Pakistan tells IMF it is ready to raise interest rates

• Gulf war risks drive inflation and policy concerns.
• Pakistan pledges exchange flexibility as shock absorber.
• Action plan promised to curb remittance subsidy costs.

ISLAMABAD: Pakistan has given the International Monetary Fund (IMF) written assurances that it will maintain a tight monetary stance, including raising interest rates if needed, to counter mounting inflationary pressures arising from the Gulf war, The News reported.

Islamabad has also assured the lender that it will draw up an action plan to address the rising cost of channelling remittances through banks and exchange companies, while keeping spending within the allocated budget and avoiding overruns.

Amid escalating regional tensions, the government and the State Bank of Pakistan told the IMF they would keep monetary policy tight in the coming months. "We stand ready to hike interest rates if the need arises," the government said.

It was communicated to the Washington-based lender that flood-related risks had dissipated, which paved the way for lowering policy rates by 50 basis points in December 2025, but the SBP’s Monetary Policy Committee (MPC) kept the policy rate unchanged in its March 9, 2026, decision in the aftermath of the eruption of regional conflict. “The Pakistani side is reviewing volatility in global food and fuel prices and the pass-through to domestic prices and core inflation and stands ready to adjust policy as the need arises,” said official sources.

The government and the SBP will continue efforts to improve the policy framework and strengthen communication, including by providing greater detail on the MPC’s monetary policy considerations in the monetary policy report. 

"By end-June 2026, Pakistan will further assess how MPC statements and minutes could more clearly (i) convey the committee’s assessment of the current and desired policy stance, and (ii) characterise the monetary policy reaction function in light of the committee’s risk assessment," said an official. 

On exchange rate flexibility, Islamabad clearly communicated to the IMF that it will continue with the policy of exchange rate flexibility as the key shock absorber, including against spillovers from the Middle East conflict, and will continue to ensure that balance of payment (BOP) pressures do not impact the Central Bank’s ability to accommodate import financing and other outward payments on a timely basis.

To this end, a well-functioning interbank market is also critical to rebuilding foreign exchange reserves. "Pakistan will improve communication and transparency by publishing semi-annual reserve targets, and FX interventions will continue to be instrumental in helping market participants gauge overall FX demand," said the official. 

As a first step, it has been decided to remove onerous regulations that unduly burden banks and their clients, including certain documentary requirements. This sets us on a broader path from ex-ante verification to risk-based ex-post supervision of FX transactions. 

"The SBP is also developing a roadmap for the gradual removal of FX restrictions, spelling out the appropriate sequencing, including the macroeconomic, financial stability, and other structural preconditions needed for each liberalisation step under a new structural benchmark for end-March 2027," the official added. 

In order to lure remittances, Islamabad also conveyed to the IMF that the government will assess the costly payment system impediments related to bringing remittances through banking and exchange companies from abroad. 

The work towards a comprehensive assessment of such impediments and costs, and an action plan to address them, has advanced to end-May 2026. After developing the action plan, the Ministry of Finance and the SBP will agree on a mechanism to ensure that claims arising from the remittance subsidy schemes during any given fiscal year do not exceed the budgetary allocation, as had happened in the recent past.