IMF Projects Pakistan’s Economy to Grow by 3.2% in FY25

The International Monetary Fund (IMF) has projected GDP growth rate for Pakistan at 3.2 percent for the current fiscal year 2024-25 compared to 2.4 percent in FY24.

The lender’s Executive Board in its latest statement on Pakistan said the country has taken key steps to restore economic stability with consistent policy implementation under the 2023-24 Stand-by Arrangement (SBA).

Growth has rebounded (2.4 percent in FY24), supported by activity in agriculture, while inflation has receded significantly, falling to single digits, amid appropriately tight fiscal and monetary policies. A contained current account and calm foreign exchange market conditions have allowed the rebuilding of reserve buffers.

Reflecting disinflation and steadier domestic and external conditions, the State Bank of Pakistan has been able to cut the policy rate by a total of 450 bps since June also supported by an appropriately tight FY25 budget.

Despite this progress, Pakistan’s vulnerabilities and structural challenges remain formidable. A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers, while the tax base remains too narrow to ensure tax fairness, fiscal sustainability and meet Pakistan’s large social and development spending needs.

In particular, spending on health and education has been insufficient to tackle persistent poverty, and inadequate infrastructure investment has limited economic potential and left Pakistan vulnerable to the impact of climate change. Without a concerted adjustment and reform effort, Pakistan risks falling further behind its peers.

Because of the progress and stability achieved under the 9-month 2023 SBA, the authorities are embarking on renewed efforts to address these challenges, build resilience and enable sustainable growth. Key priorities under the new EFF-supported program include

1. rebuilding policy-making credibility and entrenching macroeconomic sustainability through consistent implementation of sound macro policies and a broadening of the tax base;
2. advancing reforms to strengthen competition, and raise productivity and competitiveness;
3. reforming SOEs and improving public service provision and energy sector viability; and
4. building climate resilience.

Following the Executive Board discussion, Kenji Okamura, Deputy Managing Director and Acting Chair, made the following statement:

The implementation of sound policies over the past year has been critical to restore economic stability, reduce near-term risks and rebuild confidence. Growth has returned, external pressures have eased with reserves doubling over the last year, and inflation has declined markedly. However, despite this progress, significant structural challenges remain, and ambitious and sustained efforts are needed to strengthen Pakistan’s resilience and economic prospects. The authorities’ EFF-supported program provides a critical anchor to policies and structural reforms and provides a framework for partner financing.

Continuing fiscal consolidation in FY25 and beyond, through enhanced revenue mobilization and prudent expenditure management, is critical to securing fiscal sustainability and reducing the crowding out of private investment. Increasing revenue mobilization by broadening the tax base, removing special sectoral regimes, and placing a fairer burden on previously undertaxed sectors (including industrialists, developers, and large-scale agriculture), will enhance fairness and efficiency and create needed space for essential investments in human capital, infrastructure, and social spending.

Complementary institutional and structural reforms will focus on strengthening federal-provincial institutional arrangements, improving tax administration and compliance, and making public investment management more effective.

Timely energy tariff adjustments under the previous program have helped stabilize energy sector circular debt. Going forward, deep cost-side reforms are critical to securing the sector’s lasting viability and reducing its costs.

The recent marked decline in inflation is very welcome, allowing the SBP to lower the policy rate while maintaining an appropriately tight monetary stance. The buildup in FX reserves should continue, supported by inflows under the Extended Arrangement, as well as price discovery in the interbank market to help buffer external shocks, attract financing, and protect competitiveness and growth. Strong action to address undercapitalized financial institutions and, more broadly, vigilance over the financial sector is needed to ensure financial stability.

Overcoming Pakistan’s longstanding structural challenges—most notably low productivity and economic openness, resource misallocation, and climate vulnerability—requires faster implementation of structural reforms. Reform priorities include advancing the SOE reform agenda; scaling back distortive incentives, promoting a level playing field for all business; strengthening governance and anti-corruption institutions; and continuing to build climate resilience.

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