Pakistan's economic stability is hanging by a thread as it approaches a crucial International Monetary Fund (IMF) board meeting on May 9, 2025. The meeting will assess Pakistan's financing facilities, with India expected to strongly oppose further financial assistance. India's opposition stems from concerns that Pakistan is diverting funds towards terror financing, particularly in light of the recent Pahalgam terror attack on April 22.

Pakistan is currently under a 37-month Extended Fund Facility (EFF) program with the IMF, which includes six reviews over the bailout period. The release of the next tranche, approximately $1 billion, depends on a successful performance review. In July 2024, Pakistan and the IMF agreed to a $7 billion package under the extended fund facility. This program requires Pakistan to implement effective policies and reforms to strengthen macroeconomic stability, address core structural challenges, and create conditions for sustainable and inclusive growth.

However, Pakistan's economy remains fragile, burdened by high foreign debt, low foreign exchange reserves, a persistent balance of payments crisis, and high inflation. As of 2024, Pakistan's external debt exceeded $130 billion, a significant portion of which is owed to China. Its foreign exchange reserves are only around $15 billion, enough to cover approximately three months of imports. Experts have repeatedly pointed out major structural problems and risks, including high fiscal and current account deficits, political instability, low agricultural and industrial productivity, protectionist trade policies, heavy government interference in business, an inefficient public sector, an unsustainable energy sector, weak exports, and a small taxpayer base.

India's opposition to Pakistan's IMF loans is rooted in the belief that Pakistan is supporting terrorism. India has urged IMF board members to consider all facts before providing further bailouts to Pakistan. Tensions between the two countries have escalated, raising concerns about a potential prolonged military conflict.

A sustained military engagement would be economically damaging for Pakistan, especially compared to India. Moody's has warned that escalating tensions with India would negatively impact Pakistan's economic growth and hinder its fiscal consolidation efforts. The World Bank has also reported that over 10 million people in Pakistan could face extreme food insecurity and starvation this year due to poor climatic conditions affecting major crops.

Furthermore, any disruptions to trade between India and Pakistan could exacerbate Pakistan's economic challenges. Although direct bilateral trade is limited, significant trade occurs through third countries. A halt in trade could lead to shortages of essential goods, including pharmaceutical products.

Despite these challenges, Pakistan's economy has shown some signs of recovery following the IMF bailout package in September 2024. The IMF expects Pakistan's economic growth to increase to 3.1% in the financial year 2025-26. The World Bank also projects economic activity to pick up in FY26 (3.2%) and FY27 (3.5%). As of April 1, 2025, Pakistan's inflation rate was recorded at 0.7%, the lowest in 30 years. On March 1, 2025, the YoY headline inflation slowed to 1.5%, the lowest in 10 years.

However, Pakistan's path to economic recovery requires more than just financial assistance. The country must address its structural issues, expand its tax base, promote industrial renewal, and ensure political stability. Pakistan's over-reliance on imported energy has also strained its foreign exchange reserves and fueled inflation.

The upcoming IMF board meeting is critical for Pakistan's economic future. The country's ability to secure further funding and implement necessary reforms will determine whether it can overcome its economic challenges and achieve sustainable growth.