SBP predicts 2.5-3.5% growth for FY25, warns of structural challenges

The improvement in Pakistan’s macroeconomic conditions in FY24 is expected to maintain momentum in FY25 as well, the State Bank of Pakistan (SBP) said on Thursday, predicting real GDP growth of 2.5 – 3.5% for fiscal 2025, lower than the government targeted 3.6%.

The central bank said in its annual report that Pakistan’s macroeconomic conditions improved in FY24, clocking in at 2.5% supported by stabilization policies, successful engagement with the International Monetary Fund (IMF), reduced uncertainty, and favourable global economic environment.

“The increase in domestic agricultural productivity also contributed to relatively better macroeconomic outcomes during the year,” it said in the Annual Report 2023-2024 (The State of Pakistan’s Economy).

“The real GDP registered a moderate agriculture-led recovery in FY24,” it said, citing a record harvest of wheat and rice, and a rebound in the production of cotton.

The report highlighted that inflation dropped from its peak of 38% in May 2023 to 12.6% in June 2024. “A consistent decline in headline and core inflation in the latter half of FY24, created room for the SBP to reduce the policy rate by 150 basis points to 20.5% in June 2024” it said.

Political uncertainty impacting Pakistan economy, says SBP

Structural issues persist

The SBP highlights that a host of structural impediments continue to pose challenges to sustaining macroeconomic stability.

“Falling investment amid low savings, unfavourable business environment, lack of research & development, and low productivity, alongside climate change risks continue to constrain the economy’s growth potential,” it said.

The report, in particular, sheds light on the longstanding inefficiencies in the country’s energy sector, which have resulted in the accumulation of circular debt.

“While the government has started to address energy sector challenges through substantial price adjustments, there is a need to broaden the scope of these efforts by introducing sectoral policy and regulatory reforms,” read the report.

“These reforms are also necessary to address the issue of inefficiencies in the State-owned Enterprises (SOEs) that continue to be a drain on fiscal resources, which are already constrained by low tax-to-GDP ratio” it added.

IMF programme to strengthen external buffers in FY25

SBP said the approval of the $7-billion Extended Fund Facility (EFF) programme with the IMF and the realization of external inflows from multilateral and bilateral creditors are expected to further strengthen the external buffers in FY25.

“At the same time, the country is expected to benefit from a conducive global economic environment, as inflation is falling in advanced economies, while global economic growth is expected to remain steady.

“Moreover, while there are upside risks to global commodity prices due to rising geo-political tensions, commodity prices continue to be low. These factors would keep the current account deficit within the range of 0 – 1% of GDP in FY25.”

The report noted the recent outturns suggest the average inflation to fall below the earlier projected range of 11.5 – 13.5% in FY25, which is in line with the government’s CPI target of 12%.

“In addition, the continued fiscal consolidation is also expected to support further decline in inflation,” it said.