The International Monetary Fund logo is seen during the IMF/World Bank spring meetings in Washington, U.S., April 21, 2017. REUTERS
ISLAMABAD:
The International Monetary Fund (IMF) on Tuesday lowered Pakistan’s economic growth forecast to 3.5% and increased inflation projection to 8.4% for the next fiscal year due to the Middle East conflict, as it does not see any major adverse impact of the war this year.
In its flagship World Economic Outlook (WEO) report, the IMF also cut the global growth forecast for two years, basing its projections on $100 per barrel to $120 per barrel oil prices in adverse and severe war case scenarios.
The report, which the global lender released today on the sidelines of the spring meetings, showed that Pakistan’s economic growth would slow down to 3.5% in the fiscal year 2026-27, down from the earlier forecast of 4.1%.
For this fiscal year, the IMF retained the economic growth projection at 3.6%, in line with the projections of the Asian Development Bank and Fitch rating agency.
The global lender raised the inflation forecast to 8.4% for the next fiscal year, up from 7% during the second review of the programme. The forecast, thus far, is the highest by any international financial institution, which can bring the State Bank of Pakistan under pressure to raise the interest rates.
For the current fiscal year, the IMF gave a 7.2% inflation projection, higher than the earlier 6.3% rate.
Likewise, the IMF more than doubled the current account deficit projection to 0.9% of the GDP or about $5 billion for the next fiscal year. For this fiscal year, it retained the projection of around 0.4%, according to the IMF report.
Pakistan is among those countries that are directly impacted because of the Middle East conflict, as it sources 90% of its total energy imports from the region. The country has been at the forefront of brokering a peace deal between the United States and Iran and has already hosted both nations.
The IMF gave three different scenarios of the world economic growth and inflation, basing these assumptions on war ending soon, the adverse scenario and the severe case of protracted conflict, with energy pricing significantly increasing from the second half of this year.
The IMF said that the global economy was threatened with being thrown off course — this time by the outbreak of war in the Middle East. It added that over the past year, headwinds from higher trade barriers and elevated uncertainty were offset by tailwinds from technology-related investment, accommodative financial conditions, including a weaker US dollar, and fiscal and monetary policy support.
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The Middle East conflict presented a significant counterforce to these tailwinds through its impact on commodity markets, inflation expectations and financial conditions, according to the WEO.
Reference forecast
Under the reference forecast, the IMF projected global growth at 3.1% in 2026 and 3.2% in 2027, slower than its recent pace of about 3.4%. Global headline inflation was expected to increase to 4.4% in 2026 and decline to 3.7% in 2027, marking upward revisions for both years.
Adverse scenario
Under an adverse scenario with larger and more persistent increases in energy prices, global growth would slow further to 2.5% in 2026, and inflation would reach 5.4%, the IMF said.
In the adverse scenario, oil prices were assumed to increase by 80% beginning in the second quarter of 2026 relative to the January 2026 WEO Update baseline, before falling back to around 20% above baseline in 2027 and dissipating in 2028.
The IMF corresponded to an average petroleum spot price index of around $100 per barrel in 2026 and around $75 in 2027. An increase in gas prices for Europe and Asia was assumed by 160% in the second quarter relative to baseline, before also mostly unwinding in 2027.
Severe cost of conflict
Under a more severe scenario in which there was more damage to energy infrastructure in the conflict region, the impact would be even larger: global growth would be cut to only about 2% in 2026, while headline inflation would be just above 6% by 2027. The impact on emerging markets and developing economies would be almost twice that on advanced economies, it added.
In the severe scenario, the shock to commodity prices was more severe and persistent, with oil prices increasing by 100% beginning in the second quarter of 2026, relative to the January 2026 WEO Update baseline, but also staying at that level in 2027, before dissipating in 2028.
The IMF assumed an average petroleum spot price index of around $110 per barrel in 2026 and around $125 in 2027, while gas prices for Europe and Asia increase by 200% over the same period.
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The IMF said that global growth slipping below 2% rate would mean a close call for a global recession, which has happened only four times since 1980, with the latest two occasions corresponding to the global financial crisis and the COVID-19 pandemic.
The IMF said that given the current situation, governments all over the world should — as appropriate for their country-specific circumstances — mobilise revenues, reprioritise expenditures, make spending more efficient and manage windfalls prudently.
A second priority was addressing domestic imbalances, especially when doing so helped reduce excessive external imbalances, said the lender.
The IMF said that trade restrictions played a limited role in correcting imbalances but could worsen output. Instead, countries should cooperate and take coordinated actions to restore stability in international economic relations. They should seek opportunities to enhance trade integration, supported by predictable, transparent and well-communicated trade policy frameworks.
According to the WEO, prices for energy commodities were expected to rise by 19% in 2026, as opposed to the small decline projected in the October 2025 WEO report.
Oil prices were expected to increase by 21.4% on account of disruptions to production and transportation in the Middle East, corresponding to the average petroleum spot price index, averaging $82 per barrel.
It said that natural gas prices were expected to be affected more than oil prices because of the technical complexity of restarting production and the comparatively lower level of reserves to fall back on.
Food prices were expected to increase as well, more than projected in October 2025, on account of higher energy and fertiliser prices, disrupted shipping routes and increased transport costs. Industrial and precious metal prices were projected to maintain the gains experienced in 2025.
