Pakistan’s economy continues to face the effects of recent flooding and the expansionary and counterproductive policy response, with precariously low foreign reserves and high inflation. The Government has taken ad hoc administrative measures to preserve scarce foreign exchange reserves, but these measures have weakened consumer and investor confidence. Private sector activity has been heavily impacted by import and dollar outflow controls, higher borrowing and fuel costs, and continued policy uncertainty leading to sharply slowing growth. Tighter global liquidity conditions and rising macro risks have curtailed Pakistan’s access to international capital markets. Recent monetary tightening, fiscal consolidation, withdrawal of energy subsidies, and removal of the informal exchange rate cap have helped to limit imbalances, but foreign exchange reserves remain at very low levels, inflation is high, and activity and confidence are depressed. To avoid a macro-economic crisis and revive consumer and investor confidence, the Government must remain on track with stabilization and structural reforms under-pinning the IMF’s Extended Fund Facility (EFF), and secure critical external financing from bilateral partners. To maintain stability and set the foundations for medium-term recovery, the Government has to: i) sustain IMF program reforms and continue to adhere to overall sound macroeconomic management, including maintaining a flexible exchange rate and independent monetary policy targeting inflation; ii) progressively remove all import and dollar outflow restrictions, including curbs on profit and dividend outflows, to restore investor confidence;1 iii) contain the primary deficit within sustainability parameters through measures to increase revenues and rationalize expenditure; and iv) implement trade and private sector reforms to support improvements in investment, competitiveness, and productivity. Strong political ownership will be required to ensure reforms are credible and sustained over time.