IMF Secures $1.2 Billion Staff-Level Deal for Pakistan, Warns Middle East Conflict Dampening Growth

The International Monetary Fund (IMF) announced on Wednesday a staff-level agreement with Pakistan that could release approximately $1.2 billion in financing, while cautioning that elevated energy prices and supply disruptions stemming from the Middle East conflict have eroded the country’s economic growth momentum.

The understanding encompasses the fourth review of Pakistan’s $7 billion Extended Fund Facility (EFF), which supports economic stabilization and reforms, and the third review of its $1.4 billion Resilience and Sustainability Facility (RSF), aimed at bolstering resilience to climate change and natural disasters. The development comes as the Middle East conflict has driven up global energy costs, compelling Pakistan to increase domestic fuel prices and introduce subsidies to shield vulnerable consumers.

“The IMF team has reached a staff-level agreement with the Pakistani authorities on the fourth review of the 37-month Extended Arrangement under the Extended Fund Facility (EFF) and the third review of the 28-month arrangement under the Resilience and Sustainability Facility (RSF),” IMF mission chief Iva Petrova stated following discussions held in Karachi and Islamabad from September 23 to October 7.

“The staff-level agreement is subject to approval by the IMF Executive Board. Upon approval, Pakistan will have access to about $1.0 billion (SDR 760 million) under the EFF and about $210 million (SDR 154 million) under the RSF, bringing total disbursements under the two arrangements to approximately $5.7 billion.”

The IMF noted that Pakistan’s economic program remained broadly on track despite a challenging external environment, with authorities committed to maintaining fiscal discipline, containing inflation, strengthening the energy sector, and advancing structural reforms.

“Supported by the EFF, the authorities have successfully navigated the impact of the Middle East conflict, and strong policies have helped preserve macroeconomic stability,” Petrova said. “Real GDP growth reached 4 percent in the first three quarters of FY26, and although higher energy prices and supply disruptions weakened the momentum somewhat, FY26 growth is estimated at 3.6 percent.”

The Fund’s estimate for the ongoing fiscal year contrasts with the government’s more optimistic projection. Finance Minister Muhammad Aurangzeb stated on Wednesday that the government anticipates growth of “north of 4 percent” in FY27, characterizing the impact of the Middle East conflict on growth and inflation as “manageable.”

FUEL SUPPORT

The IMF also urged Pakistan to promptly phase out its fuel support scheme, warning that its high cost and broad targeting could strain public finances. “Any future fuel support — should oil prices surprise on the upside — should be limited, timebound, targeted using established social assistance programs, and accommodated within the FY27 budget envelope,” Petrova said.

Pakistan introduced fuel relief measures following sharp petroleum price increases linked to intensifying hostilities in the Middle East, including subsidies for motorcycle riders, rickshaw operators, and other eligible consumers. While intended to cushion households and transport operators against rising costs, these measures have added to the government’s fiscal commitments.

The IMF stressed the importance of implementing Pakistan’s fiscal year 2026-27 budget, which targets an underlying primary surplus of 2 percent of gross domestic product, supported by tax reforms and stronger revenue collection. It also urged timely electricity tariff adjustments and measures to prevent the accumulation of circular debt, alongside reforms to improve power distribution and maintain cost recovery in the gas sector.

On the broader economic outlook, the Fund reported that Pakistan’s headline inflation had moderated to about 10.3 percent in September after peaking in May, while gross foreign exchange reserves had risen to approximately $21.5 billion by the end of September. The country’s current account remained broadly balanced in fiscal year 2025-26, supported by strong remittances, although the IMF warned that geopolitical tensions, volatile energy prices, tighter global financial conditions, and trade disruptions continue to pose significant risks.

The Fund also noted progress on climate-related reforms under the RSF, including efforts to improve the management and pricing of irrigation water and strengthen financing for disaster response. The staff-level agreement followed discussions under the IMF’s 2026 Article IV consultation, which focused on structural reforms aimed at increasing productivity, attracting private investment, boosting exports, and creating jobs.

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