EDITORIAL: Asian Development Bank has downgraded Pakistan’s growth rate to 2.5 percent for the current year, against the 3.5 percent budgeted for the year by the government with 3.2 percent forecast by the International Monetary Fund (IMF) five months ago in October (though a downgrade is expected once the documents pertaining to the staff level agreement that reached on 25 March this year are uploaded subsequent to Board approval).
It is perhaps noteworthy that the press release issued by the Fund mission dated 25 March did not refer to a possible downgrade in the growth rate though the mention of inclusive growth did feature prominently in the sentence that the authorities agreed to “further strengthen institutional capacity to fight corruption and significantly reduce trade barriers to support inclusive growth and a level playing field for business and investment”, – level playing field defined as easing out all subsidies to all productive sectors, inclusive of income tax on farmers, not supporting economic zones and giving the same incentives to foreign and local investors, which are likely to dampen growth further in the short run.
The World Bank projected a growth rate of 2.8 percent, below potential due to tight macroeconomic (monetary and fiscal policies) and elevated inflation (which again dates the forecast as inflation has plummeted to a low of 0.7 percent in March 2025) but, disturbingly, the World Bank added that “with slower wage and employment increases (barring of course the 20 to 25 percent raise budgeted for government employees – civilian and military – accounting for 78 percent of the total workforce) and high population growth rate at nearly 2 percent, the poverty headcount for fiscal year 2025 is estimated to remain unchanged at 42.3 percent, close to Covid 19 peak levels, implying an additional 1.8 million poor people.”
Additionally, the growth rate was downgraded by the State Bank of Pakistan in its half yearly July-December 2024 report, which stated that “the economic recovery achieved in FY2024, with GDP growth rate of 2.5 percent against a contraction of 0.2 percent in FY2023, has sustained positive growth of 0.92 percent in the first quarter of FY2025.
However, growth has slowed compared to the 2.3 percent recorded last year, reflecting moderation across key sectors, particularly in agriculture.“ In this context it is relevant to note that services sector (with the largest component of wholesale and retail trade) and agriculture were expected to lead the way towards growth while large-scale manufacturing sector as per the latest figures for July-January 2025 registered negative 1.78 percent growth as opposed to negative 0.65 percent in the comparable period of the year before in spite of nearly halving of the discount rate from 22 percent in April 2024 to 12 percent at present.
Moody’s report written before US President Trump’s decision to pause tariffs for 90 days, notes that Pakistan may see a worsening of the external position if the US tariffs are implemented on our exports to the US.
While the list of countries that may benefit from the pause has not yet been released yet it is a fair assumption that the old international trade order is undergoing a sea change compelling many a US trading partner to seek alternate markets and trade in currencies other than the USD – an emerging reality that may have accounted for Trump’s decision to stay the tariffs for 90 days while focusing on its main rival in the economic arena, China, that was not only levying reciprocal tariffs on trade with the US and stabilizing its own stock markets through institutional support but also those within the South East Asian region and also visibly engaging with former US trading partners and allies.
Pakistan, too, must now proactively seek alternate markets for its exports, an objective that has been rhetorically stated for the past decade or so with slogans like ’Empower Pakistan, ‘Buy Pakistani’ and ‘Make in Pakistan’ slogans yet the Commerce Ministry has largely focused on seeking monetary and fiscal incentives for the five major exporters, incentives that were never within its purview to grant, rather than in proactively seeking new markets.
It is, therefore, unlikely that growth would be higher than 2.5 percent this year mainly because of the IMF programme conditions especially as the government is going slow on structural reforms specifically tax reforms that would have widened the net rather than raising taxes on existing tax payers with no focus on containing its own current expenditure funded by borrowing domestically and externally. It is worrisome that with the growth rate stalled poverty would continue to rise.
One would hope that the government begins to focus on increasing its leverage with the Fund, which is possible through a massive curtailment of current expenditure, to the tune of 2 to 3 trillion rupees in next year’s budget, which in turn will allow authorities to resist the severity of some of the Fund supported monetary and fiscal policies.
Copyright Business Recorder, 2025
Comments