ISLAMABAD: The State Bank of Pakistan (SBP) has forecasted real GDP growth of 2.5-3.5% for the fiscal year 2025, slightly below the government’s target of 3.6%, according to its Annual Report for 2023-2024, released on Thursday.
In the report, titled The State of Pakistan’s Economy, the SBP highlighted that Pakistan’s macroeconomic conditions showed significant improvement in FY24, with GDP growth reaching 2.5%, driven by stabilization policies, a successful engagement with the International Monetary Fund (IMF), reduced uncertainty, and favorable global economic conditions. The report attributed the improvement to an uptick in agricultural productivity, which led to better-than-expected economic performance.
“The real GDP registered a moderate agriculture-led recovery in FY24,” the SBP stated, citing record wheat and rice harvests and a rebound in cotton production as major contributors to the growth.
Inflation and Monetary Policy Adjustments
The SBP report also pointed out that inflation, which had peaked at 38% in May 2023, had significantly dropped to 12.6% by June 2024. This reduction in both headline and core inflation allowed the central bank to cut the policy rate by 150 basis points, bringing it down to 20.5% by the end of FY24.
Structural Challenges Persist
Despite the positive outlook, the SBP acknowledged that several structural challenges continue to threaten sustained macroeconomic stability. These include falling investment levels, low savings, an unfavorable business environment, inadequate research and development, and low productivity, all exacerbated by climate change risks.
The report specifically highlighted the inefficiencies in Pakistan’s energy sector, where the accumulation of circular debt remains a major concern. While the government has implemented price adjustments to address some of these issues, the SBP stressed the need for broader sectoral policy and regulatory reforms to tackle the inefficiencies in State-Owned Enterprises (SOEs), which continue to drain fiscal resources.
“These reforms are necessary to address the inefficiencies that persist within SOEs, which are already a burden on fiscal resources, particularly given Pakistan’s low tax-to-GDP ratio,” the report stated.
IMF Program and External Buffers
Looking ahead to FY25, the SBP expressed optimism that the approval of the $7-billion Extended Fund Facility (EFF) from the IMF, along with inflows from multilateral and bilateral creditors, would help strengthen the country’s external buffers. The SBP also expects Pakistan to benefit from a favorable global economic environment, with inflation decreasing in advanced economies and global economic growth remaining steady.
The report acknowledged potential risks from rising geopolitical tensions, but noted that global commodity prices have remained relatively low, which could help contain Pakistan’s current account deficit within the range of 0-1% of GDP in FY25.
Inflation Outlook for FY25
The SBP report also revised its inflation forecast for FY25, predicting that average inflation will fall below the earlier projected range of 11.5-13.5%, in line with the government’s Consumer Price Index (CPI) target of 12%. Continued fiscal consolidation efforts are also expected to further support this decline in inflation.
In conclusion, while the SBP remains optimistic about Pakistan’s economic trajectory in FY25, it underscored the need for addressing long-standing structural issues to ensure sustainable growth and macroeconomic stability.