The IMF drives FY26 Budget’s austerity, which is tax revenue-driven. Some concessions have been made as GoP tries to secure parliamentary approval;
Consolidated fiscal deficit target is 5% of GDP, and growth is projected at 4.2%; both are ambitious targets. This requires large surpluses from the provinces and a 19% increase in FBR revenues. However, with slower growth and inflation in FY26, revenue targets will be challenging;
SBP’s 5-7% average inflation range is unhelpful, while the IMF’s 7.7% projected inflation is too high. If average inflation is around 5% (our tentative prediction), the market will expect interest rate cuts in FY26;
The Budget seeks to financially isolate Non-Filers, who will not be allowed to buy or sell autos and real estate, will not be able to operate bank accounts, and cannot invest in financial instruments. After the failure of the Tajir Dost scheme, penalties against Non-Filers seek to force them to be documented;
The EFF and the government’s power policy is to focus on full cost recovery. This will fail as cheaper solar power options will be adopted, even though the authorities are trying to discourage renewable energy. Pakistan’s power sector needs a radical rethink;
Tariff rationalization as part of the five-year program seeks to make Pakistan’s economy more competitive. This will hurt local manufacturing, specifically textiles, autos, and other protected sectors. It will also make Pakistan’s BoP more challenging in FY26;
This will further complicate SBP’s net international reserves (NIR) targets in the EFF;
Israel’s surprise attack on Iran (13 June) was designed to scuttle US-Iran nuclear talks. Both countries continue to strike each other, but Israel has the upper hand, as it controls Iran’s airspace;
Trump invites Field Marshal Munir to the White House for an unprecedented, cozy meeting. FM Munir may have warned Trump against attacking nuclear sites, as it would set a dangerous precedent. Pakistan then nominates Trump for the Nobel Prize;
The next day Trump says he will decide in two weeks whether the US will join Israel to target Iran’s nuclear facility, which is Netanyahu’s dream. Despite China and Russia blaming Israel for the war and demanding a diplomatic solution, the US strikes three nuclear sites in Iran (21 June) on the 3rd day of his two-week deadline;
How Iran responds remains to be seen, but this action goes against the expectations created by Trump’s two-week deadline;
With the Establishment’s elevation on the global stage, we hope this will allow Pakistan to undertake tough structural reforms and resolve sensitive issues with India (Kashmir and the Indus Water Treaty).
Pahalgam incident (22 April) provokes India to attack Pakistan on 7 May;
Engagement lasts four days before the US pushes through a ceasefire. Foreign media acknowledge that Pakistan comes out looking better;
Pakistan credits US mediation, but India rejects Trump’s claim;
2nd Tranche of the EFF is released, but recent IMF Staff Paper (SP) imposes 11 new conditions for the ongoing EFF;
Austerity is in the pipeline with higher energy tariffs and forcing more sectors into the tax net. However, the fate of the failed Tajir Dost Scheme remains uncertain;
FX reserves continue to fall, raising concerns about SBP’s net international reserve (NIR) target for end-June 2025;
External sector comfort remains in place, as the 10-month period of FY25 posts a CA surplus of $ 1.9 bln;
Near-zero YoY inflation forces SBP to cut interest rates by 100 bps. However, with rising non-oil imports, we do not expect further rate cuts;
Our average inflation projection for FY25 is now 4.8%, while the IMF predicts inflation at 7.7% in FY26;
Remittances are on track to break Pakistan’s record in FY25. We still think $ 37 bln + is possible this fiscal year;
Military engagement with India has increased public support for the Establishment and has united the coalition government. However, it has hurt PTI and IK;
With Trump conceding to bring down tariffs on imports from China (to 30%), and China reciprocating on imports from the US, the global tariff war appears to have ended. However, with Trump calling the shots… uncertainty prevails.
Trump declares war on global trade when he inaugurates Liberation Day;
Despite across-the-board tariffs on friends and foe alike (named by country), his prior tariffs on autos, his 10% blanket tariff, the 90-day reprieve, and exemptions for Chinese-manufactured smartphones, laptops, and electronics create utter confusion. Trump’s contradictory statements afterwards add to the confusion;
Most analysts agree that the sell-off in the US bond market may have forced Trump to roll back some of his more aggressive moves;
As things stand, the US has 145% tariffs on non-exempt Chinese goods, while China has imposed 125% tariffs on US goods. It should be pointed out that only China has retaliated against US tariffs, all others have accepted the unilateral US tariff move;
With growing chances of recession in the G7 countries, commodity prices have fallen, with oil taking a significant hit. This is helping Pakistan;
The fact that Pakistan does not have an export-led economy is another source of comfort;
March has been a good month for Pakistan, with remittances at a record $ 4.1 bln and a current account surplus of $ 1.2 bln (also a record);
However, with ongoing debt and profit repatriation payments, SBP’s FX reserves continue to fall, but this is not a source of market anxiety;
With the fall in global oil prices, GoP has increased PDL to Rs 80/liter without raising retail fuel prices. This means inflation remains low, but revenue collection will increase;
The EFF is on track, but disbursement of the 2nd tranche will be after the FY26 Budget is approved. We don’t expect the tranche till June 2025, and also expect additional IMF conditions related to institutional reforms;
Pakistan’s political parties have become dysfunctional, and PPP’s stance against the SIFC’s Green Pakistan Initiative threatens the ruling coalition government. A weak civilian government is not well placed to negotiate the seismic global developments that are taking place;
At this point, Pakistan is only a spectator as global economic powers try to protect their economic and financial interests. Pakistan is relatively insulated, which makes it very lucky – at least for now.
IMF mission concludes with a nod that Pakistan has stayed on track with the EFF. However, the Fund states that key structural reforms have not been implemented;
The Staff Level Agreement (SLA) may be delayed till the FY26 Budget, which means the 2nd tranche could be delayed till June. Managing BoP and FX reserves in the next three months could be challenging;
Only after GoP’s commitments for FY26 will Pakistan’s case be shared with the IMF board. There is some concern about whether the US will allow for a business-as-usual program for Pakistan;
PML-N appears more interested in providing relief to small households rather than a growth boost. This may have come from MoF and SBP;
Holding interest rates signals that SBP is concerned about Pakistan’s BoP after two consecutive months of CA deficits;
FBR revenue target for FY25 has been reduced to Rs 12.3 trn, which is doable (hence, no need for a mini-budget). However, scraping the Tajir Dost Scheme suggests that PML-N doesn’t have the will to expand the tax base;
With unchanged fuel prices and soft Brent, our average inflation projection for FY25 is now 5.4%. However, we see no rate cut in the near future because of BoP concerns;
The terrorist attack on the Jaffar Express in Balochistan has provoked a stern response from the Establishment. The issue is whether this could further destabilize the province;
Trump’s plan for a ceasefire in the Ukraine war effectively ignores Western Europe and empowers Russia. With a changing global order, how will Pakistan position itself as it deals with the growing unrest in its Western provinces?
Revenue shortfall and missed Structural Benchmarks could complicate the EFF-related IMF mission in March;
Rising imports and net service payments push the CA into a deficit of $ 420 mln, but the 7-month balance is still a surplus of $ 682 mln;
The rupee has started to gradually weaken as SBP realizes that import demand is picking up (organic growth);
Despite political pressure, MoF and SBP have said they will not undertake expansionary policies;
With some EFF targets in doubt, SBP is unlikely to cut interest rates in the near future;
IK is stepping up pressure on the Establishment as he knows the global community is watching;
The 26th Amendment and the Peca amendment, have triggered public protests as Pakistan’s democratic foundations are being weakened;
Trump’s Riviera plan for Gaza is now US foreign policy, which puts Saudi Arabia and the Arab world on the defensive;
Modi’s visit to the White House, US Congressmen tweeting in favor of IK, and the nomination of Paul Kapur as Assistant Secretary of State for South Asia, are ominous signs that Pakistan is not viewed favorably by the Trump administration.
The macroeconomic picture is improving with a comfortable BoP position. However, headwinds are building against the end-February IMF mission;
Missed targets on FBR revenues, the inability to expand the tax base, delays in downsizing SOEs, and required actions against captive power plants are being discussed;
CA surplus of $684 and $582 mln in the last two months has completely changed Pakistan’s BoP trajectory and must be acknowledged by the IMF;
Stable rupee, organic growth in FX reserves, and soft oil prices have brought down YoY inflation to below 5%, which is expected to last till March 2025 (more rate cuts are expected);
SBP must balance the demand for higher growth without reversing the BoP picture in 2H-FY25;
Reconciliation between the Establishment and PTI and IK’s defiance signals a shift in political forces. PML-N may lose appetite for hard reforms if it risks political support at this stage;
Trump’s team shows awareness and support for the incarcerated IK. Perhaps related, IK rejects a shift to a more comfortable house arrest;
Ceasefire in Gaza is linked to Trump’s public threat. However, we do not see unconditional US support for Netanyahu’s government;
Trump’s inauguration speech is surprisingly restrained and focuses on domestic issues. Spheres of influence will likely be carved out instead of a full-on economic war between China and the US.
Business sentiments continue to improve on the back of single-digit inflation, falling interest rates, soft Brent, stable commodity prices, rising FX reserves, and a very stable rupee. PSX rally is unprecedented;
There are concerns the PML-N government may opt for a quick growth strategy even though past economic booms have always ended in a BoP and debt crisis;
We think favorable economic conditions could increase organic growth – i.e., without expansionary policies;
$ 729 mln CA surplus in November is a record for Pakistan. The IMF’s $ 3.6 bln CA deficit target for FY25 needs to be sharply reduced, which also means the $ financing gap in FY25 has disappeared;
Taxes/levies on fuel will likely be delayed till March/April to maintain YoY inflation below 5%. The 200-bps rate cut disappointed the market, and expectations are growing of further rate cuts;
Imports are likely to increase in 2H-FY25, which means SBP must find a suitable balance that delivers more growth and also satisfies the IMF;
The heavy-handed treatment of PTI, the judiciary, and the Western provinces implies that political tensions remain high. PML-N appears powerless and is losing public support;
The sudden collapse of the Assad regime in Syria means that Iran’s Axis of Resistance has been systematically downgraded. This means significant changes are possible in the Middle East region.
The unscheduled IMF mission is not viewed as a negative for the EFF;
GoP has announced that it will not release a mini-budget, and will not impose PDL/GST on fuels till March 2025. This has sharply reduced our inflation projections, with our average inflation projection for FY25 at 7.2% compared to 11.5% last month;
With single-digit YoY inflation projected till April 2025, there is lots of room for further interest rate cuts;
Pakistan’s current account balance is a surplus of $ 218 mln in 4m-FY25. This keeps the rupee stable and FX reserves rising, which underpins the improvement in business sentiments;
If the IMF brings down its CA deficit target of $ 3.6 bln for FY25, the $ 2.5 bln financing gap could be filled without asking for debt rollovers;
There are growing hints of a more credible power sector reform agenda. This is likely to be flushed out in the coming months;
Simmering politics and ongoing terrorism could flare up as the Establishment maintains its uncompromising strategy in the Western provinces;
Trump’s comprehensive election victory has triggered a sense of global dread. We argue that the fears are exaggerated.
EFF begins without prior actions and the immediate release of the 1st tranche;
IMF Staff Paper (SP) emphasizes the need to broaden the tax base, and contains very ambitious FBR revenues for the next three years;
The EFF curtails the powers of SIFC and could undermine the 2nd stage of CPEC;
The Tajir Dost Scheme is off to a poor start, but we expect strict compliance from November;
YoY inflation comes in at 6.9% in September, while the CA shows a surplus of $ 119 mln. The market expects further rate cuts, but the EFF could reverse the inflation trajectory;
SP shows that official sources of FX (IFIs and bilaterals) will taper off and need to be replaced by private capital inflows (from individual investors). This will not be easy;
A watered-down 26th Amendment has been approved, and the government will appoint the next CJP. The legal fraternity and local media are strongly opposed to this amendment. PTI has promised to bring people out into the streets in favor of an independent judiciary and Supreme Court;
Pakistan’s power sector needs a holistic analysis, as the policy of full cost recovery is already failing. Case-by-case cancellation of PPA will not provide much relief and is undermining business confidence.
