Low growth, high inflation, natural disasters, high external debt: Many challenges that riddle Pakistan’s economy

With its GDP growing at less than 3% since 2023, record inflation and natural disasters, Pakistan’s economy has been reeling from shocks on several front that eventually led it to seek yet another bail out from the International Monetary Fund. Its external debt obligations, analysts highlight would not be financed without the IMF package with its total external debt at $131 billion by December 2024.
 
After contracting by 0.2% in their fiscal year July 2022 to June 2023, Pakistan’s economy was on a recovery track with GDP growth at 2.5% in FY24 and estimated at 2.7% in FY25 as per the World Bank. Its economic growth was seen to expand to 3.1% in FY26, as per the World Bank’s estimate. Inflation, which had risen to a peak of nearly 40% in mid 2023 in Pakistan, has declined to 0.7% by March 2025 and to 0.3% by April this year.
 
“In Pakistan, the economy continues to recover from a combination of natural disasters, external pressures, and inflation. Inflation has slowed more quickly than expected, providing room for further monetary easing,” noted the World Bank’s South Asia Development Report that was released in April 2025.
 
“The agreement reached in September 2024 on an IMF-supported policy program helped stabilize the exchange rate and reduce the risk of debt default, as reflected in ratings upgrades from several credit rating agencies and a narrowing of borrowing spreads,” the report highlighted noting the crucial role of the IMF bailout to Pakistan.
 
IMF Bailout
 
On May 9, the Executive Board of the IMF approved completed the first review of Pakistan’s economic reform program supported by the Extended Fund Facility (EFF) Arrangement that allowed for an immediate disbursement of around $1 billion to the nation. With this, the total disbursements to Pakistan from the IMD under the arrangement are now at $2.1 billion. Additionally, the IMF Executive Board approved the authorities’ request for an arrangement under the Resilience and Sustainability Facility (RSF), with access of about US$1.4 billion (SDR 1 billion).
 
At the meeting, India raised concerns over the efficacy of IMF programs in case of Pakistan given its poor track record and abstained from voting.
 
The 37-month EFF facility which was approved by the IMF in September 2024, had begun to show some results, as per the IMF press release, that noted that Pakistan’s fiscal performance has been strong with primary surplus of 2% of GDP in the first half of FY25.  The progress on disinflation and steadier domestic and external conditions, have allowed the State Bank of Pakistan to cut the policy rate by a total of 1100 bps since June 2025, the IMF noted, adding that gross reserves stood at $10.3 billion at end-April, up from $9.4 billion in August 2024, and are projected to reach $13.9 billion by end-June 2025 and continue to be rebuilt over the medium term.
 
Analysts also expected a pick up in consumer demand and business confidence.
 
Risks continue:
 
But the ongoing conflict with India will definitely prove to be a drag on Pakistan’s economy with investor and business confidence set to wane and a further depreciation of government finances. Several other risks have continued and Pakistan would have a long way to go in achieving a full turnaround of its economy.
 
Analysts note that governance continues with internal political stress is a key risk for Pakistan as well as the impact of climate change that has led to sever flooding in recent years while access to fresh water remains a challenge for the country.
 
More worryingly, its external debt obligations remain high without adequate foreign exchange reserves.
 
Moodys’s Ratings in its credit opinion on Pakistan in February this year noted that Pakistan's external vulnerability risks remains high. “Although increasing, foreign exchange reserves remain well below what is required to meet its external debt obligations over the next few years,” it said. The government’s external principal debt repayments are about $22-23 billion each year over fiscal 2025-2027.
 
“The country continues to be reliant on timely financing from official partners to fully meet its external debt obligations, underscoring the importance of steady progress with its IMF EEF program to continually unlock financing,” it noted.
 
This is not all. The country has a poverty rate of 21.9%, meaning that nearly a quarter of its population is unable to afford basic items. Its per capita GDP rate was $1,566 in 2023-24. Its unemployment rate was 8.3% in FY24 and was projected at 8% in FY25 as per the IMF.  As per the UN Human Development Index, Pakistan was ranked 164 on a list of 193 countries in 2023.