Pakistan’s economy, long marred by recurring balance-of-payment crises, persistent structural bottlenecks, and cyclical political disruptions, has entered a critical phase of recovery in 2025. At the heart of this turn lies a $7 billion International Monetary Fund (IMF) Extended Fund Facility (EFF), a high-stakes stabilization program launched to rescue the economy from default and restore macroeconomic balance. The program, approved in mid-2024, is Pakistan’s 23rd agreement with the IMF since 1958 and perhaps its most stringent yet. But unlike the short-lived optimism of past programs, this one has begun to deliver visible, quantifiable changes. Inflation has dramatically declined. Interest rates are easing. Fiscal discipline is showing signs of maturity. Growth has returned, though slowly. Yet, underneath these improvements lie serious structural headwinds that continue to test the country’s resilience and political will.

At the time of entering the EFF arrangement, Pakistan was on the verge of a sovereign default. Foreign exchange reserves had fallen below $3 billion, barely enough to cover three weeks of imports. The Pakistani rupee had lost more than 50% of its value over 18 months. Inflation had surged to a 50-year high of 38% in May 2023, driven by global energy prices, domestic supply shocks, and excessive monetary expansion. The fiscal deficit had widened to nearly 7.9% of GDP, while public debt stood at over PKR 76 trillion, or roughly 75% of GDP. The IMF agreement came with strict performance criteria to address these imbalances, including tax reforms, subsidy rationalisation, market-based exchange rate policies, and tighter monetary controls.

One of the most impressive outcomes of the IMF-backed stabilisation has been the collapse of inflation. From its peak in mid-2023, inflation has steadily dropped to 0.3% in April 2025—its lowest level in over 35 years. The decline is attributed to several factors, including a stable exchange rate following central bank intervention, improved food supply management, global disinflationary trends, and, most notably, a sharp reduction in domestic demand due to tight monetary policy. The State Bank of Pakistan (SBP), which had held interest rates at a record high of 22% for nearly a year, has now begun to loosen its stance. In a significant policy move, the SBP reduced the policy rate by 500 basis points between January and May 2025, bringing it down to 17%. Real interest rates, once profoundly negative, have now normalised, and market........

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