KARACHI:

The State Bank of Pakistan (SBP) has received the second tranche of funding under the International Monetary Fund's (IMF) Extended Fund Facility (EFF), amounting to SDR760 million - approximately $1.023 billion— following the successful completion of the program's first review by the IMF Executive Board on May 9, 2025.

The inflow was credited on May 13 and will be reflected in Pakistan's foreign exchange reserves for the week ending May 16, according to SBP.

The disbursement is part of a broader support package aimed at bolstering Pakistan's economic recovery and macroeconomic stability. The IMF board recently also approved a new Resilience and Sustainability Facility (RSF) for Pakistan worth $1.4 billion, with initial disbursements expected after its first review later this year.

"The IMF's second tranche of $1.023 billion will strengthen Pakistan's foreign exchange reserves, support currency stability, and boost investors' confidence," said the Head of Sales at Insight Securities, Ali Najib.

It improves the balance of payments and signals the IMF's trust in ongoing economic reforms, potentially attracting further external support by opening other bilateral and multilateral lenders' doors.

The inflow eases pressure on the rupee and reduces default risk, enhancing macroeconomic stability.

However, sustained benefits require continued structural reforms and fiscal discipline to ensure long-term economic resilience and reduce dependence on external financing.

To recall, Pakistan authorities reached Staff Level Agreement (SLA) with International Monetary Fund (IMF) on first review of Extended Fund Facility (EFF) on Mar 25, 2025. Today, in its board meeting, the IMF board has approved the first review and a new facility under the Resilience and Sustainability Facility (RSF) of US$1.4 billion, said Director Research of Topline Securities, Shankar Talreja.

This will unlock inflows of $1 billion after this approval under the EFF facility, bringing total inflows under EFF to $2.1 billion, he said. While inflows from RSF facility will be released after its first review, likely in September 2025, in our view.

It is important to note that Bangladesh received the RSF installment during the first review of its program, not at the time of approval.

Approval of first review of EFF was in line with our expectations considering the fact that Pakistan achieved the required quantitative indicative criteria of the program, he said. However, there were some fears, India may create some blockages in approval of this program due to ongoing border tensions.

"We view this as a positive development as this signals Pakistan's reform agenda is in progress and afloat," Talreja said. In our annual strategy released in Nov 2024, we mentioned, approval of first review of IMF in Mar 2025 would be a key trigger in re-rating of market multiple to historic average.

Currently, the PSX is trading at an estimated 2026 price-to-earnings (P/E) ratio of 4.7 times, which is 32% lower than the historical forward price-to-earnings ratio of 7 times.

Furthermore, recent tension between India and Pakistan wiped out 13% from the market in last 11 sessions between Apr 22 to May 08, 2025 before recovering 3.5% on May 09. We consider this as an opportunity for value investors to ride on Pakistan's improving macro indicators, he said.

For the first time in almost last 2 decades, Pakistan is set to post current account and primary account surplus, Talreja added. Furthermore, interest rates are down 1100bps from peak of 22% to 11% in last 1 year, this will further augment the market rally through induction of more funds in equities from fixed income.

Talreja said they maintain their PSX's base case index target of 127,000 for December 2025. However, with higher liquidity, index can cross 150,000 mark assuming successful IMF reviews and political and geo-political stability.

In its latest projections, the IMF now expects Pakistan's real GDP growth to reach 2.6% in FY25, down from the earlier forecast of 3.2% published in October 2024. Inflation is projected to average 5.1%, a significant downward revision from the previous estimate of 9.5%. The primary balance is expected to post a surplus of 2.1% of GDP, slightly up from the earlier estimate of 2%, while the current account deficit is now seen at just 0.1% of GDP, compared to the previously projected 0.9%. Additionally, foreign exchange reserves are forecast to reach $13.9 billion by June 2025, higher than the earlier estimate of $12.75 billion.

In comparison, our own projections anticipate real GDP growth in the range of 2.5% to 3.0% during FY25, with average inflation between 4.5% and 5.5%, said Talreja. We expect a primary surplus of 2% of GDP, a current account surplus in the range of 0.3% to 0.7%, and foreign exchange reserves to rise to approximately $14.3 billion by the end of June 2025.