IMF lowers Pakistan growth outlook to 3.5% for next fiscal year

ISLAMABAD: The International Monetary Fund (IMF) has revised down Pakistan’s economic growth forecast for the next fiscal year to 3.5% and increased its inflation projection to 8.4%, citing the impact of the Middle East conflict, its latest World Economic Outlook released on Tuesday on the sidelines of the spring meetings.

Pakistan’s economy is expected to expand by 3.5% in fiscal year 2026-27, lower than the IMF’s earlier estimate of 4.1%. For the current fiscal year, however, the lender kept its growth forecast unchanged at 3.6%, a figure that is in line with projections by the Asian Development Bank and Fitch.

The IMF also raised its inflation estimate for the next fiscal year to 8.4%, up from 7% projected during the second review of the programme. For the ongoing fiscal year, it projected inflation at 7.2%, compared with an earlier estimate of 6.3%.

The IMF has also sharply increased its projection for Pakistan’s current account deficit for the next fiscal year to 0.9% of gross domestic product, or about $5 billion. For the current fiscal year, it retained the estimate at around 0.4%.

Pakistan is among the countries directly affected by the Middle East conflict because it obtains 90% of its total energy imports from the region. It also said Pakistan has been at the forefront of efforts to broker a peace deal between the United States and Iran and has already hosted both countries.

Global outlook revised amid conflict risks

In its flagship report, the IMF lowered the global growth forecast for the next two years and based its scenarios on oil prices ranging from $100 per barrel to $120 per barrel in adverse and severe war situations. The global economy risks being derailed by the outbreak of war in the Middle East.

The IMF said that over the past year, pressures from higher trade barriers and elevated uncertainty had been offset by support from technology-related investment, easier financial conditions including a weaker US dollar, and fiscal and monetary policy support. The Middle East conflict now poses a major challenge to those supportive factors through its effects on commodity markets, inflation expectations and financial conditions.

Reference, adverse and severe scenarios

Under its reference forecast, the IMF projected global growth at 3.1% in 2026 and 3.2% in 2027, slower than the recent pace of about 3.4%. Global headline inflation is expected to rise to 4.4% in 2026 before easing to 3.7% in 2027, with both years revised upward.

Under an adverse scenario involving larger and more persistent increases in energy prices, global growth would slow to 2.5% in 2026, while inflation would reach 5.4%. In that case, oil prices are assumed to rise by 80% from the second quarter of 2026 relative to the January 2026 WEO Update baseline, before easing to around 20% above baseline in 2027 and fading in 2028. This would correspond to an average petroleum spot price index of around $100 per barrel in 2026 and around $75 in 2027. Gas prices for Europe and Asia are assumed to rise by 160% in the second quarter relative to baseline before mostly unwinding in 2027.

In a more severe scenario involving greater damage to energy infrastructure in the conflict region, global growth would fall to 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.

In that severe case, oil prices would increase by 100% from the second quarter of 2026 relative to the January 2026 WEO Update baseline and remain at that level in 2027 before easing in 2028. This would imply 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 would increase by 200% over the same period.

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.

Policy recommendations and commodity prices

Governments should, depending on their country-specific circumstances, mobilise revenues, reprioritise expenditures, improve spending efficiency and manage windfalls prudently. A second priority is addressing domestic imbalances, especially where doing so also helps reduce excessive external imbalances.

Trade restrictions have a limited role in correcting imbalances and can instead weaken output. Countries should cooperate and take coordinated steps to restore stability in international economic relations, while also seeking opportunities to deepen trade integration through predictable, transparent and clearly communicated trade policy frameworks.

Energy commodity prices are expected to rise by 19% in 2026, instead of the slight decline projected in the October 2025 report. Oil prices are expected to increase by 21.4% because of disruptions to production and transportation in the Middle East, corresponding to an average petroleum spot price index of $82 per barrel.

Natural gas prices are likely to be affected more than oil prices because restarting production is technically more complex and reserve buffers are comparatively lower. It also projected higher food prices than in the October 2025 report due to increased energy and fertiliser costs, disrupted shipping routes and higher transport expenses. Industrial and precious metal prices are expected to maintain the gains recorded in 2025.