IMF warns Pakistan’s external position may weaken as Middle East war fuels inflation

The IMF expects Pakistan’s external position to deteriorate over the medium term as imports rise and remittance growth eases, according to its October 2026 regional outlook. It also warned that a prolonged Middle East conflict could keep inflation elevated, raise the government’s financing costs and increase pressure for tighter monetary policy. Consumer inflation in Pakistan stood at 11.1% year-on-year in August.

The Fund raised its 2026 inflation projection for Pakistan by 1.5 percentage points compared with April, citing higher food and energy costs. Pakistan was the only flexible-exchange-rate economy in the region to raise interest rates after the conflict began in February 2026, while the IMF said inflation was above target and the monetary stance appeared accommodative. It also expects Pakistan’s 2026 fiscal policy to remain restrictive because spending room is limited.

Pakistan’s growth outlook for 2026 was broadly unchanged from April, and activity remained resilient in the first half of the year. The IMF cautioned that large financing needs could expose the country to higher borrowing costs if market sentiment worsens, while banks’ holdings of government securities warrant monitoring. It advised monetary authorities to be ready to respond if inflation risks rise.