By Staff Reporter
KARACHI: Pakistan’s economy will expand 3.5% in the fiscal year starting July 2026, the International Monetary Fund said, falling half a percentage point short of the government’s own 4% target and underscoring the drag that elevated energy costs and global trade disruption continue to exert on the South Asian nation.
The forecast, unchanged from the Fund’s April assessment, was published Wednesday in the IMF’s July World Economic Outlook Update, the twice-yearly report’s mid-cycle refresh. The IMF also left its outlook for the current fiscal year, ending June 2026, at 3.6% growth. Taken together, the figures chart a gradual deceleration for Pakistan’s economy — from 3.2% growth in calendar 2025, the IMF’s data show, to 3.6% this year and back down to 3.5% in 2027 — a trajectory that has proven stubbornly resistant to revision even as the Fund overhauled its assumptions elsewhere in the report.
The steady read on Pakistan arrives against a far more turbulent global backdrop. The IMF trimmed its 2026 world growth forecast to 3.0%, citing the war in the Middle East, fraying global trade ties and the risk of a reassessment in markets that have priced in aggressive assumptions about artificial intelligence. That marks a second consecutive downgrade to the global number and leaves growth running well below the 3.5% average logged in 2024 and 2025, though the Fund penciled in a rebound to 3.4% in 2027.
Global headline inflation is now seen at 4.7% this year, a 0.3 percentage-point increase from the Fund’s April projection, before easing to 3.9% in 2027. The revision traces almost entirely to energy markets: crude prices are running roughly 25% above pre-war levels, the IMF said, and are expected to stay elevated. The Fund’s baseline now assumes shipping through the Strait of Hormuz — the conduit for roughly a fifth of the world’s seaborne oil trade — begins to normalize in mid-July, with a full return to pre-war conditions not expected until March 2027.
That the world economy has avoided a deeper downturn owes largely to an offsetting force from an unrelated corner of the market. Booming investment in technology and artificial intelligence has helped counterbalance the war’s toll on energy supply, the IMF said, cushioning what might otherwise have been a sharper blow to global output. “That the global economy is so far weathering the shock is cause for reassurance, but not complacency,” IMF Managing Director Kristalina Georgieva said, adding that global energy markets will likely take considerably longer to normalize than the pace of political developments alone would suggest, given the extent of infrastructure damage sustained during the conflict.
The divergence in fortunes has been stark. Energy exporters outside the conflict zone and economies deeply woven into the technology supply chain have generally seen their outlooks brighten. Commodity importers without meaningful exposure to the AI buildout have borne the brunt of the downgrades — a split that helps explain why the aggregate global figure masks such divergent paths across regions.
Global trade growth is projected to slow sharply, to 3.5% in 2026 from 5% in 2025 — a year that saw heavy front-loading of shipments ahead of U.S. tariff deadlines — before recovering to 4.3% in 2027.
Deniz Igan, chief of the World Economic Studies division in the IMF’s Research Department, said the global economy has proven more resilient than the Fund had feared back in April, notwithstanding the war’s toll and the closure of the Strait of Hormuz. Prices have risen and confidence has slipped, she said, but the release of strategic petroleum reserves and commercial inventories, coupled with gains in energy efficiency, has helped offset the supply shortfall. The private sector, meanwhile, has adapted quickly, sourcing alternative routes and supplies as the conflict has dragged on.
“So far things have been okay, but that doesn’t take away the risk factors that are there, particularly with the war,” Igan told Reuters. A collapse of the ceasefire and a resumption of fighting could pose outsized risks, she said, warning that many countries have already drawn down their reserves substantially and would have far less room to maneuver in a renewed crisis.
The warning carries particular weight given the pace of recent escalation. The U.S. military launched a fresh wave of strikes against Iran on Tuesday and revoked a license permitting Iranian oil sales, after three tankers were struck in the Strait of Hormuz — developments that have piled pressure on an already fragile truce.
“A renewed conflict in the region is going to catch the global economy in a worse position than it was the first time,” Igan said, noting that a simultaneous scramble by multiple countries to rebuild depleted oil reserves could itself trigger a fresh spike in prices. “If there is a perception that this is going to be more prolonged, then both the incentive and the room to use those reserves is going to shrink very fast,” she said.
Inflation and inflation expectations have climbed, Igan said, but the increase has been concentrated in the near term, with little evidence so far that medium-term expectations are becoming unanchored.
The Fund’s update also marks a shift in methodology. In April, before Washington and Tehran struck their ceasefire, the IMF had published three separate scenarios spanning a range of possible war outcomes. The July update discards that framework in favor of a single baseline forecast, with comparisons drawn instead against the April reference case, which had assumed a shorter conflict.
Among major economies, the U.S. growth forecast for 2026 was left unchanged at 2.3%, while the 2027 projection was nudged up a tenth of a point to 2.2%. The euro area saw its 2026 outlook cut to 0.9% from 1.1% in April, with the 2027 forecast held steady at 1.2%. Japan’s 2026 forecast slipped a tenth of a point to 0.6%, offset by an equivalent upward revision for 2027, to 0.7%.
Emerging market and developing economies as a group face a 0.1 percentage-point cut to 3.8% growth in 2026, though the Fund lifted its 2027 outlook for the cohort by 0.3 points, to 4.5%. China’s growth forecast was revised higher on both counts, to 4.6% in 2026 from 4.4% previously and to 4.1% in 2027 from 4.0%. India, still among the fastest-growing major economies, saw a modest downgrade to 6.4% for 2026 from 6.5%, alongside an upgrade to 6.7% for 2027 from 6.5%.
The Middle East and Central Asia region, unsurprisingly the hardest-hit by the conflict, absorbed the report’s most dramatic swing: a 1.2 percentage-point cut to 0.7% growth in 2026, paired with a 1.9 percentage-point upgrade to 6.5% for 2027 — a reflection of how sharply the war has front-loaded the region’s economic pain, and how much of a rebound the Fund expects once the conflict finally clears.
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