.5%, said the sources.
The sources said that the IMF asked about the remittances flow after the war in the Middle East region. The Finance Ministry was of the view 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 about 4.5 million in the Middle East, many of whom are employed in semi-skilled and skilled essential services. Based on these assumptions, the remittances are projected to increase to $43 billion in this fiscal year, said the sources.
The IMF was informed that there would be marginal impact of increase in the petroleum products prices on inflation, ranging from 0.2% to 0.3%. The government was of the view that despite highly uncertain conditions and chances of multiple rounds of fuel price increase, the overall inflation rate in this fiscal year would remain below 6.5% in this fiscal year.
The low inflation impact projection is based on the fact that the petrol has very little weight in the overall inflation basket, thus, despite significant impact on the lives of the people, the official inflation figure may not dramatically increase, said the sources.
For the next fiscal year, the IMF was told that the inflation may remain increasing but it would depend upon how long the war continues. According to the sources, the IMF said the oil price volatility remains the most significant external risk, while Pakistan currently remains in a relatively stable macroeconomic position.
The central bank on Monday also shared the viewpoint of the federal government. “The MPC’s initial assessment of the evolving geopolitical situation indicates that the outlook for key macroeconomic variables for fiscal year 2026 is within the earlier projected ranges,” according to the Monetary Policy Committee statement .
However, risks for the macroeconomic outlook have increased significantly, it added.
The central bank said that macroeconomic fundamentals, especially in terms of inflation and the country’s FX and fiscal buffers, are better as compared to the time of the start of the Russia-Ukraine 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 domestic economy. In this regard, the MPC acknowledged the important role of prudent monetary and fiscal policies in increasing the economy’s resilience to shocks.
