ME conflict: IMF warns of financial stability risks

Business Recorder · 23/10/2026، 12:47:19 AM

ISLAMABAD: The International Monetary Fund (IMF) has warned that Pakistan faces renewed inflationary and financial stability risks from the prolonged Middle East conflict, with rising food and energy prices, higher borrowing costs and mounting external financing pressures threatening macroeconomic stability and potentially forcing further monetary tightening. In its latest report “Regional Economic Outlook, Steering Through Uncertainty: Strengthening Resilience in Challenging Times”, the IMF stated that concerns about rising government debt could also lead to higher government borrowing costs than in the baseline, heightening fiscal sustainability concerns in countries with large gross financing needs, like Algeria, Egypt and Pakistan. The IMF has cautioned that Pakistan may need to tighten monetary policy further if inflationary pressures intensify, particularly as real policy rates fall below estimated neutral levels. READ ALSO: IMF sees Pakistan’s inflation rising to 9.9% in 2027 as growth slows “If inflationary risks materialise, monetary policy should be the main line of defence. Although baseline forecasts generally point to moderating inflation in the Middle East and Central Asia from 2027 onward, authorities should remain prepared for renewed price pressures if the Middle East conflict persists longer than assumed and the adverse scenario materialises. Countries should stand ready to tighten monetary policy, particularly where inflation is already above target and the policy stance appears accommodative, with ex-ante policy rates below estimated neutral levels, a combination most evident in the Kyrgyz Republic and Pakistan. Where fiscal space is limited, authorities should avoid using fiscal stimulus to offset the impact of tighter monetary policy”, the report noted. It further stated that authorities should stand ready to safeguard financial stability amid downside risks. Financial supervisors should continue to monitor bank liquidity and funding conditions