Pakistan’s GDP growth is projected to hit 3.2% in the ongoing fiscal year FY2024-25, said BMI, a Fitch Solutions company, in its research titled ‘Pakistan Country Risk Report’. The forecast is slightly below the government’s targeted level of 3.6% growth this ongoing year.

“We remain more optimistic than most analysts about Pakistan, and we hold an above-consensus view that GDP will expand by 3.2% in FY2024/25 (July 2024 to June 2025),” read the report published on July 15 after the staff-level agreement with the International Monetary Fund (IMF).

It added that while growth was a bit weaker than “we had expected at the start of the 2024 calendar year, recent figures have validated our core view that the economy would continue to recover following deadly floods in 2023”.

The report noted that preliminary figures from the government suggest that the economy expanded by 2.4% in FY2023/24, much faster than the 1.8% consensus forecast collected by Focus Economics.

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BMI highlighted three key reasons for its optimistic view about growth FY25 including growth in agriculture, lower inflation and policy easing.

“First, we expect that the vital agriculture sector will continue to recover,” read the report.

BMI noted that the proximate cause of Pakistan’s economic crisis in 2023/24 was devastating floods, which disrupted agricultural activity.

The report highlighted that the disaster caused significant economic pain in a country where 40% of the population works in agriculture.

“Grains production rebounded in 2024 and our agribusiness team expects that conditions will remain favourable in the 2025 harvest year.

On the other hand, cotton production in the country will slip from 6.7 million 480-pound bags in 2024 to 6.5 million bags in 2025, said the report.

“Even so, production will remain elevated by recent standards. This would be the second largest harvest since 2019,” read the report.

BMI was of the view that strong output in the agricultural sector will boost exports, support, rural incomes, and help to contain inflation. Meanwhile, easing foreign exchange shortages will allow an increase in ginning and other processing activities.

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“Second, we think that inflation will ease sharply, slipping from 11.8% y-o-y in May 2024 to just 6.2% in December 2024.

“Slower inflation will, in part, reflect the improve agricultural production,” it said.

Moreover, BMI expects “big falls in Pakistan’s currency are now behind us, and that a broadly stable exchange rate will reduce inflationary pressures”.

“The disinflation will help to protect consumers’ incomes and is a key reason why we expect that the growth of consumer spending will pick up from 2.6% in FY2023/24 to 3.4% in FY2024/25,” it said.

“Third, we predict policy easing in late 2024 and into 2025. With inflation slowing, we think that policymakers at the State Bank of Pakistan (SBP) will continue to loosen monetary policy.

“We expect that the key policy rate will be cut from 20.5% in June 2024 to 16.00% by December 2024 and to 14.00% by December 2025.

However, fiscal policy will, admittedly, continue to tighten, it said.

On the other hand, Pakistan’s economy remains very fragile in the face of external shocks, warned the report.

“The authorities have very limited fiscal buffers and the World Bank’s latest Crisis Preparedness Gap Analysis rated the country as ‘basic’ or below on all five of its key metrics

“Given that 40% of Pakistanis work in agriculture, another flood or drought would prose a significant risk to the economy,” it said.

The report noted that Pakistan’s fragile political situation could also derail the recovery.

“While Pakistan’s establishment parties were successful in creating a new coalition government following the February election, the strong electoral performance of independent candidates backed by jailed opposition leader Imran Khan suggests that there is significant dissatisfaction with the current political elite.

“Another round of protests in urban areas could disrupt economic activity,” it noted.