Pakistan Economy 2026: GDP Grows 3.7% as IMF Completes EFF Review Amid Middle East Risk

Pakistan’s economy expanded 3.7% in FY26, its fastest pace in four years, according to the government’s Economic Survey, even as the IMF’s Executive Board flagged the ongoing Middle East conflict as a cloud over the country’s near-term outlook after completing the third review of its Extended Fund Facility program.

GDP Growth and the IMF’s Verdict

Finance Minister Muhammad Aurangzeb presented the Economic Survey of FY26 in Islamabad in June, showing GDP growth that, while the fastest in four years, still fell short of the government’s own target, according to Dawn. The survey noted the KSE-100 index rose 18.4% between July and March of FY26, driven by strong corporate earnings, a falling policy rate, easing inflation, and the successful review of the IMF-EFF program.

The IMF’s Executive Board formally completed the third review of the Extended Fund Facility and the second review of the Resilience and Sustainability Facility in May 2026, noting that fiscal performance had been strong, with a primary surplus of 1.6% of GDP expected in FY26, in line with program targets, according to the IMF’s official statement. Gross reserves stood at $16 billion at end-December, up from $14.5 billion at end-June 2025.

Growth Drivers and Persistent Risks

The IMF’s detailed staff report attributed the acceleration in GDP growth — averaging 3.8% year-on-year in FY26 H1 — to the auto, construction, and garment industries, even as flooding in July-August 2025 weighed on output, according to the IMF Country Report. Headline inflation, however, climbed to 7.3% year-on-year in March as higher global commodity prices began passing through to domestic energy costs, with core inflation holding at 7.6%.

Pakistan’s central bank, the State Bank of Pakistan, cut its policy rate by 50 basis points in December 2025 before holding it at 10.5% through January and March 2026, per the same IMF report. The central bank also lowered banks’ cash reserve requirement from 6% to 5%, effective January, to support credit growth.

The Social Cost Behind the Recovery

Despite the headline recovery, the IMF’s own analysis flagged a stark deterioration in poverty indicators: Pakistan’s poverty headcount rate rose to 25.3% in FY24, up from 18.3% in FY22, driven by overlapping shocks including COVID-19, flooding, and sustained economic instability. Health and education outcomes remain weak relative to other lower-middle-income countries, underscoring the gap between macroeconomic stabilization and household-level welfare.

The Middle East War and What Comes Next

The IMF explicitly warned that “the impact of the war in the Middle East clouds Pakistan’s near-term outlook,” a caution that has only grown more relevant following the July 2026 collapse of the US-Iran ceasefire and the reinstated Strait of Hormuz blockade, according to the IMF’s staff report summary. As a major oil importer, Pakistan remains exposed to a renewed spike in global energy prices, which could complicate the central bank’s tight monetary stance and pressure the current account just as reserve rebuilding has started to gain traction. The IMF’s next mission to Pakistan is expected in the second half of 2026, with discussions on the FY27 budget continuing in parallel, according to The Indian Panorama.