IMF clears $1.2bn path for Pakistan as economy absorbs energy shock

Pakistan has moved closer to receiving more than $1.2 billion from the International Monetary Fund after completing the latest reviews of its economic reform programmes, giving Islamabad another financial cushion as high energy costs and geopolitical disruptions continue to test the economy.

The IMF said Wednesday that its staff had reached an agreement with Pakistani authorities on the fourth review of the country’s 37-month Extended Fund Facility and the third review of its Resilience and Sustainability Facility. Reuters reported that the agreement could unlock about $1.21 billion once approved by the IMF Executive Board. The amount comprises about $1 billion under the main lending programme and $210 million through the climate-focused facility.

The agreement is therefore an important step, but the money has not yet been released. Executive Board approval is still required before Pakistan can draw the funds. Once approved, cumulative disbursements under the two programmes would rise to about $5.7 billion.

The latest review comes as Pakistan attempts to maintain macroeconomic stability while facing a difficult external environment. IMF mission chief Iva Petrova said the country had managed to withstand the effects of the Middle East conflict, with policy measures helping to contain the shock from higher energy prices and supply disruptions.

Pakistan’s economy expanded by 4 per cent during the first three quarters of fiscal 2026, although the pace weakened as energy costs increased and supply chains were disrupted. The IMF estimates full-year growth at 3.6 per cent.

Inflation has also eased from its recent peak. Consumer-price inflation fell to about 10.3 per cent in September after reaching a higher level in May, while core inflation remained comparatively contained. Pakistan’s current account was broadly balanced in FY26, helped by strong remittance inflows, and gross foreign-exchange reserves reached about $21.5 billion by the end of September.

But the improved headline indicators do not remove the structural pressures behind Pakistan’s repeated dependence on external financing. The country still needs to maintain foreign-exchange liquidity, manage public debt and reduce vulnerabilities in the energy sector while protecting households from another surge in living costs.

The IMF has consequently tied continued support to further reforms. Pakistan is expected to implement its FY27 budget firmly, including an underlying primary surplus target of 2 per cent of GDP, while improving tax administration through measures such as risk-based audits, digital invoicing and greater use of third-party data.

The Fund has also called for changes in the energy sector and better-targeted social protection. A major immediate issue is the government’s fuel-support programme. Pakistani authorities have been asked to phase out broad fuel subsidies and, if support becomes necessary because of another oil-price shock, make it temporary and targeted towards vulnerable households.

That condition reflects the difficult policy balance facing Islamabad. Subsidies can cushion households when fuel prices rise sharply, but they also put pressure on government finances and can undermine the fiscal consolidation required under the IMF programme.

Pakistan’s exposure to the international energy market has become particularly significant during the Middle East conflict. Higher oil prices raise the cost of imports, while disruptions to shipping and regional supply chains can put additional pressure on inflation and the current account.

At the same time, stronger remittances and improving reserves have provided some protection. The IMF said Pakistan’s current account remained broadly balanced in FY26, while renewed access to international capital markets and sovereign rating upgrades pointed to improved policy credibility.

The Fund nevertheless warned that risks remain high. Geopolitical tensions, volatile energy prices, tighter global financial conditions and disruptions to international trade could all weaken the recovery and quickly reverse recent improvements in external stability.

For Islamabad, the latest IMF agreement therefore represents more than an immediate injection of foreign exchange. It reinforces a policy framework built around fiscal discipline, higher domestic revenue, energy-sector reform and targeted social protection.

The central challenge will be whether those reforms can be sustained without placing a disproportionate burden on households already facing high living costs. The $1.2 billion in prospective financing can strengthen Pakis