Prospects for 2025

The year 2025 will come after a year which has witnessed both positive and negative trends. The GDP growth rate has shown no improvement and has remained low. Consequently, there has been only a marginal expansion in employment. There is the likelihood that the unemployment rate has approached 11 percent, one of the highest ever.

The overall level of investment has also remained low in 2024, especially in the first half of the year, from January to June. Both public and private investment have faltered in the face of record high interest rates. Development spending has been ‘squeezed out’ by the quantum jump in debt servicing.

The only redeeming feature of 2024 is the spectacular fall in the rate of inflation. The Consumer Price Index, on a year-to-year basis, rose by 28.4 percent in January 2024. This fell to 9.6 percent by August and came down to the exceptionally low rate of 4.9 percent in November.

The other moderately positive development has been the improvement in the balance of payments position. The current account in the first nine months of 2024 had a cumulative deficit of only USD 429 million. During this period, the deficit in the financial account was USD 1193 million.

However, foreign exchange reserves have continued in 2024 to improve on the back of over $2 billion of IMF and other inflows. They stood at $6,159 million at end-December 2023 and have since risen to over $12 billion.

The budgetary position of the Federal and Provincial Governments has also shown some improvement in 2024. During the first nine months from January to September, it was 3.0 percent of the GDP. This is significantly lower than the budget deficit of 4.3 percent of the GDP in the first three quarters of 2023.

Given the above mixed picture in 2024, we now look at the various projections for 2024-25 and 2025-26. The average of these two projections is likely to be close to the projection for the calendar year, 2025.

The first set of projections are by the IMF staff after finalization of the three-year Extended Fund Facility with the IMF. These projections are generally optimistic and paint the picture of Pakistan’s economy moving to greater economic stability and faster growth.

The IMF projection of the GDP growth rate is of 3.2 percent in 2024-25, rising significantly to 4 percent in 2025-26. This implies a growth rate of close to 3.5 percent in the calendar year of 2025.

However, recent trends are worrying in nature. The agricultural crop sector has seen in the Kharif season a big drop in cotton output of 25 percent to 30 percent. The outlook for the wheat crop is also not very promising.

The large-scale manufacturing sector has consistently been showing negative growth. From July to October 2024, the growth rate has been a negative 0.6 percent. Major industries which are showing big declines are cement, iron and steel, and chemicals. The textile industry has shown a modest growth rate of only 2.6 percent.

Therefore, the prospects for 2025 must be judged more cautiously. It is unlikely that the IMF projection of a GDP growth rate of 3.5 percent in 2024-25 will be achieved. The probability is higher that it will remain between 1 percent and 1.5 percent.

However, the likelihood of a rise in the level of investment in 2025 is relatively high. The policy rate has been brought down sharply from 22 percent to 13 percent. Further, government borrowing from the commercial banks has declined sharply after the receipt of SBP profits of Rs 2500 billion. Consequently, there has been a quantum jump since early October in lending to the private sector and the DFIs.

The fundamental question relates to the outlook for inflation. The high base effect has contributed to the large drop in the rate of inflation. From May 2025 onwards, there will be a low base effect. Inflation was down to 11.8 percent in May 2024 and to single digit thereafter. Consequently, it will not be surprising if the inflation rate picks upappreciably after April 2025.

There are other factors which could contribute to higher inflation. The big shortfall in FBR revenues may necessitate big increases in indirect tax rates. Electricity and gas tariffs may also have to be raised.

The IMF has projected a rate of inflation of only 7.8 percent in 2025-26. This looks highly unlikely given the beginnings of a low base effect.

The IMF has also estimated the size of the current account deficit of USD 0.9 billion annually in 2024-25 and 2025-26. This outcome in 2024-25 looks likely, with a surplus currently. However, if as per the IMF projection, the GDP growth rate rises significantly in 2025-26, then this will inevitably push up import demand and increase the likelihood of significant current account deficits.

There is need also to highlight that the IMF projection is also of a sharp containment of the budget deficit from 6 percent of the GDP in 2024-25 to only 4.7 percent of the GDP in 2025-26. The former target is already beginning to look unattainable in the presence of a large and growing shortfall in FBR revenues.

There is need to emphasize that the above projections for 2025 are based on one positive outcome early in 2025. This is the successful review of the IMF program by the IMF Staff Mission in March 2025. Already, there are clear indications that the targeted external financing inflows will not be realized.

Further, there is the likelihood that a number of structural conditionalities, performance criteria and indicative targets for March 2025 will not be met. This could include the big shortfall in FBR and provincial tax revenues and in the size of the provincial cash surplus. There may also be a lack of implementation of the higher agricultural income tax and failure of the Tajir Dost Scheme.

The risk is that in the event of a delay in completion of the review or suspension of the programme, there will be a further curbing of external financing to Pakistan, leading after March 2025 to a process of decline in foreign exchange reserves. This will fundamentally change the economic outlook for 2025.

Copyright Business Recorder, 2024