Pakistan is set to undergo a significant review concerning its financing needs at a crucial International Monetary Fund (IMF) board meeting in Washington. This comes as the country seeks financial assistance to tackle its ongoing economic difficulties, which include spiraling debt and dwindling foreign exchange reserves. India has publicly stated its opposition to any additional funding for Pakistan during this vital meeting, urging the IMF board to consider the geopolitical implications of bailing out Pakistan.
Tensions between India and Pakistan have escalated, raising global concerns about potential military conflict between the nuclear-armed neighbors. However, Pakistan’s pressing financial woes render military engagement a precarious option for Islamabad, which is currently facing a critical balance of payment crisis along with unprecedented inflation.
As of 2024, Pakistan’s external debt has exceeded $130 billion, with around 20% owed to China. Its foreign exchange reserves, conversely, have dwindled to just over $15 billion, sufficient to cover only three months of imports. Moreover, the country is confronting maturing public external debts totaling over $22 billion in FY25. Despite these challenges, a past bailout package from the IMF in September 2024 provided a $7 billion loan, leading to some early signs of economic recovery.
According to an updated report from the IMF, Pakistan’s economic performance has shown signs of improvement following a mix of recovery efforts. While inflation has slowed more than anticipated and there are strengthening imports, economic growth is expected to rise gradually from a contraction in previous years. The IMF predicts an increase in growth from 2.5% in FY24 to 3.1% in FY26.
The upcoming IMF board meeting is crucial for Pakistan, as it faces stringent conditions tied to the ongoing Extended Fund Facility program, which requires successful performance reviews to access further funding. India’s opposition is centered on concerns regarding potential misallocation of funds toward terrorist financing, particularly following incidents like the Pahalgam terror attack.
Experts predict a potential economic rebound, with the World Bank estimating a steady growth projection of 3.2% in FY26 and 3.5% in FY27. However, significant risks remain, particularly stemming from political instability and unresolved structural problems in Pakistan’s economy, which include operational inefficiencies, a burgeoning public sector, and reliance on imports amid declining fiscal health.
Given the surging poverty rates exacerbated by previous natural disasters and ongoing economic turmoil, the potential for conflict with India could threaten any recovery strides made. Analysts caution that a sustained military conflict would divert scarce resources and could push the vulnerable Pakistani economy to the brink.
Pakistan’s current energy constraints add further pressures, with reliance on imported fuels straining foreign reserves, contributing to inflation, and leading to ongoing energy crises. Addressing these complex, interrelated issues remains imperative for Islamabad as it navigates its economic landscape amid geopolitical tensions.
While the situation is precarious, there remains hope that continued international support and successful economic measures could pave the way for recovery and stability, underscoring the importance of cooperation rather than conflict in the region.