Pakistan has secured another IMF tranche at a moment when the country badly needs reassurance, and the approval confirms that stabilisation has moved from promise to measurable compliance. The Fund’s board has cleared immediate access to about $1.32 billion, including around $1.1 billion under the Extended Fund Facility and about $220 million under the Resilience and Sustainability Facility, raising total disbursements under the two arrangements to about $4.8 billion. The money helps, and the performance record behind it matters. Yet it does not settle the question now facing Islamabad: whether fragile stabilisation can survive a Middle East war that is already raising the cost of energy, shipping, food, fertiliser, financing and policy delay.
The IMF’s own language offered approval with conditions. “Amid a more challenging and highly uncertain external environment since the onset of the war in the Middle East, Pakistan needs to maintain strong macroeconomic policies while accelerating reform efforts,” the Fund said after the board decision. It also commended the State Bank for acting “proactively” after the central bank raised the policy rate by 100 basis points to 11.5 percent in April, its first hike in almost three years.
The Fund also acknowledged that Pakistan’s “strong implementation, despite the Middle East war,” had maintained stability and improved financing and external conditions. IMF Deputy Managing Director and Acting Chair Nigel Clarke said Pakistan’s “strong programme implementation” had continued, adding that the war had made reform more important for managing further shocks and fostering sustainable medium-term growth.
There is a recovery story here, and it should not be buried under the warning label. Pakistan met all end-December 2025 quantitative performance criteria under the IMF programme, outperformed against the floor on the State Bank’s net international reserves, and comfortably met the general government’s primary balance target. It also met six of eight indicative targets and delivered four structural benchmarks on time in governance, social support, gas-sector sustainability and special technology zones. For an economy that was recently surviving on import controls, emergency rollovers, and default speculation, meeting performance criteria under a live IMF programme carries real value.
The improvement is visible in the way the Fund and markets now speak about Pakistan. The IMF tranche is being released because Islamabad has stayed inside the agreed fiscal and monetary framework, and because the authorities have given fresh assurances that they will not abandon the pre-war stabilisation path despite pressure from slower growth, higher unemployment, poverty and inequality. The government has also adopted a green taxonomy and issued guidelines on climate-related financial risks and listed companies’ climate disclosures under the resilience facility, giving the reform agenda a climate-finance dimension that can matter for future concessional flows.
Finance Minister Muhammad Aurangzeb’s assurance to the Fund that Pakistan remains committed to “sound and prudent macroeconomic policies” and structural and institutional reforms deserves mention because it marks a break from the old habit of treating IMF reviews as one-off cash events.
The more encouraging trend is discipline under pressure. The government has committed to a Rs3.4 trillion primary budget surplus target for the current fiscal year and a Rs2.84 trillion primary surplus, equal to 2 per cent of GDP, for FY2026-27. It has also assured the Fund that the new budget will remain aligned with programme targets and that electricity and gas prices will be adjusted regularly while shielding the most vulnerable through a progressive tariff structure. These are politically difficult commitments, but they show a state trying, at least on paper, to move from crisis firefighting to rules-based economic management.
The market’s first reading is cautiously constructive. Arif Habib Limited’s May outlook report said sentiment was likely to improve if the IMF tranche was approved, while further support could come from budget cues. The KSE-100 had gained 14,251 points in April, or 9.6 per cent, closing at 162,994 points. However, the state would do well to remember that investor sentiment remained volatile because of weak earnings and geopolitical uncertainty.
AKD Research has put the near-term trigger more bluntly, saying a constructive resolution of geopolitical tensions remained the key catalyst for direction, with any easing in oil prices expected to trigger recovery. That is why the IMF approval and the Iran war cannot be separated.
The global backdrop has, however, become harsher since the staff-level agreement. IMF Managing Director Kristalina Georgieva warned that the Fund’s earlier assumption of a short-lived Middle East conflict was moving “further and further behind in the rear-view mirror.” If the war continues into 2027 and oil prices reach around $125 a barrel, she said, the world should expect “a much worse outcome,” with inflation climbing and expectations beginning to de-anchor. The IMF’s adverse scenario sees global growth slowing to 2.5 per cent in 2026 with headline inflation at 5.4 per cent, while its severe scenario would push growth down to 2 per cent and inflation to 5.8 per cent.
Fertiliser is another pressure point. Georgieva said the IMF was tracking the slow-moving supply-chain impact of the conflict, with fertiliser already 30 to 40 per cent more expensive globally, a development she said could raise food prices by 3 to 6 per cent. “Don’t throw gasoline on fire,” she warned policymakers.
IMF Resident Representative in Pakistan, Dr Mahir Binici, has drawn the Pakistan-specific line from the war to the economy. Speaking at an event in Islamabad, he said the conflict had disrupted energy markets, trade routes and financial conditions, particularly around the Strait of Hormuz, while also affecting global logistics, food and fertiliser prices. For oil-importing economies such as Pakistan, he warned, vulnerabilities were compounded by higher energy and food import costs, possible decline in remittances from Gulf-based workers and tighter financial conditions.
The Fund’s Pakistan prescription is therefore deliberately tight: keep the exchange rate flexible, avoid untargeted subsidies, align domestic fuel, electricity and gas prices with costs, broaden taxation, strengthen public finances, reform state-owned enterprises, improve governance and protect the vulnerable through targeted support. These are familiar conditions, but the war changes their political weight.
Aurangzeb has tried to frame the approval as validation of the government’s reform direction while also pushing to diversify financing. At a press conference, he said Pakistan expected to access Chinese capital markets through a Panda bond, adding, “God willing, next week you will hear good news.” The $250 million issue would be the first part of a planned $1 billion programme backed by the Asian Development Bank and Asian Infrastructure Investment Bank.
Aurangzeb said Pakistan’s economy was showing signs of recovery through exports and remittances, but the war in Iran and closure of the Strait of Hormuz had placed a massive strain on a country heavily dependent on imported fuel and gas.
The external financing picture remains delicate. Pakistan recently faced pressure from a $3.5 billion UAE repayment after repaying a $1.3 billion Eurobond due on April 8, while central bank reserves stood at about $16.4 billion on March 27, and the IMF programme required reserves above $18 billion by June. Waqas Ghani, head of research at JS Global Capital, noted to a media outlet that repayments represented a significant near-term drain on reserves and that timely support from friendly countries would be key to stabilising reserves and restoring market confidence.
This is why the IMF approval should not be mistaken for independence from external creditors. It is proof of continued access, not proof of durability. Pakistan is still moving between Fund reviews, friendly-country deposits, bond plans, rollovers and commodity shocks. That may be enough to avoid a crisis. It is not enough to call the economy strong.
Deputy Prime Minister and Foreign Minister Ishaq Dar said that the tranche approval reflected the IMF’s confidence in the government’s measures. That is politically useful for Islamabad, particularly after Indian opposition to Pakistan’s access to Fund resources, but it should not lead to complacency. Fund confidence is conditional confidence. It lasts until the next missed target, the next budget slippage or the next attempt to hide energy liabilities in accounting fog.
The budget will now become the battlefield. The IMF has called for stronger revenue mobilisation, a broader tax net and improved compliance. Federal Board of Revenue remained the weakest link in the review, missing targets on net tax revenues and income tax from retailers, while the government increased petroleum levy rates to offset the revenue shortfall. That means the next fiscal package cannot survive on squeezing salaried taxpayers, compliant firms and petroleum consumers while politically noisy sectors remain negotiated exceptions.
Energy is the second battlefield. The IMF said domestic fuel, electricity and gas prices must remain aligned with costs to prevent the return of fiscal pressures, with vulnerable households protected through targeted support rather than broad subsidies. That is sound economics and hard politics. A government facing higher oil prices will be tempted to delay pass-through, park liabilities somewhere in the system and call it relief. However, the government has accepted nearly a dozen more conditions, including approval of the new budget in line with the Fund agreement and amendments to laws governing special economic and technology zones.
The third battlefield is the exchange rate. The IMF’s insistence that exchange-rate flexibility remain the main shock absorber reflects its view that Pakistan should not burn reserves defending a politically convenient level of the rupee.
Pakistan’s diplomacy in the Middle East also has a direct economic dimension. Al Jazeera reported on Sunday that Iran had sent its response to a US proposal to end the war via mediator Pakistan, with Tehran saying talks should focus on ending hostilities, securing guarantees against future attacks and reopening the Strait of Hormuz. Pakistan is also in talks with Iran to allow more Qatari LNG shipments through Hormuz.