IMF-backed reform agenda to accelerate Pakistan’s economic growth in FY25: ADB

The reform agenda agreed under the International Monetary Fund (IMF) 37-month Extended Fund Facility (EFF) is likely to accelerate growth in Pakistan, said the Asian Development Bank (ADB) on Wednesday.

As per the Asian Development Outlook report for September, growth in Pakistan rebounded to 2.4% and inflation proved lower than expected in FY2024.

“Economic activity was boosted by fiscal discipline, a market-determined exchange rate, energy sector efficiency, climate resilience, and an improved business environment,” it added.

The report noted that higher income from agriculture and increased remittances bolstered private consumption, while improved crop production curbed a rise in food prices in Pakistan.

The ADB was of the view that a comprehensive economic reform programme supported by the IMF is projected to increase growth, expected to grow by a moderate 2.8%, and reduce inflation in FY2025.

“The reform programme is expected to support economic activity by providing a more stable macroeconomic environment,” ADB said.

“Private investment should rebound on more favorable macroeconomic conditions, including easier access to foreign exchange. This will also benefit manufacturing and services,” the ADB’s outlook noted.

The Pakistani authorities and the IMF team reached a staff-level agreement on a 37-month EFF in the amount equivalent to SDR 5,320 million (or about USD 7 billion) on July 12.

The IMF Executive Board is all set to consider “Pakistan - 2024 Article IV Consultation and Request for an Extended Arrangement under the Extended Fund Facility” on Wednesday (today).

The ADB report highlighted concerns that higher personal income tax rates in the FY2025 budget and the government’s efforts to limit spending will constrain private and public consumption.

“In addition, growth in agriculture is projected to slow in FY2025 as higher administered prices for gas and lower subsidies raise the cost of fertiliser,” it said.

The report said that public debt is forecast to decline as a percent of GDP in 2024, but risks remain as interest payments rose to close to 60% of fiscal revenues.

On inflation, ADB outlook stated that Pakistan’s inflation slowed to 23.4% in FY2024 mainly on lower food inflation resulting from higher agriculture production.

“Inflation in 2025 is expected to moderate to 15.0%, supported by a tighter monetary policy and more stable global commodity prices,” the global lender projected.

Moreover, Pakistan’s current account deficit is expected to remain moderate but rise to 1% of GDP in FY2025.

“The trade deficit is expected to widen as imports grow more rapidly than exports, driven by ongoing recovery in domestic economic activity and the improved availability of imported inputs,” said the report.

The outlook report noted that a rise in the trade deficit will be partly offset by higher worker remittance inflows.

“In addition, the new IMF program has improved prospects for multilateral and bilateral financing. Investment is also expected to revive as investor confidence is restored with the implementation of the program. Thus, despite a larger current account deficit, international reserves are expected to increase from 1.8 months of import cover in FY2024 to about 2.1 months in FY2025,” it said.

However, the ADB warned that with Pakistan’s sizeable external financing requirements, its economic outlook is vulnerable to any shortfall in external inflows, making timely disbursements from multilateral and bilateral partners crucial.

“Lapses in policy implementation could jeopardize these inflows, increasing pressure on the exchange rate and worsening sovereign debt vulnerabilities,” it said.

The report noted that externally, the main risks to Pakistan’s macroeconomic stability stem from the economic impacts of adverse geopolitical developments, including higher food and oil prices and tighter global financial conditions.

“On the upside, improved global financing conditions and lower international food and fuel prices would reduce fiscal and external vulnerability, lower inflation, and allow for a faster buildup of external buffers,” it said.