The Staff Level Agreement (SLA) is done after an inconclusive mission. The two parties had different views on the impact of the floods on FY26 projections. It would appear that the IMF has prevailed, as pre-flood targets have been accepted;
SBP’s Annual Report FY25 was released a day after the SLA announcement. The central bank’s assessment has highlighted the risks for key macro projections like GDP growth, inflation, and Pakistan’s BoP, but it retains the pre-flood annual targets, and has an ambitious fiscal deficit goal of 3.8-4.8% of GDP;
CA surplus of $ 110 mln in September surprises many, but the 1Q-FY26 external deficit is still $ 594 mln;
There are concerns about Pakistan’s BoP data and net SBP FX reserves. There is a large discrepancy between PBS and SBP’s trade deficit data for September, while the consistent buildup in net SBP reserves does not tally with the BoP reversal in 1Q-FY26 and Eurobond repayment in end-September;
The PKR continues to gain strength, which suggests active management by SBP (intervention and/or moral suasion);
Interest rate expectations have settled, with most analysts predicting a status quo for the foreseeable future;
The IMF’s Staff Paper, which is released at the time of the 2nd tranche, is awaited but could be delayed. The fate of hard structural reforms (↑ tax base, SOE, and energy sector reforms) will be revealed when the Staff Paper is released;
Trump’s Gaza peace plan is signed with much pomp and ceremony, but the next steps are vague. Details of the International Stabilization Force are awaited, as it is expected that Pakistan’s army could play a pivotal role;
The conflict in Ukraine is likely to be settled in Putin’s favor. Trade tensions have increased between China and the US, while the latter is resorting to authoritarian measures to manage public protests in the US.
The IMF review mission begins on 25th September, starting with SBP;
Media reports claim that SBP’s operational independence, the lack of progress on SOE reforms, failure to expand the tax base, and a missed structural benchmark on corruption and governance, will be sore points;
However, the floods are likely to dominate media coverage, changing fiscal targets and BoP projections;
The 2-month CA Deficit hits $ 624 mln, but the rupee continues to gain strength. Soft oil prices will help Pakistan, but the impact of the floods on imports and exports is likely to be severe;
SBP maintains the status quo on its monetary policy, and this is likely to remain until revised inflation projections are released. We maintain our average inflation projection of 8.2% for FY26;
Pakistan’s debt is not as alarming as recent media reports. However, the acute dependency on bank financing reveals a structural problem;
Pakistan and Saudi Arabia signed a Strategic Mutual Defence Agreement a few days back. Details are lacking, but domestic and global media are touting this as a significant development. Providing a security umbrella to Saudi Arabia (and the rest of the GCC) should earn Pakistan hard currency (export of military hardware and services). However, official secrecy will make it very difficult to gauge the positive impact on Pakistan’s BoP; &
Netanyahu has not lost the plot, but is changing the global story. His attack on Doha and invasion of Gaza City have made Israel an international pariah and weakened America’s global standing. We see the Saudi defence pact as just another step in a changing global order.
There is some concern with the EFF after missed revenue targets (end-June), and concerns raised by the IMF about governance issues (e.g., beneficial owners of companies, money laundering checks) and the need to change the SBP Act;
Abnormal SBP profits surrendered to GoP in FY25 (Rs 2.6 trn), allowed the government to overachieve on the fiscal deficit target despite the tax revenue shortfall;
Giving up on documenting traders and businessmen, while placing a heavier burden on the salaried class, will not be appreciated by the IMF;
SBP surprises the market by not cutting interest rates. This may have been done because the next day, PBS data showed that YoY inflation had increased from 3.2% to 4.1%;
SBP releases data on its net purchases of $s on its website. For the period from June 2024 to April 2025, SBP purchased $ 7.2 bln. In our view, this is the reason the rupee started depreciating in the last two months of FY25;
Ratings agencies have upgraded Pakistan’s sovereign ratings, which makes it more likely that GoP will tap into global capital markets in FY26;
The rupee started gaining strength on 23 July, as the authorities clamped down on exchange companies and currency smuggling. While the rupee still remains strong, this goes against the reversal in Pakistan’s BoP;
Against a CA surplus of $ 2.1 bln in FY25, July’s CA deficit was $ 254 mln. With the IMF projecting a full-year CA deficit of $ 1.5 bln in FY26, SBP will have to manage expectations in the FX market as Pakistan’s BoP position reverses;
Monsoon rains across the country have killed over 700 people and devastated infrastructure in GB and KP. Pakistan’s inability to manage extreme weather conditions means it is ill-equipped to handle climate change. The IMF’s climate resilience program will help, but this requires smooth sailing with the underlying EFF;
The massive reconstruction needed to repair the flood damage could undermine the fiscal austerity of the EFF; &
What we have in Pakistan is economic stability without structural reforms, promises of future prosperity, and no clear roadmap for the economy.
Traders’ strike reveals a disconnect between the federal government and the provincial and local governments. We expect a compromise that will have to be sold to the IMF;
The sharp increase in fuel prices in July has upped our average inflation projection to 11.2% in FY26. Revenue focus will have a regressive impact on the people;
If our inflation projection is correct, this opens up the possibility that interest rates could be increased in FY26;
Breaches in end-June targets and structural benchmarks will be discussed and finalized in mid-September during the second biannual IMF review. We expect headwinds in our negotiations with the IMF;
Pakistan’s BoP posts a $ 2.1 bln CA surplus in FY25, with a $ 328 mln CA surplus in June. The swing factor was a record-breaking remittance inflow of $ 38.3 bln last fiscal year;
GoP has withdrawn the incentive scheme on remittances in FY26. A senior source in SBP has cautioned that this could reduce remittances to pre-FY24 levels;
With a rising trend in non-oil imports and an expected reversal in Pakistan’s BoP in FY26, the rupee is weakening. With low domestic interest rates, there is a growing risk of $ization;
GoP appears to have lost the appetite for structural reforms. After two years of stagnant economic growth and the likely spike in inflation, the political costs are perhaps too high to remain committed to past promises made to the IMF;
The judiciary hands the government a 2/3 majority at the center by allocating reserved seats to the ruling coalition government. With the hybrid arrangement solidified in favor of the Establishment, the shift toward authoritarian control of the country is intensifying.
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.
