Fiscal fault lines

Unfortunately, no amount of reforms will change the fact that the GDP growth prediction remains extremely low for a developing country, and inflation is forecast to be relatively high.

The inflation outlook is particularly concerning.

Having decelerated from a peak above 38% in May 2023 to single digits, consumer prices are now projected to rise by nearly 10% in FY27.Surging oil prices and disrupted trade routes amid the Middle East conflict are primary drivers, as oil and gas constitute a large share of Pakistan's imports.

Meanwhile, the government's relief scheme for motorcyclists and small-car owners has drawn IMF criticism for being "broad-based" and "costly", underscoring the tension between populist measures and fiscal prudence.On the external front, the current account is expected to shift from balance in FY26 to a deficit of 1% of GDP in FY27.

The SBP has rebuilt reserves to $21.45 billion, providing roughly three months of import cover – which is useful, but not enough to address broader concerns.

Meanwhile, the rupee has appreciated to around Rs277 per dollar, but the real effective exchange rate stands at 107, raising concerns about currency valuation and export competitiveness.

Public debt also remains unsustainable.While the debt-to-GDP ratio declined to 68.3% in FY26 from 70.6% a year earlier, the nominal stock rose 7.7% to Rs86.72 trillion.

Debt servicing consumes more than half of federal revenue, leaving little fiscal space for development or social spending.

Unemployment is forecast to ease to 6.5% from 7.1%, but with a labour force expanding by roughly 2 million annually, growth of 3.5% is insufficient to absorb new entrants.The IMF's downward revision of Pakistan's FY27 growth forecast in its World Economic Outlook – downgraded by 0.6 percentage points mainly due to the Mideast conflict's economic drag – highlights the fragility of the recovery.

Policymakers will thus have their hands full as they chart a way to achieve reform goals such as macroeconomic stability.