State of the economy

The first three quarters of 2024-25 have come to an end. This is the appropriate time for reviewing the state of the economy, as the federal and provincial budgets will be presented towards the end of the next quarter.

Further, it is essential to get an assessment as to how Pakistan’s economy has performed in relationship to the quantitative performance criteria and indicative targets of March 2025 in the IMF Programme.

The state of the economy presented below will first look at the indicators of the growth performance and the level of investment in the economy. This is followed by examination of the process of stabilization in the economy.

Factors contributing to the quantum decline in the rate of inflation are identified and an assessment made of the likely rate of inflation in coming months.

Trends in the external balance of payments and in the public finances are subsequently studied. Information on the first three quarters of the balance of payments has been made available by the SBP. However, the outcome of fiscal operations up to March 2025 has not yet been released by the Federal Ministry of Finance.

We focus first on indicators of growth. The major crops sub-sector in agriculture has performed poorly. There is a decline in both wheat and cotton outputs. In the latter case, there has probably been a fall in production of over 28%.

The performance of the large-scale manufacturing sector has also been disappointing. The Quantum Index of Manufacturing (QIM) has declined by 1.9 percent in the first eight months of 2024-25. Major industries which have shown big falls are sugar, cement and iron and steel of 12.6 percent, 6.4 percent and 11.7 percent, respectively.

The GDP growth rate projection in the IMF Programme for 2024-25 is a modest 3.2 percent, representing a minor recovery from the growth rate in 2023-24 of 2.4 percent. More recently, the World Bank has projected the GDP growth rate in 2024-25 at 2.3 percent.

Overall, the bottom line now is that the GDP growth rate will remain very low also in 2024-25 at close to 2 percent. In fact, over the five-year period, 2019-20 to 2024-25, the average GDP growth rate is likely to be only 3 percent. This is one of the periods of lowest growth in Pakistan’s history.

The level of investment, private plus public, as a percentage of the GDP reached the lowest level of 11.4 percent in 2023-24, compared to the last ten years. This was in comparison to the peak of 15.1 percent of the GDP attained in 2017-18. Both public and private investment has fallen sharply. This is one factor which is contributing to lower GDP growth.

The outcome for private investment is likely to be significantly better in 2024-25. Not only has the policy rate of the SBP been brought down sharply from 22 percent to 12 percent, but there is less ‘crowding out’ of bank credit because of less recourse to borrowing by the government. The latest figure of the SBP on credit as of April 4th 2025 to the private sector is Rs 550 billion, as compared to Rs 151 billion in the corresponding period of 2023-24.

However, public investment is likely to remain retarded. The Federal PSDP spending has been severely constrained to keep within the IMF target for the primary deficit in 2024-25. Consequently, as compared to the annual target of Rs 1400 billion for the Federal development outlay, the actually spending has been very low at Rs 133 billion only in the first half of 2024-25.

Overall, there is unlikely to be a major jump in the level of investment in the economy in the economy. A positive outcome will be if it increases by 0.5 percent of the GDP, in relation to the extremely low level of fixed investment in 2023-24.

Perhaps the greatest pleasant surprise is the precipitate drop in the rate of inflation. It was 11.1 percent in July 2024, 6.9% in September 2024, 4.1 percent in December 2024 and only 0.7 percent in March 2024. The average was as high as 27.1 percent last year. During the first nine months of 2024-25 it has been only 5.3 percent.

There is need, however, to highlight that the ‘core’ rate of inflation remains relatively high at 8.2 percent in March 2025. The average for the period, July 2024 to March 2025, is 9 percent.

Clearly, the overall rate of inflation has been lower because of the extremely limited rise or even fall in food and fuel prices. In fact, the food price index has actually fallen by over 5 percent in March 2025. The biggest fall is in wheat and wheat flour prices of almost 35 percent. Is this because farmers have had to dump their output in the absence of the public procurement system?

Other food prices, which have seen big falls, are of tomatoes and onions of as high as 54 percent and 71 percent, respectively. Prices of livestock products have shown some increases. Although in some cases for the wrong reasons, the big fall in food prices will have provided significant relief to the majority of the population.

Prices on the fuel front also show some declines. A very welcome development is the big fall in electricity charges of over 21 percent and no change in gas charges. Further, the price of motor fuel is down by 7 percent.

Overall, there is no doubt that the stabilisation of prices is a welcome development. However, the question is whether this will be sustained.

We are likely to see the beginnings of ‘low-base’ effects from April 2025 onwards. This will take the rate of inflation to a higher single-digit rate. The World Bank expects it to average 6 percent in 2024-25.

The next article will focus on the balance of payments and the state of public finances. Performance up to March 2025 will also be reviewed in relation to the IMF quantitative performance criteria and indicative targets.

Copyright Business Recorder, 2025