Zafar Iqbal
When the Middle East erupted in conflict at the end of February, the shockwaves did not stop at regional borders. They travelled swiftly across trade routes, financial markets, and energy supply chains, reaching the offices of the International Monetary Fund in Washington and, by extension, the anxious corridors of Pakistan’s economic policymakers in Islamabad. The third mandatory review of Pakistan’s USD 7 billion Extended Fund Facility programme has now been delayed, and the reason is not domestic failure alone. The world has changed, and the IMF’s numbers must change with it.
Every projection the Fund had made, whether for global growth, trade volumes, energy prices, or country-specific fiscal targets, now requires fresh examination. How much recalibration will be needed depends, as the Fund itself has acknowledged, on how long the conflict lasts and how far it spreads. That uncertainty is the central problem. Pakistan’s review cannot be concluded cleanly until the IMF understands what kind of world Pakistan’s economy is now operating in.
The Fund was candid. On 3 March, just three days after the conflict began, it publicly noted disruptions to trade, surges in energy prices, and rising volatility in financial markets. These were not hypothetical warnings. They were early observations of damage already unfolding. For Pakistan, whose exporters were already reporting anxiety over whether their shipments would reach their destinations safely, the IMF’s acknowledgment carried real weight. The government came under immediate pressure to provide assurances and support to an export sector that was watching its supply chains fray in real time.
The IMF’s own team, led by Petrova, made the picture clearer still. After virtual discussions with Pakistani authorities spanning from 25 February to 11 March, the team confirmed that while considerable progress had been made, the discussions would continue in the coming days, specifically to assess the impact of recent global developments on Pakistan’s economy and on the programme itself. The language was measured but unmistakable: the third review was not finished. The staff-level agreement had not been reached. And the primary reason was not a collapse in reform implementation. It was the world itself intervening at the wrong moment.
That said, the IMF’s statement was not without positive content. The Fund acknowledged real progress. Pakistan was credited with sustaining fiscal consolidation to strengthen public finances, maintaining a sufficiently tight monetary policy to keep inflation durably within the State Bank’s target range, and advancing reforms to improve the financial viability of the energy sector. These are not small achievements for an economy that was in acute distress not long ago. The Fund also noted that particular attention was being paid to deepening structural reforms, with emphasis on accelerating growth while strengthening social protection and rebuilding public spending on health and education.
It is precisely the phrase accelerating growth that opens a complicated conversation. Growth cannot be accelerated without some easing of monetary policy, yet the Monetary Policy Committee held the policy rate steady on 9 March, a decision that many observers read as reflecting an understanding, if not a formal agreement, with the Fund. Growth also sits in tension with the principle of full-cost recovery for utilities, which the IMF has consistently upheld. The Prime Minister’s recently announced incentive package, which envisages a reduction of over four rupees per unit in electricity rates and a significant cut in export refinance rates from 7.5 percent to 4.5 percent, may well have entered the discussions as a point requiring further examination. Whether such measures are compatible with the fiscal discipline the programme demands is a question that the coming days of negotiation will need to resolve.
The balance of payments concern looms largest of all. Pakistan sought the IMF programme in the first place because of pressure on its external accounts. That pressure has not eased, and in several respects it has worsened. The country’s trade deficit widened substantially between the first eight months of the previous fiscal year and the same period this year, growing from USD 20 billion to USD 25 billion. That is a five billion dollar deterioration in a single year, a figure that demands attention regardless of any other variable in the equation.
Remittances had been a bright spot. Inflows were on an upward trajectory until recently, reflecting the hard work of millions of Pakistanis employed across the Gulf. But the economic disruption caused by the conflict is now expected to suppress those inflows for as long as hostilities persist. The Gulf countries are major sources of remittance income for Pakistan, and any slowdown in their economic activity translates directly into reduced transfers to Pakistani families and, by extension, reduced foreign exchange earnings for the country. This is a vulnerability that no amount of structural reform can quickly offset.
Foreign direct investment is a third pressure point. Pakistan has signed Memoranda of Understanding with Gulf investors for significant investment commitments. The prospect of those funds actually arriving in the near term, at a moment when regional economies are absorbing the shock of a military conflict, is not realistic. Pledged investment and disbursed investment are very different things. Pakistan cannot bank its balance of payments calculations on promises that circumstances have now rendered premature.
None of this means the situation is irretrievable. The IMF team has indicated that discussions will continue and that a conclusion is in sight. But the government must ensure that the delay in reaching a staff-level agreement is not compounded by any failure on Pakistan’s own part to meet agreed conditions and structural benchmarks. If the Fund has raised reservations about specific time-bound targets, those reservations must be addressed without hesitation and without delay. Pakistan cannot afford to give the impression that domestic policy indecision is contributing to a postponement already being driven by circumstances beyond its control.
The global economic order is being reshaped by fire and conflict. Pakistan must navigate that turbulence with discipline, transparency, and a clear-eyed recognition that the IMF programme is not merely a financial arrangement. It is the foundation of economic stability at a moment when instability is the defining feature of the world outside.
