Business Recorder
ISLAMABAD: The International Monetary Fund (IMF) engagement with Pakistan remains critical, as the Fund-supported programme under the Extended Fund Facility (EFF) in Pakistan, amounting to about USD7.2 billion, focuses on restoring macroeconomic stability, rebuilding external buffers, and advancing reforms in fiscal management, energy pricing, and governance. The Fund stated this in its latest Regional Economic Outlook update which covers the economic effects of the war in the Middle East on the Middle East, North Africa, Afghanistan, and Pakistan (MENAP), as well as spillovers to the Caucasus and Central Asia (CCA). The Fund said that compared to projections made immediately before the war, growth was revised down by almost a full percentage point cumulatively across 2026 and 2027 (1.1, 0.6, and 0.8 percentage points in Egypt, Pakistan, and Tunisia, respectively), reflecting the impact of the commodity supply shock. READ MORE: IMF MENAP meeting: Policy response to global shocks highlighted Compared to October, the growth downgrade was more pronounced for low-income MENAP countries, but this mainly reflects the downward revision in Sudan, unrelated to the war in the Middle East and instead caused by the worsening economic situation amid an internal conflict that shows no sign of abating. Compared to projections made immediately before the war, GDP growth for this group of countries is revised down by almost 1 percent cumulatively across 2026 and 2027. It further stated that MENAP countries with pre-existing vulnerabilities have been affected more. Exchange rate movements have been modest across most countries; however, Egypt allowed the exchange rate to act as the main shock absorber, with the Egyptian pound depreciating more than 13 percent as of early April. Sovereign spreads widened moderately, although by more than the average for other emerging markets, with Bahrain and Pakistan increasing by over 50 basis points and Egypt by more than 60 basis points, as of early April. For the average MENAP emerging market and developing economy oil importer, IMF estimates suggest that a 10 percent rise in the average annual oil price leads to output losses of about 0.5 percentage point, and inflation increases of about 1 percentage point. The terms-of-trade shock would also contribute to a deterioration in current account balances, from over 1 percentage point (West Bank and Gaza) to about 0.3 percentage point (Pakistan), and in fiscal balances, from about 0.5 percentage point (Egypt, Jordan, and Tunisia) to 0.1 percentage point (Pakistan). Among emerging markets and developing MENAP oil importers, a few are highly dependent on Gulf economies for both energy imports and financial flows, leaving them exposed to a longer or more intense war. Egypt, Lebanon, and Pakistan import substantial amounts of oil from the GCC—roughly between 15 and 80 percent of total oil and gas imports—while Egypt and Jordan rely on natural gas from Israel, accounting for just under 20 percent of total oil and gas imports. Egypt, Jordan, Lebanon, and Pakistan are also big recipients of remittance inflows—at about 5 percent of GDP from the GCC, which have large expatriate shares of their labour forces. Lower trade and income flows pose greater risks the longer the war goes on. These risks are amplified by pre-existing macroeconomic pressures, including elevated financing needs and limited reserve buffers in many of these countries. These features raise the likelihood that even higher energy and food prices could complicate ongoing disinflation efforts. Moreover, if global sentiment deteriorates further, financing and market risks could intensify. Although financial market reactions have been contained so far, a more adverse scenario could involve a sharper tightening of global financial conditions, capital outflows, and more pronounced exchange rate pressures. This would increase refinancing risks for highly indebted sovereigns and could deepen the sovereign–bank nexus in some countries. The report further noted that since the start of the war, external sovereign bond yields have risen notably in several MENAP economies. Pakistan and Egypt saw the sharpest increases, from roughly 8 percent before the war to above 9 percent by the end of March. Inflationary pressures stemming from higher energy and food prices may warrant a prompt monetary policy response, which would need to be consistent with the fiscal policy response. However, the appropriate speed and magnitude of action will depend on country-specific monetary policy frameworks and starting conditions—most importantly, the level and persistence of inflation example, is expected to reach almost 8 percent in Egypt and 5.5 percent in Pakistan in 2026. Clear communication remains essential to prevent market overreaction to new data and to keep inflation expectations anchored, especially for central banks with imperfect credibility. Heightened vigilance is particularly warranted in economies with elevated public debt and large bank holdings of domestic sovereign securities (for example, Egypt, Jordan, Pakistan, and Tunisia), where rising borrowing costs could quickly translate into pressures on bank balance sheets. The Fund said that the war in the Middle East that started on February 28, 2026, has inflicted profound human suffering and significantly affected the outlook for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region. Earlier in 2026, economic activity was gaining momentum and inflation was easing in most MENAP economies. However, the closure of the Strait of Hormuz, the disruption of oil and natural gas production, and the severe impact on air traffic to and through the Gulf have all had immediate economic consequences. The war started as a regional shock but soon became a global one: the price of Brent crude has risen above USD100 per barrel, and prices have spiked for natural gas, fertilizers, and metals, tightening supply chains and raising production costs across the region and globally. The ceasefire agreement announced on April 7 is a welcome development and an important step toward a de-escalation of the war. However, uncertainty remains exceptionally high and much depends on whether the ceasefire holds and global and regional stability is restored, it added. Copyright Business Recorder, 2026
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