KARACHI: The State Bank of Pakistan (SBP) has said that uncertainty on the economic front has reduced and macroeconomic conditions have been improved during the initial months of this fiscal year, supported by stabilization policies, successful engagement with the IMF and favourable global economic environment.
In light of these developments, the SBP has projected real GDP growth of 2.5 to 3.5 percent for FY25. However, the SBP has cautioned that fluctuations in global energy prices may pose significant risks to this economic outlook.
According to SBP’s Annual Report “The State of Pakistan’s Economy” for the fiscal year 2023-24 released on Thursday, that the improvement in Pakistan’s macroeconomic conditions in FY24 is expected to maintain the momentum in FY25 as well.
Political uncertainty impacting Pakistan economy, says SBP
The approval of the Extended Fund Facility (EFF) program with the IMF in September 2024 is anticipated to further strengthen the country’s external account position, improve sovereign credit rating, and enhance investor confidence. At the same time, the country is expected to benefit from a conducive global economic environment, as inflation is falling in advanced economies, while global economic growth is expected to remain steady.
The report said that the latest data on high-frequency indicators points to further improvement in macroeconomic conditions in FY25, combined with the approval of the Extended Fund Facility (EFF) program by the IMF Board in September 2024, is expected to enhance investor confidence and support a further upgrade of Pakistan’s credit rating.
The SBP believed that release of funds from the IMF could make way for external inflows from multilateral creditors, as well as from private investors. Moreover, global commodity prices are maintaining a downtrend while global growth is expected to remain steady, as per the IMF’s latest World Economic Outlook.
“These developments have improved Pakistan’s near-term macroeconomic outlook, however, inherent volatility in global energy prices may pose some risks to this outlook”, the Report said.
As against 2.5 percent growth in FY24, the SBP is expecting real GDP growth to be in the range of 2.5-3.5 percent during FY25, in view of development on economic front, including improved LSM, lower borrowing cost on back of decreased in interest rate, increase in development spending, lower inflation and arrival of foreign inflows. The SBP projects a fiscal deficit in the range of 5.5-6.5 percent in FY25, compared to 6.8 percent of GDP in FY24. This improvement is expected to come from a sharp increase in both tax and nontax revenues. In addition, the current account deficit to remain contained in the range of 0-1.0 percent of GDP in FY25.
The report said that amid receding inflationary pressures, the SBP has already started to lower the policy rate, after maintaining the tight monetary policy stance for the longest period in recent past. Despite reduction in the policy rate, the real interest rates remain significantly positive. The tight monetary policy stance and continued fiscal consolidation, as envisaged in FY25 budget, are expected to keep inflation significantly contained during FY25.
Lower borrowing costs, combined with improving external position and fall in global commodity prices, are expected to support expansion in industry and services sectors during FY25. Meanwhile, the FY25 budget envisages a notable increase in development spending that may further boost economic activity.
The high frequency demand indicators also continue to show signs of bottoming out, whereas LSM saw almost consistent improvement since December 2023. However, the latest information about Kharif crops suggest that the agriculture sector may not sustain its growth momentum into FY25, the report said.
Moreover, the headline inflation has maintained a general downturn since January 2024, falling to 6.9 percent in September 2024, whereas core inflation has also declined considerably in recent months.
In view of the recent outturns, the average inflation in FY25 may even fall below the earlier projected range of 11.5-13.5 percent. However, volatility in international oil prices, fiscal slippages and unplanned subsidies pose significant risks to this projection, the report said.
While direct taxes are expected to continue the uptrend witnessed since the last year, the continuing momentum in economic activity, which is anticipated to be led by industry and services sectors in FY25, and an uptick in imports are likely to further boost indirect taxes.
In addition, the government has announced an increase in salaries and pensions of government employees in view of the high inflation. Similarly, to give a boost to economic growth, the budget envisages substantial increase in development spending during FY25. In line with the moderate expansion in industry and services sectors, imports are likely to increase in FY25.
Moreover, while there are upside risks to global commodity prices due to rising geo-political tensions, commodity prices continue to be low. On the other hand, both the exports and workers’ remittances are holding the trends observed in FY24.
According to report, on the external front, incorporating these trends and expected future developments, the SBP expects the current account deficit to remain contained in the range of 0-1.0 percent of GDP in FY25. The approval of $ 7 billion EFF program and the realization of external inflows from multilateral and bilateral creditors are expected to further strengthen the external buffers.
Copyright Business Recorder, 2024