Macroeconomic projections of IMF, WB

There have been two very recent sets of macroeconomic projections for Pakistan. The first is in the IMF Staff Report on the Extended Fund Facility for Pakistan. The second set of projections is in the October 2024, World Bank Development Update for Pakistan.

A comparison is made of the key macroeconomic projections by the two Multilateral Agencies in Table 1.

There are key projections relating respectively to the GDP growth rate, rate of inflation, current account deficit in the balance of payments and the budget deficit.

The expectation is that the IMF projections are likely to be more conservative. The objective of the Extended Fund Facility is oriented more towards stabilizing the economy and focusing more on reduction of the two deficits. However, as is shown below, this is not necessarily the case.

The first projection of the GDP growth rate is that both Agencies see some recovery in the growth process in the economy. The IMF projects a rise in the growth rate from 2.5% in 2023-24 to 3.2% in 2024-25 and to 4.0% in 2025-26. World Bank envisages less acceleration, with the growth rate rising marginally to 2.8% in 2024-25 and to 3.2% in 2025-26.

A key determinant of medium-run growth prospects is the level of investment in the economy. The year, 2023-24, witnessed perhaps the lowest level of investment as a percentage of the GDP. It was only 13.1% of the GDP, as compared to above 15% of the GDP in earlier years.

The IMF Staff Report is optimistic about the revival of investment in the economy due to the umbrella of reduced risk and uncertainty in the presence of the EFF. As such, the level of investment is projected to increase to 13.6% of the GDP in 2024-25 and to 15.1% of the GDP in 2025-26.

The World Bank is probably more concerned about the impact of high interest rates on private investment and pre-emption of bulk of the bank credit by the borrowing undertaken by the federal government. Also, there is the beginning of realization that the extremely high growth rate of 16.8% of the major crop sector in 2023-24 may imply a fall in the sector output in 2024-25.

A key projection relates to the likely rate of inflation in 2024-25 and 2025-26. Both agencies expect a very big drop in the rate of inflation. The IMF projects it at 9.5% in 2024-25 and further down to 7.8% in 2025-26. However, World Bank expects it to remain double-digit in 2024-25 at 11.1% and then come down to 9.0% in 2025-26.

A number of factors will play a significant role in determining the rate of inflation. The IMF is probably of the view that the rate of monetary expansion will be restricted by contraction in bank borrowing by the federal government and inflation will be restrained by the somewhat better availability of basic goods in 2024-25, due to the faster GDP growth.

However, the World Bank is likely to be more concerned about the risk of continued big increases in electricity and gas tariffs to limit the circular debt. Also, food prices could start rising once again with low growth in the agricultural sector in 2024-25.

As regards the two deficits, both agencies project that the current account deficit will remain below 1% of the GDP in 2024-25 and 2025-26, respectively. Clearly, this is based on the expectation that appropriate policies will be followed to keep the current account deficit at a low level, given the limited level of foreign exchange reserves in the country. For example, the IMF expects that the rupee will depreciate cumulatively by over 15% by June 2026, compared to the level in June 2024.

However, there are some emerging negative developments that could increase the trade deficit in 2024-25 and lead to a significantly larger current account deficit. There has been recently an over 10% increase in the price of crude oil after the escalation of the conflict in the Middle East.

The apparent failure of the current cotton crop will add significantly to cotton imports. Further, the re-entry of India in the rice export market will constrain Pakistan’s rice exports.

Overall, there is need now to recognize that the current account deficit could rise by over 1% of the GDP. This will increase the problems for Pakistan to meet fully the external financing requirements. Consequently, there could be pressure on the foreign exchange reserves and on the value of the rupee in the second half of 2024-25.

Finally, we look at the size of the budget deficit projected by the two agencies. The biggest difference in projections is in this variable. IMF requires as part of the EFF a very sharp reduction in the size of the budget deficit. It expects the deficit to come down from 6.7% of the GDP in 2023-24 to 6.0% of the GDP in 2024-25 and to only 4.7% of the GDP in 2025-26. If achieved, this will indeed be a big breakthrough in stabilizing the economy.

The World Bank’s expectations are in complete contrast to the IMF’s. The budget deficit is expected to show a rising trend to 7.6% of the GDP in 2024-25 and then decline to 7.3% of the GDP in 2025-26. The difference between the two projections of the budget deficit is large at 1.6% of the GDP in 2024-25 and as much as 2.6% of the GDP in 2025-26.

The IMF expects a quantum jump in the tax-to-GDP ratio of Pakistan by almost 1.8% of the GDP in 2024-25. This has never happened before and will necessitate a growth rate in tax revenues of almost 40%, when the nominal GDP is expected to increase by only about 13%. The federal budget of 2024-25 apparently does not contain enough taxation proposals to yield this big jump in revenues. This probably explains the World Bank’s projection of the rise in the budget deficit in 2024-25.

Overall, the macroeconomic projections for 2024-25 and 2025-26 by the two Agencies appear to have significant differences, especially in the rate of inflation and the size of the budget deficit. This provides an opportunity for the federal ministry of finance to talk simultaneously with both the IMF and the World Bank for agreement on a common set of macroeconomic projections.

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**Table** 
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Macroeconomic Projections for Pakistan
by the IMF and World Bank, 2024-25 and 2025-26
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                                 2023-24     2024-25        2025-26
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Real GDP Growth (%)
IMF                                  2.5         3.2            4.0
World Bank                           2.5         2.8            3.2
Rate of Inflation (%)
IMF                                 23.4         9.5            7.8
World Bank                          23.4        11.1            9.0
Current Account Deficit (% of GDP)
IMF                                 -0.2        -0.9           -0.9
World Bank                          -0.2        -0.6           -0.7
Budget Deficit (% of GDP)
IMF                                 -6.7        -6.0           -4.7
World Bank                          -6.8        -7.6           -7.3
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