IMF warns Pakistan faces major economic risks due to dependence on Gulf economies

By Shahzad Paracha :

The International Monetary Fund has identified Pakistan’s economic dependence on Gulf economies as the country’s most significant external vulnerability following the release of a fresh $1.1 billion loan tranche under its financial support programme.

In its latest staff report, the IMF warned that ongoing regional instability and the impact of the Iran conflict could place additional pressure on Pakistan’s economy because of its heavy reliance on fuel imports, remittances and external financial conditions linked to Gulf countries.

The report said Pakistan remained “highly exposed” to developments in the Gulf Cooperation Council economies, particularly due to the country’s dependence on energy imports and overseas workers employed in the Gulf region.

According to the IMF, nearly 81% of Pakistan’s fuel imports originate from GCC member states, while around 55% of workers’ remittances equivalent to roughly 9% of the country’s gross domestic product — also come from Gulf economies.

The lender warned that any major disruption in Gulf economies, including economic slowdown or the return of migrant workers, could significantly affect remittance inflows and external financing stability.

“A significant disruption to the GCC economies and/or return of migrant workers could weigh on these flows,” the report stated, describing remittances as a critical source of financing for household consumption and Pakistan’s balance of payments.

The IMF said the economic consequences of the Iran conflict had now been formally incorporated into Pakistan’s macroeconomic projections under the ongoing programme.

Under the Fund’s baseline scenario, Pakistan’s economic growth is expected to weaken in the coming years, with gross domestic product growth projected to slow by 0.2 percentage points in the fiscal year 2025-26 and by a further 0.6 percentage points in FY27.

Inflationary pressures are also expected to intensify, with prices projected to rise by approximately half a percentage point this year and by around 1.5 percentage points in FY27.

The report highlighted Pakistan’s continuing vulnerability to global energy price fluctuations and external financial shocks at a time when the country remains under a broader economic stabilisation programme supported by the IMF.

Despite acknowledging that Pakistan had largely met programme targets, the IMF cautioned that recent fiscal improvements were driven more by spending controls than by sustainable revenue growth.

“The consolidation progress so far has relied primarily on increasing revenue from the formal sector,” the report noted.

It added that the Federal Board of Revenue had missed its end-December tax collection target by 0.3% of GDP, underlining continuing weaknesses in revenue generation.

The IMF also pointed to energy pricing adjustments as one of the prior actions required for completion of the latest programme review.

According to the report, the government had temporarily delayed fuel price increases after the outbreak of regional conflict and provided support to oil marketing companies to offset the impact of higher prices.

The report further revealed that Pakistan’s court-directed transition towards an interest-free banking system has now been formally incorporated into IMF programme monitoring.

The lender said Pakistan’s financial sector strategy would need to provide “a detailed roadmap” for implementing a constitutionally mandated transition to a riba-free economy.

It stressed that authorities must clearly outline how financial institutions would manage the shift away from conventional banking practices while addressing existing liabilities tied to interest-based financial arrangements.

The issue of Islamic banking reform has gained increasing attention in Pakistan following judicial rulings directing the government and financial regulators to eliminate interest-based systems within a specified timeframe.

Economists say the transition poses major operational and regulatory challenges for Pakistan’s financial sector, including banking structures, sovereign debt management and international financial obligations.

The IMF’s latest assessment comes as Pakistan continues to navigate economic stabilisation efforts under a broader reform programme focused on fiscal consolidation, inflation control and external financing stability.

While recent IMF support has helped improve foreign exchange reserves and restore some investor confidence, analysts warn that Pakistan remains vulnerable to external shocks, particularly those linked to energy markets, geopolitical tensions and overseas remittance flows from Gulf countries.

Observers say the IMF’s warning reflects growing international concern over the interconnected nature of regional conflicts and fragile economies such as Pakistan, where external financing pressures can rapidly affect inflation, currency stability and economic growth prospects.

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