Lending Agencies

IMF Calls on China to Halve Industrial Subsidies — and the Stakes for the Global Economy Have Never Been Higher

Published

7 months ago

February 19, 2026

China’s state-backed industrial machine is running at full throttle — but the International Monetary Fund says the fuel costs are crippling the very economy it’s meant to supercharge.

In a sweeping set of policy recommendations that span from Beijing’s factory floors to global supply chains, the International Monetary Fund has delivered its clearest call yet for China industrial policy reform: slash state subsidies to industry from roughly 4 percent of GDP to around 2 percent, redirect those savings toward social welfare spending, and pivot the world’s second-largest economy away from export-led manufacturing toward domestic consumption. The message is urgent, data-backed, and geopolitically loaded.

This is not a bureaucratic nudge. It is a diagnosis of a fundamental imbalance — one with consequences that ripple from the steel mills of Wuhan to the factory floors of Michigan, the automotive plants of Stuttgart, and the solar panel markets of Mumbai.

The 4 Percent Problem: What IMF China Subsidies Research Actually Found

The numbers at the heart of this debate come from IMF Working Paper No. 2025/155, a landmark study published in August 2025 that, for the first time, comprehensively quantified the full fiscal cost of China’s industrial policy apparatus. The findings were striking:

Cash subsidies account for approximately 2.0 percent of GDP annually
Tax benefits add another 1.5 percent of GDP
Subsidized land contributes 0.5 percent of GDP
Subsidized credit adds a further 0.4 percent of GDP
Combined total: roughly 4 percent of GDP per year — equivalent to well over $700 billion at current exchange rates

To put that in perspective: China’s annual industrial policy expenditure rivals the entire GDP of Switzerland. The beneficiaries are concentrated heavily in sectors flagged under Beijing’s “Made in China 2025” strategic plan — chemicals, machinery, electric vehicles, metals, and semiconductors. By 2022, the number of subsidies flowing into these strategic sectors had nearly quadrupled compared to 2015.

Yet here is the paradox that IMF China subsidies reduction advocates keep returning to: all this spending is quietly undermining the very productivity it claims to boost.

The Hidden Drag: 1.2 Percent Productivity Loss

The IMF’s structural modeling reveals a striking inefficiency at the core of Beijing’s industrial strategy. By distorting how capital and labor are allocated across the economy — a phenomenon economists call “factor misallocation” — China’s industrial policies are estimated to reduce aggregate total factor productivity (TFP) by approximately 1.2 percent. That is not a rounding error. For an economy of China’s scale, a 1.2 percent productivity drag represents hundreds of billions of dollars in foregone output every year.

The mechanics differ by policy instrument. Cash subsidies and subsidized credit tend to encourage excess production — factories churn out more than the market can absorb, leading to the gluts in steel, aluminum, and electric vehicles that have triggered trade disputes from Brussels to Washington. Trade and regulatory barriers, by contrast, suppress production in sectors that might otherwise thrive, distorting resource allocation in the opposite direction.

The net result, as discussed in CEPR’s analysis of China’s industrial policy costs, is an economy that is simultaneously over-producing in some industries and under-investing in others — a structural imbalance that feeds directly into deflation, weak domestic demand, and swelling trade surpluses.

IMF Recommendations for China’s Economy: The Reform Blueprint

The Fund’s 2025 Article IV Consultation with China, concluded in December 2025 and formally endorsed by the IMF Executive Board in February 2026, frames IMF recommendations for China’s economy around three interlocking priorities.

1. Scale back industrial subsidies — urgently. The IMF’s call to roughly halve support from 4 percent to around 2 percent of GDP is not merely about fiscal savings. It is about forcing market discipline back into an economy where state preferences have increasingly crowded out private-sector dynamism. Freed-up fiscal resources should be redirected toward social protection: healthcare, pensions, childcare, and expanded coverage for China’s 300 million-plus migrant workers under Hukou reform.

2. Rebalance toward consumption-led growth. IMF Managing Director Kristalina Georgieva, speaking at the 2025 Article IV press conference, was direct: China has the opportunity to reach “a new stage in its economic development, in which its growth engine switches from investment and exports to domestic consumption.” The Fund estimates that boosting social spending — particularly in rural areas — combined with Hukou reform could lift consumption by up to 3 percentage points of GDP in the medium term.

3. Structural reforms to lift long-term growth. These include reducing regulatory burdens, lowering barriers to internal trade (especially in services), leveling the competitive playing field between state-owned and private enterprises, and addressing persistent youth unemployment.

The payoff, the IMF calculates, is substantial: material progress on all three fronts could lift China’s GDP by about 2.5 percent by 2030, generate approximately 18 million new jobs, and meaningfully reduce both deflationary pressures and the current account surplus — currently running at an estimated 3.3 percent of GDP in 2025, up sharply from 2.3 percent the year before.

Global Trade Impact of China Subsidies: A World on Edge

The global trade impact of China subsidies has become one of the defining fault lines of 21st-century economic diplomacy. Beijing’s subsidized exports have suppressed prices in sectors from solar panels and electric vehicles to steel and furniture across dozens of markets. The IMF’s own 2024 working paper on trade implications found that Chinese subsidies not only boosted the country’s own exports and depressed imports, but amplified these effects through supply-chain linkages — subsidies given to upstream industries expand the export competitiveness of downstream sectors in ways that compound and cascade globally.

The resulting overcapacity has fed a wave of trade countermeasures. The European Union has imposed tariffs on Chinese electric vehicles. The United States has layered tariffs on a broad range of Chinese manufactured goods. India, Brazil, and other emerging markets are increasingly deploying anti-dumping investigations. The IMF’s call for IMF China subsidies reduction is, in this context, as much a diplomatic signal as an economic one — a multilateral institution urging Beijing to defuse tensions by reforming the policies at their source.

For global businesses and policymakers tracking the global trade impact of China subsidies, the IMF’s framework offers a rare piece of analytical clarity in what has otherwise been a fog of political rhetoric.

China’s Balancing Act: Resilience Meets Structural Fragility

None of this is to suggest China’s economy is in crisis. Far from it. The IMF projects GDP growth of 5 percent in 2025 — meeting the government’s target — and 4.5 percent in 2026. China accounts for roughly 30 percent of global growth. Its export machine, fueled in part by the very subsidies the IMF wants curtailed, has been a pillar of resilience.

But the structural tensions are real and deepening. Headline inflation averaged 0 percent in 2025. The GDP deflator continued to decline. Consumer confidence remains fragile. The property sector, once a locomotive of growth, has shifted into a slow-motion adjustment that is compressing local government finances and dragging on household wealth. The yuan, weakened in real terms relative to trading partners, has kept exports competitive but contributed to external imbalances the rest of the world finds increasingly difficult to absorb.

The China economic shift toward consumption that the IMF envisions would address all of these dynamics — but it requires the government to consciously redirect resources from the industrial sector it has long prioritized toward households it has long expected to save.

Modeling the Reform Scenarios: What Halving Subsidies Could Mean

Consider two scenarios, based on IMF modeling assumptions:

Scenario A — Partial Reform (subsidies cut to 3 percent of GDP): Factor misallocation eases modestly. TFP improves by approximately 0.4–0.6 percent. Fiscal savings of roughly 1 percent of GDP are partially redirected to social spending, nudging household consumption upward. Trade tensions moderate but do not resolve. Net GDP benefit by 2030: modest.

Scenario B — Full Reform (subsidies cut to 2 percent of GDP, per IMF target): Factor misallocation falls sharply. TFP gains approach the full 1.2 percent identified in the working paper. Fiscal savings fund meaningful social protection expansion, boosting consumption by up to 3 percentage points of GDP over the medium term. Current account surplus narrows. Trade tensions ease. GDP gains of 2.5 percent by 2030 materialize. Eighteen million new jobs created.

The second scenario is economically compelling. It is also politically difficult. China’s industrial policy apparatus is not just an economic tool — it is a statement of geopolitical ambition, a mechanism for technological self-sufficiency, and a source of local government revenue and employment. The IMF knows this. Its language is careful, constructive, and notably free of ultimatums.

Conclusion: A Reform Window That Won’t Stay Open Forever

The IMF’s call for China to halve its industrial subsidies is the most precisely calibrated version yet of an argument the global economic community has been making for years: that China’s current growth model, for all its undeniable successes, is generating costs — domestic and global — that are becoming increasingly hard to ignore.

The data on IMF China subsidies reduction is unambiguous. A 4-percent-of-GDP industrial policy bill that drags productivity by 1.2 percent, inflates trade surpluses, fuels global overcapacity, and suppresses household consumption is not a foundation for durable prosperity. It is a structural vulnerability dressed up as industrial strength.

China’s leaders have signaled their awareness of the challenge. The 15th Five-Year Plan explicitly names the transition to consumption-led growth as a strategic objective. But as the IMF’s Georgieva noted pointedly in December 2025, the economy is like a large ship — changing course takes time. The question is whether the wheel is being turned with sufficient force and speed.

For businesses navigating global supply chains, investors pricing geopolitical risk, and policymakers from Washington to Brussels, the answer to that question will define much of the decade ahead. As discussed in broader analyses of global trade impacts, the trajectory of China economic policy reform is not a regional story — it is the central economic narrative of our time.

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IMF & World Bank 2026 Global Economic Outlook: Growth, Inflation, Debt

Published

5 hours ago

September 9, 2026

Abdul Rahman

Global growth forecasts have been on a genuine roller coaster through 2026, and the two institutions tasked with tracking that trajectory — the International Monetary Fund and the World Bank — have delivered a consistent underlying message even as their specific numbers moved: the global economy has proven more resilient than feared at each individual shock, but the 2020s as a whole are on track to be the weakest decade for growth since the 1960s, and inflation’s decline has stalled rather than completed.

The IMF’s 2026 Forecast Trajectory

WEO Report	Global Growth 2026	Global Growth 2027	Inflation 2026	Key Driver
January 2026	3.3%	3.2%	Declining	Technology investment, fiscal/monetary support
April 2026	3.1%	3.2%	Rising to 4.4%	Middle East war outbreak
July 2026	3.0%	3.4%	Revised up to 4.7%	Disinflation trend stalled; energy/food prices

The swing between January and April 2026 — a full 0.2-point downgrade to growth alongside a jump in the inflation forecast — was driven almost entirely by the outbreak of war in the Middle East, which IMF Chief Economist Pierre-Olivier Gourinchas described directly: “The war has stopped that momentum and we now project growth of 3.1 percent this year… with inflation rising to 4.4 percent, a sharp departure from the previous trend.”

By July, the Fund’s own briefing described the resulting trajectory as a “V-shaped recovery” — weaker 2026 growth than the pre-war forecast, followed by a stronger 2027 rebound (revised up to 3.4%) — while cautioning that the disinflation trend in place since early 2024 has stalled, with headline inflation revised upward for both 2026 and 2027 versus the April forecast.

Three Scenarios, Not One Baseline

Reflecting the genuine uncertainty introduced by the Middle East conflict, the IMF’s April 2026 report broke from its traditional single-baseline format and instead presented three explicit scenarios:

Reference forecast: assumes a short-lived conflict with a moderate 19% rise in energy prices in 2026 — global growth at 3.1%, inflation at 4.4%.
Adverse scenario: assumes further disruption, higher energy prices, elevated inflation expectations, and tighter financial conditions throughout the year — growth falling to 2.5%, inflation rising to 5.4%.
Severe scenario: assumes energy supply disruptions extend into 2027, with greater macroeconomic instability across advanced and emerging markets alike.

This scenario-based approach itself signals how much weight the Fund places on geopolitical risk as the dominant swing factor in the current outlook, ahead of more traditional cyclical drivers like monetary policy stance or fiscal consolidation pace.

Regional Divergence: Winners and Losers

The IMF’s reporting has consistently emphasized that the aggregate global figures mask sharply uneven regional impacts:

The euro area continues to underperform, with subdued growth reflecting unresolved structural headwinds, lingering effects of elevated post-Ukraine-invasion energy prices, and real appreciation of the euro relative to competitor export currencies. Planned defense-spending increases are expected to provide only gradual support, given commitments to reach target spending levels by 2035.
The United States has been a relative bright spot, with growth projected at 2.4% for 2026 in the January update, supported by fiscal measures and continued technology-driven investment.
Energy-importing and vulnerable emerging market economies are bearing the brunt of the Middle East war’s growth and inflation impact, hit through three distinct channels the IMF identifies explicitly: higher energy and food prices directly; persistence in wage and price inflation; and a broader confidence shock affecting investment decisions.
Countries integrated into the AI-driven technology value chain are seeing that demand partly offset war-related headwinds, creating a genuine bifurcation between economies positioned to capture AI infrastructure investment and those that are not.

The World Bank’s Parallel — and More Pessimistic — Assessment

The World Bank’s Global Economic Prospects reports have tracked a broadly similar trajectory but with a structurally lower growth baseline and a starker framing of the developing-world implications:

January 2026: Global GDP growth projected at 2.6% in 2026, recovering to 2.7% in 2027 — an upward revision from the Bank’s own June 2025 forecast, driven primarily by stronger-than-expected U.S. performance.
Structural framing: World Bank Group Chief Economist Indermit Gill’s foreword to the Bank’s report states plainly that, barring a change in trajectory, “the 2020s are on track to become a lost decade for far too many developing economies,” noting that virtually half of all developing economies have failed since 2019 to narrow the income gap with the world’s most prosperous economies.
A longer-term counterpoint: The same report expresses genuine optimism about the 2030s specifically, arguing that AI, energy transformation, and deeper regional integration represent economic forces powerful enough to unlock transformative progress in the next decade — but only if the necessary preparation begins now.

Sovereign Debt: The Structural Vulnerability Beneath the Cyclical Numbers

Both institutions have devoted increasing analytical attention in 2026 to rising sovereign debt burdens across emerging market and developing economies (EMDEs):

Rising debt is driving up EMDE borrowing costs, particularly for the most indebted nations, creating a self-reinforcing dynamic the World Bank’s June 2026 report analyzes in detail under a dedicated section on “A Rising Challenge: Sovereign Debt Levels and Interest Rates in EMDEs.”
Fiscal rules show measurable benefit: World Bank analysis finds that countries adopting formal fiscal rules see budget balances improve by 1.4 percentage points of GDP within five years — but Deputy Chief Economist M. Ayhan Kose cautions that “credibility, enforcement, and political commitment ultimately determine whether fiscal rules deliver stability and growth,” meaning the rules alone are insufficient without genuine follow-through.
The scale of the underlying problem remains severe by any historical standard: global public debt has reached roughly $97 trillion, developing-country debt service payments have surged sharply since 2021, and dozens of developing countries remain in or at high risk of debt distress — a burden that in some cases consumes over half of national federal budgets on debt servicing alone, severely constraining capacity for development spending.

What to Watch Through Late 2026 and Into 2027

Middle East conflict duration: Every IMF scenario is explicitly conditioned on conflict duration and scope; a longer or broader war would mechanically push outcomes toward the adverse or severe scenarios described above.
Whether the “V-shaped recovery” materializes: the IMF’s July 2027 growth upgrade to 3.4% depends on the disinflation trend resuming and energy-price disruptions fading — neither of which is guaranteed given the stalled disinflation the Fund itself flagged.
EMDE debt distress escalation: with borrowing costs elevated and debt service consuming a growing share of national budgets across dozens of developing economies, any further increase in global interest rates or a renewed dollar appreciation would tighten conditions further for the most vulnerable sovereigns.
AI-driven investment durability: both institutions flag a reassessment of AI-driven productivity expectations as a genuine downside risk — if technology investment cools faster than currently assumed, it would remove one of the few consistent offsetting forces cited across every 2026 forecast vintage.

Bottom Line

The IMF’s 2026 growth forecast has been revised down and its inflation forecast revised up twice this year, driven primarily by the Middle East war’s disruption to energy markets and confidence — even as the Fund now projects a rebound to 3.4% growth in 2027. The World Bank’s parallel assessment is structurally more pessimistic about developing economies specifically, warning the 2020s risk becoming a lost decade for growth convergence, with rising EMDE sovereign debt and borrowing costs compounding the cyclical pressure from the war-driven inflation spike.

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IMF

Pakistan IMF Program 2026: Inside the Push Toward an Interest-Free Economy

Published

1 month ago

August 4, 2026

Abdul Rahman

Pakistan is running two demanding reform programs at once, and they don’t obviously fit together. On one track, the IMF is pressing for stricter fiscal controls, expanded tax collection, and continued tight monetary policy under its Extended Fund Facility. On the other, Pakistan’s own constitution now mandates the removal of “riba” — interest — from the economy entirely, with a deadline set for January 2028, following a constitutional amendment passed in October 2024, according to IMF Country Report 25/109.

The IMF’s side of the ledger

Pakistan’s economic recovery gained real momentum in the first half of FY26, with GDP growth averaging 3.8% year-on-year, driven by the auto, construction, and garment industries, even as flooding in July-August weighed on output, according to IMF staff reporting. Inflation, however, climbed to 7.3% year-on-year in March as higher global commodity prices passed through to domestic energy costs. Foreign reserves have been rebuilding steadily — from $14.5 billion at end-June 2025 to $16 billion by end-December — while the primary fiscal surplus is expected to reach 1.6% of GDP in FY26, in line with IMF targets.

In May 2026, the IMF Executive Board completed the third review of Pakistan’s Extended Fund Facility and second review of its Resilience and Sustainability Facility, unlocking roughly $1.1 billion and $220 million respectively and bringing total disbursements under the two programs to about $4.8 billion, according to the IMF’s official press release. The Fund explicitly credited Pakistan’s “strong implementation” for maintaining stability despite the disruption from the Middle East war.

The parallel Islamic finance transformation

Running alongside that fiscal program is a structural transformation few outside Pakistan are tracking closely: the State Bank of Pakistan is required to develop a full financial sector strategy detailing the legal, regulatory, and strategic path to a riba-free economy, addressing monetary policy implementation, public debt management, and bank supervision — with a strategy deadline the IMF set for end-June 2026, per the same country report. Parliament has already moved on a related front, approving the Virtual Assets Bill in March 2026 and formally establishing the Pakistan Virtual Assets Regulatory Authority.

Why the IMF is watching this transition warily

The IMF’s own language signals concern about execution risk: publishing the riba-free transition plan “will help align the expectations of market participants, investors, and regulators… and mitigate concerns about any possible cliff effect,” according to the country report language. That is diplomatic phrasing for a real structural risk — an abrupt, poorly sequenced transition away from conventional interest-based finance could destabilize a banking sector the IMF has spent years helping stabilize.

The tax reform Pakistan still owes

Beyond monetary policy, Pakistan has committed to finalizing a new audit manual and centralizing taxpayer audit selection by August 2026, accelerating its Retailer Tax Registration Scheme, and making its Tax Policy Office fully operational, according to ProPakistani’s summary of IMF commitments. The Federal Board of Revenue has continued missing collection targets, prompting the IMF to propose making FBR revenue goals a formal Quantitative Performance Criteria — a stricter enforcement mechanism than before.

Why this matters for Gulf and global investors

Pakistan’s dual reform track — IMF-style fiscal orthodoxy alongside a constitutionally mandated Islamic finance transition — is unusual among IMF program countries and is drawing renewed Gulf capital interest, visible in DIFC’s decision to bring its Dubai FinTech Summit to Pakistan for the first time in August 2026 (see our companion report). Investors assessing Pakistan’s banking sector need to model both trajectories simultaneously, not just the more familiar IMF fiscal metrics.

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Analysis

Pakistan Passed Its Third IMF Review

Published

1 month ago

August 1, 2026

Abdul Rahman

The IMF’s Executive Board completed Pakistan’s third review of its 37-month Extended Fund Facility (EFF) and second review of its Resilience and Sustainability Facility (RSF) on May 8, 2026, unlocking roughly $1.1 billion under the EFF and $220 million under the RSF, according to the IMF’s official statement. Total disbursements under both arrangements now stand at roughly $4.8 billion. Acting Chair Nigel Clarke credited Pakistan’s “strong program implementation” for supporting macroeconomic recovery and building resilience to shocks.

The Genuinely Good Numbers

By the IMF’s own account, the underlying data supports the assessment. GDP growth accelerated to an average of 3.8% year-on-year in the first half of FY26, driven by the auto, construction and garment industries, even accounting for flood disruption in July-August, according to the IMF’s staff report. Inflation, while ticking up to 7.3% year-on-year in March as commodity price pass-through hit domestic energy prices, remained within a broadly contained range, with core inflation at 7.6%. The current account was described as broadly balanced, and reserve rebuilding exceeded earlier projections — the State Bank of Pakistan projects reserves continuing to climb to roughly $18 billion by June 2026, according to analysis from the Islamabad Policy Research Institute.

The State Bank confirmed receipt of $1.3 billion from the IMF on May 12, 2026, according to CSS Prep’s policy analysis, which notes reserves had fallen to dangerously low levels in 2022-2023 before this recovery.

The External Risk the IMF Flagged Explicitly

The Fund’s own report is notably candid about downside exposure: under its April 2026 World Economic Outlook adverse scenario, the cumulative hit to Pakistan’s GDP from continued Middle East conflict could rise to around 1.5 percentage points by FY27, with inflation and the current account deficit each worsening by roughly 1.5-2.5 percentage points of GDP, according to the IMF’s staff country report. Given Pakistan’s reliance on imported energy, oil price volatility discussed in the IMF’s global outlook feeds directly into this specific country risk.

The Reform Question That Keeps Recurring

The structural policy conditions attached to this review read as familiar territory: sustaining fiscal consolidation, broadening the tax base, maintaining tight monetary policy to keep inflation within the State Bank’s target range, and advancing energy-sector reform — commitments the IMF’s own end-of-mission statement described as still “ongoing” rather than complete, per the IMF’s March 2026 mission statement.

A sharper framing comes from Pakistani policy analysts themselves: reforms that would genuinely break the IMF-program cycle — broadening the tax base to include agriculture and retail, ending energy subsidies, privatizing loss-making state-owned enterprises — impose concentrated, visible costs on politically organized interest groups, while the benefits of reversing those costs are diffuse and delayed, according to CSS Prep’s analysis. That political-economy imbalance, the analysis argues, consistently favors populist continuation of stabilization support over the structural reform that would end the need for it — a pattern this third review’s genuine macroeconomic progress doesn’t yet break.

Social Cost of the Adjustment

Pakistan’s poverty headcount rate rose to 25.3% in FY24, up sharply from 18.3% in FY22, driven by overlapping shocks from COVID, floods and inflation, according to the IMF’s staff report. The Benazir Income Support Programme (BISP) remains the primary social protection mechanism absorbing the distributional cost of IMF-mandated energy price increases and fiscal tightening — whether its scale is adequate remains, in the IMF’s own words, a live policy question rather than a settled one.