Pakistan has stepped back from the brink of economic collapse a note from Capital Economics suggests. Foreign exchange reserves have been rebuilt, inflation has eased, the current account is broadly balanced and the fiscal position has strengthened markedly. Yet weak growth and fractious domestic politics suggest that the current period of stability may prove difficult to sustain over the medium term.

The crisis peaked in 2023, when a severe balance-of-payments shock forced Islamabad to seek emergency support from the International Monetary Fund. Foreign exchange reserves had fallen to levels covering only a few weeks of imports, the rupee had depreciated sharply, inflation had surged beyond 30% and investor confidence had deteriorated significantly the note adds. Without external financing, the risk of failing to meet external debt obligations rose sharply. A short-term Stand-By Arrangement helped stabilise conditions and avert an imminent external default.

In September 2024, the IMF approved a $7bn Extended Fund Facility aimed at restoring macroeconomic stability and rebuilding policy credibility. To date, Pakistan has received roughly $3.3bn under the programme. A further $3.7bn is now scheduled for disbursement in semi-annual tranches through to the end of 2027, subject to successful reviews and continued compliance with IMF conditions. The structure is intended to entrench policy discipline, with IMF approval serving in practice as a signal for Gulf region partners to extend additional financial support.

In return, the authorities committed to a decisive shift towards orthodox macroeconomic management. Fiscal consolidation has been substantial, driven primarily by tax increases and efforts to broaden the revenue base, alongside cuts to untargeted subsidies. The primary balance, which excludes interest payments, has moved into surplus.

Monetary policy was tightened aggressively at the height of the crisis, with the policy rate raised to a peak of 22%. Exchange rate management has also become more flexible and as a result, distortive administrative measures, notably import controls, have been scaled back.

As a result, the short-term results have been striking. The current account deficit narrowed sharply before shifting into modest surplus in 2024 and 2025, the first such outcome in several years. In turn, foreign exchange reserves have recovered from their crisis lows, reducing immediate external financing risks, though at around three months of import cover they still remain modest. Headline inflation has also fallen back into single digits as tighter policy and a more stable currency have filtered through the economy.

The cost has been subdued growth, however. Real GDP expanded by just 2.4% in 2024 and is estimated to have grown by about 3.5% in 2025. With population growth running at close to 2% per annum, gains in per-capita income have been limited, offering scant improvement in living standards.

That weak backdrop complicates the government’s reform agenda somewhat. Opposition to IMF-backed policies, widely characterised by critics as anti-growth, has been building. Planned increases in electricity tariffs, designed to tackle structural imbalances in the energy sector, could add around 1% to inflation in the near term and risk further eroding public support for the programme.

Furthermore, Pakistan’s long history with the IMF also offers little reassurance. This is now its 24th programme since 1958, more than any other country. The pattern has often been one of compliance during acute crises followed by policy slippage once pressures ease, only for similar imbalances to re-emerge a few years later. While previous arrangements have typically restored short-term stability, they have seldom delivered durable structural reform or a marked improvement in long-term growth prospects.

As such, some political voices have already called for an early exit from the current programme. Such demands are unlikely to gain significant traction for now at least as Pakistan’s external financing needs remain considerable and, with the next general election not due until 2029, the government retains a degree of political space to maintain policy discipline.

Subsequently, the programme will run until the end of 2027 and while IMF oversight remains in place, adherence to orthodox fiscal and monetary settings is likely. Once conditionality expires, however, the temptation to loosen policy or delay politically costly reforms could resurface as it has in the past, particularly if growth continues to disappoint as the election cycle draws nearer.

The recent stabilisation for now though is undeniably encouraging. But the underlying vulnerabilities have not disappeared. Over the medium term, GDP growth is expected to average around 4%, broadly in line with the past decade. For an economy with a low income base and significant catch-up potential, and with population expanding at roughly 2% a year, that pace would amount to a modest performance at best. Stability has been restored for now; whether it proves durable remains an open question.