The World Bank has estimated Pakistan’s GDP growth at 2.8 percent in fiscal year 2025 against 2.5 percent in 2024, but warned that this level of growth is not sufficient to bring down poverty rates, which increased from 40.2 percent in 2023 to 40.5 percent in 2024 and improve the people living standard, says the World Bank.
The Bank in its latest report “Pakistan Development Update: The Dynamics of Power Sector Distribution Reform” released on Thursday stated that following the recession in the fiscal year 2023, economic activity strengthened in fiscal year 2024 reflecting strong agricultural output, lower inflation, prudent macroeconomic measures, and reduced political uncertainty.
The report noted that downside risks remain high with the outlook dependent on the new IMF-EFF program remaining on track, continued fiscal restraint, and continued access to additional external financing. Potential policy slippages, reversals in reforms, and further policy uncertainty would lead to reduced confidence among businesses and increased external financing constraints and costs.
External Financing Risks
Significant risks stem from high external financing needs in the context of modest foreign exchange reserves, high debt, the heavy exposure of the banking sector to the Government, geopolitical instability and Pakistan’s exposure to climate shocks and natural disasters.
A return to “business as usual” offers little hope to most Pakistanis. Even if risks can be avoided, the economic outlook remains sobering. With current rapid population growth, projected economic growth will only be sufficient to support marginal improvements in incomes and living standards over the medium to long term.
Continued fiscal constraints and low levels of private investment in the economy will impede much-needed improvements in service delivery and jobs, leaving Pakistan’s human capital crisis (including high rates of child stunting and learning poverty) unaddressed. Little progress will be achieved in reducing poverty from current high levels.
Poverty
The poverty rate is estimated to have increased to 40.5 percent from 40.2 percent in FY23 (US$3.65/day 2017 purchasing power parity [PPP] per capita) due to low economic growth, high inflation, and declining labor incomes. Although official remittances increased by 10.7 percent in FY24, the real value of transfer incomes has fallen due to the exchange rate appreciation and elevated inflation.
Public spending on infrastructure and construction has decreased, while social protection expenditures have not kept pace with inflation. The economic slowdown and fiscal challenges have limited investments in human capital.
“Pakistan’s stabilizing economy is on a path of recovery. To sustain and strengthen that positive momentum, steady implementation of the Government’s structural reforms plan that aims to address long-standing constraints to faster growth will be key. These include reforming an inequitable and distortive tax system, reducing inefficient expenditures and untargeted subsidies, lessening the large state presence in the economy, reducing barriers to trade and investment, and reducing losses in the energy sector” said Najy Benhassine, World Bank Country Director for Pakistan.
“Implementation of planned structural policy reforms supported by a strong national political consensus and increased private sector participation is critical to mitigate risks, support stronger private-led growth and poverty reduction.”
As the economic stabilization continues, macroeconomic risks remain high reflecting high financing needs, modest foreign exchange reserves, high debt and debt servicing costs, financial sector vulnerabilities, and a loss-making power sector that continues to weigh on public finances.
“Pakistan’s recovery is expected to continue, with real GDP growth expected to reach 2.8 percent in fiscal year 2025,” said Mukhtar ul Hasan, lead author of the report. “However, output growth is expected to remain below potential over the medium term as tight macroeconomic policy, elevated inflation, and policy uncertainty are expected to continue to weigh on economic activity. Faster growth will be needed to support significant improvements in living standards.”
The macroeconomic outlook is predicated on the effective implementation of the new IMF-EFF program, including continued fiscal restraint, realization of expected rollovers and fresh external financing, the absence of further major policy disruptions, and no further major domestic or external shocks. Under these assumptions, recovery is expected to continue, with real GDP growth reaching 2.8 percent in FY25, as the economy benefits from the absence of import controls and lower inflation.
Business confidence is expected to improve with the recent credit rating upgrades25 on account of the IMFEFF program, reduced political uncertainty, and implementation of planned fiscal reforms, such as the devolution of constitutionally mandated expenditures to the provinces. Even with these assumptions, however, output growth is expected to remain below potential at 3.2 percent in FY26 as tight macroeconomic policy, elevated inflation, policy uncertainty, and unaddressed structural constraints continue to weigh on activity. Policy uncertainty, high refinancing needs, limited buffers for shocks, and financial sector risks pose substantial risks to the outlook.
Positive Agriculture Growth
Agriculture sector growth is expected to slow to 1.9 percent in FY25 due to a high base effect.26 In the medium term, the agriculture sector is projected to grow at an average rate of 2.4 percent over FY25–26. As supply chain challenges continue to subside with easing import controls, the availability of farm inputs such as certified seeds and fertilizers will improve.
Additionally, the significant increase in the import of agricultural machinery and implements in FY24 indicates growing investment in farming technology, which is expected to enhance productivity and efficiency in the sector over the near term.27 With the suspension of import management measures and improved confidence, the industry is projected to begin recovering, growing at 3.1 percent in FY25 and further to 3.2 percent in FY26.
Together with lower inflation rates, growth in the agricultural and industrial sectors will spill over to the services sector, which is anticipated to grow by 3.0 percent in FY25, led by a recovery in the largest sub-sectors of wholesale and retail trade, and transport and storage amid the revival of imports and aggregate demand. With inflationary pressures easing further, the services sector is expected to strengthen to 3.3 percent in FY26.
With high base effects, lower commodity prices, and continued tight macroeconomic policies, consumer price inflation is expected to slow to an average of 11.1 percent in FY25 and to 9.0 percent in FY26 but remain elevated in the short term due to higher domestic energy prices, expansionary OMOs, and new taxation measures as fiscal consolidation efforts continue.
Further Cut in SBP Policy Rate Likely
In June 2024, the SBP reduced the policy rate by 150 basis points, followed by 100 basis points in July and another cut of 200 basis points in September, bringing the rates down to 17.5 from a peak of 22 percent. Looking ahead, based on the continued moderation in inflation, further cuts in the policy rate are likely.
The CAD is forecast to increase to 0.6 percent of GDP in FY25 and further to 0.7 percent in FY26, with imports projected to grow faster than exports, leading to a wider trade deficit. Without any import management measures, imports are expected to continue strengthening with the recovery of investment, domestic demand, and industrial sector activity. Meanwhile, exports are also projected to increase, although at a slower rate in FY25 as agriculture sector exports moderate after the agricultural boom last year.
Remittances, Fiscal Deficit, Public Debt
Additionally, worker remittances are expected to slow due to base effects and slower growth in host countries. Despite a higher CAD, gross reserves are expected to improve marginally over FY25–26, supported by new inflows under the IMF-EFF.
The fiscal deficit, excluding grants, is projected to increase to 7.6 percent of GDP in FY25 due to higher interest payment expenditures, before decreasing over the medium term as interest payments gradually decrease and fiscal consolidation and revenue mobilization measures take effect.
The primary balance is projected to record a surplus of 0.7 percent of GDP in FY25, primarily due to the projected windfalls from the exceptionally high central bank dividends. These dividends reflected one-off profits from high policy rates in FY24, to be transferred to the Government as non-tax revenues in FY25.
The primary balance is projected to turn into a deficit of 0.2 percent of GDP in FY26. Gross financing needs will remain sizeable throughout the projection period due to maturing short-term debt, multilateral and bilateral repayments, and Eurobond maturities.
Public debt, including guaranteed debt, is expected to reach 73.8 percent of GDP in FY25 and increase further to 74.7 percent of GDP in FY26. Sustaining comprehensive fiscal consolidation measures over the medium term is essential to restore fiscal and debt sustainability.
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