ISLAMABAD: The Asian Development Bank (ADB) has revised Pakistan’s GDP growth forecast for the fiscal year 2025 down to 2.5 per cent (3 per cent in December 2024), while saying that the country’s outlook depends largely on the success of ongoing economic reform.
The bank in its latest report, “Asian Development Outlook April 2025” stated that inflation in Pakistan is anticipated to plunge from 23.4 per cent in fiscal year 2024 to sixper cent in fiscal year 2025 but also warned that it is expected to rise in the coming months from its recent low.
Pakistan’s growth is projected to remain steady at 2.5 per cent in 2025 and 3 per cent in 2026, supported by the implementation of a reform programme that should strengthen private investment, it added.
ADB projects Pakistan’s GDP growth at 2.5%, inflation at 6%
The growth forecasts were finalised prior to the 2 April announcement of new tariffs by the US administration, so the baseline projections only reflect tariffs that were in place previously. However, ADO April 2025 does feature an analysis of how higher tariffs may affect growth in Asia and the Pacific, the bank added.
The bank warned that the economic outlook faces significant downside risks. An improved external position and a quicker than-anticipated drop in inflation could encourage the government to relax macroeconomic policies, possibly triggering a reemergence of balance-of-payment pressures and jeopardising Pakistan’s hard-earned macroeconomic stability.
Deviation from projected fiscal consolidation due to revenue underperformance or pressures from recurrent expenditures could boost government debt, thereby increasing borrowing costs, possibly crowding out private borrowing and undermining exchange rate stability. Policy lapses could also jeopardise disbursements from multilateral and bilateral partners, cutting financial inflows and intensifying pressure on the exchange rate. The ongoing recovery in business confidence might wane if political tensions were to escalate, curtailing private investment and consumption and weakening growth. Insufficient rain and the potential for drought could undermine food security, also threatening growth. Externally, the main risks to the outlook stem from a rise in global food and commodity prices and changes in global trade policies that might adversely impact global interest rates and exchange rate stability, it added.
Growth in the first quarter (Q1) of fiscal year 2025 registered 0.9 per cent, down from 2.3 per cent a year earlier, mainly because of a significant slowdown in agriculture. Production of key crops fell by 11.2 per cent in Q1 fiscal year 2025, compared to a 30 per cent rise a year earlier, as a reduction in area under cultivation, changing weather patterns, and high input costs cut the output of cotton, rice, and sugarcane. Industry also contracted, by oneper cent, though less than by 4.4 per cent the previous year.
The bank stated that the recent decline in inflation was in line with expectations and mainly driven by a continued moderation in food inflation, stable global oil and commodity prices, moderate domestic demand conditions, and a favorable base effect. Core inflation, while continuing to ease, is still at an elevated level.
Inflation is expected to rise in the coming months from its recent low, in part from pending reform in the gas sector involving a planned increase in gas prices for captive power plants that will likely raise input costs for these private facilities. Overall, the inflation outlook is susceptible to multiple risks emanating from volatile global commodity prices, unfavourable changes in global trade policies, the timing and magnitude of administered energy tariff adjustments, as well as any additional measures to meet the government’s revenue targets. The central bank is expected to adopt a cautious approach to easing monetary policy.
The report noted that economic reform has progressed considerably under an International Monetary Fund (IMF) Extended Fund Facility arrangement that began in October 2024, enhancing macroeconomic stability. Agricultural income became taxable across Pakistan after all provinces successfully passed the Agriculture Tax Bill, 2025. The reform programme implementation has been strong in several other areas, including the planned fiscal consolidation to durably reduce public debt, maintenance of sufficiently tight monetary policy to maintain low inflation, improvement of the energy sector viability, and implementation of Pakistan’s structural reform agenda to accelerate growth.
However, Pakistan still faces substantial vulnerabilities and structural challenges. Consistent policy implementation is thus crucial for building resilience and enabling sustainable and inclusive growth. Key priority areas include consolidating public finances by broadening the tax base while increasing social spending and protection, strengthening external buffers, mitigating fiscal risks from state-owned enterprises, and improving the business environment to promote growth led by the private sector, it added.
The Bank further stated that sustaining fiscal consolidation and mitigating fiscal risks from state-owned enterprises, particularly in energy, remain crucial to the economic outlook. Fiscal discipline and lower interest rates are expected to cut full-year interest payments sharply, generating the necessary fiscal space for much-needed social and development spending. A stronger effort in policy and administrative reform is essential to address slippage in retail and overall tax collection, and in implementing provincial agriculture taxes.
The current account deficit is expected to remain contained in fiscal year 2025. Imports are expected to rise during the rest of fiscal year 2025 as economic activity strengthens, backed by monetary easing and stable macroeconomic conditions, potentially erasing the accumulated surplus in the current account balance. Remittances rose by almost one-third to $20.8 billion during the first seven months of fiscal year 2025 and are expected to remain robust in the remainder of the year, supported by greater exchange rate stability, improvements in digital payment infrastructure, and an increase in migrant workers. The anticipated increase in workers’ remittances and the realization of projected financial inflows are likely to raise official reserves to $13.0 billion (2.9 months of import cover) by June 2025.
Fiscal performance remained strong in the first half of fiscal year 2025. Despite a shortfall in tax collection, the government achieved a primary surplus of 2.9 per cent of GDP and an overall deficit of 1.2 per cent.
Total revenue increased to 7.9 per cent of GDP during this period from 6.5 per cent in the same period a year earlier, primarily because of a profit transfer of Rs2.5 trillion (2.2 per cent of GDP) from the central bank. Tax collection increased by 25.5 per cent compared to the first half of fiscal year 2024 but still fell short of the target by Rs384 billion (0.3 per cent of GDP). Expenditure increased to 9.1 per cent of GDP in the first half of fiscal year 2025.
The report noted that while women comprise almost half of Pakistan’s total working age population, their labor force participation remained low at 23 per cent in fiscal year 2021. This is below the average of 27 per cent in South Asia and 35 per cent in lower-middle-income countries globally. Pakistan’s low female labor force participation poses a significant loss of productivity that limits potential economic growth while perpetuating gender inequality. Greater labour force participation could significantly boost productivity and output while advancing female empowerment, as female earners have greater influence in household decision-making.
Copyright Business Recorder, 2025
Comments