The headline growth rate of 2.7 percent in the outgoing fiscal year offers a deceptively optimistic picture of Pakistan’s economic performance. Beneath this modest figure lie deeper structural imbalances and questionable statistical representations, particularly in the manufacturing and agricultural sectors.
Meanwhile, the Monetary Policy Committee’s (MPC) decision to leave the policy rate untouched casts a long shadow over fiscal planning and investor sentiment, especially as macroeconomic risks intensify. Despite a discernible uptick in inflationary pressures, the Monetary Policy Committee (MPC) elected to maintain the benchmark interest rate at a steady 11 percent. This stance emerged even as the year-on-year Consumer Price Index (CPI) in May 2025 surged to 3.5 percent — a dramatic leap from April’s tepid 0.3 percent, and the most pronounced inflation figure since January 2024, which registered at 2.4 percent. Nonetheless, the accompanying Monetary Policy Statement (MPS) placidly noted that “some near-term volatility in inflation is expected before it gradually inches up and stabilises within 5 to 7 percent,” implying transient turbulence before settling into a tolerable corridor.
According to the Pakistan Bureau of Statistics (PBS), the average CPI for fiscal year 2024-25 rests at 4.61 percent — a figure more subdued than what is forecast for the upcoming financial cycle.
Core inflation, a more stable barometer often stripped of food and energy volatility, decelerated to 7.3 percent in May — the lowest notch since May 2024. Though April’s rate edged marginally higher at 7.4 percent, this slim divergence inexplicably prompted the MPS to refer to “persistence in core inflation.” A puzzling assertion, considering the gradual decline charted between January and March 2025 — readings of 7.8 percent, 7.8 percent, and 8.2 percent, respectively — do not paint a portrait of obstinacy.
The MPS further contended that the real interest rate remains comfortably in the positive zone, ostensibly capable of anchoring inflation expectations. Yet, had the CPI been used as the decisive metric — as was common practice between 2019 and 2022 — a modest hike of 25 to 50 basis points would have been warranted. Conversely, if core inflation served as the benchmark, a trim of 25 basis points would have aligned more sensibly.
This selective rigidity reinforces the pervasive speculation that the International Monetary Fund (IMF) quietly vetoed any recalibration of the policy rate at this juncture — an opaque maneuver, particularly given the MPC convened on 16 June, a day after domestic fuel prices were jacked up in response to swelling international oil costs, triggered by the intensifying Israel-Iran confrontation. Nevertheless, the MPS curiously declared that “energy prices continued to remain lower than last year, mainly reflecting the impact of moderation in global oil prices” — a statement that rings hollow, given the contemporaneous upward adjustment in domestic fuel rates.
The IMF’s shadow looms unmistakably over the narrative, with the MPS echoing the Fund’s earlier rhetoric: “economic growth is picking up gradually and is projected to gain further traction next year, supported by the still unfolding impact of earlier policy rate cuts.” This near-verbatim duplication mirrors the IMF’s first review commentary, published just weeks prior, which claimed: “the MPC’s decision to hold the policy rate in their March 10 meeting was appropriate, allowing time for past rate cuts to feed through to the economy.”
Ultimately, the central bank’s decision — cloaked in institutional justifications — appears more the product of externally imposed orthodoxy than of independent economic calibration.
The ostensibly modest economic growth rate of 2.7 percent for the outgoing fiscal year masks deeper structural weaknesses. Two pivotal macroeconomic indicators expose the fragility beneath the surface: the large-scale manufacturing sector, already in retreat, saw its contraction deepen from -0.22 percent during July–March 2023-24 to -1.47 percent in the same span of 2024-25, as per Finance Division data. On the agricultural front, crop performance faltered noticeably. Yet the Pakistan Bureau of Statistics (PBS) buoyed overall agricultural figures by elevating livestock growth — a segment notoriously difficult to quantify accurately, considering it comprises over 14 percent of agriculture’s total 24 percent contribution to GDP. Meanwhile, the services sector’s numbers remain suspect, with its core component — wholesale and retail trade — largely embedded within the shadow economy and thus eluding proper documentation.
The MPS claims that economic momentum gathered pace in the latter half of 2024-25, citing a rise in GDP growth to 3.9 percent from a subdued 1.4 percent in the first half — in line with MPC forecasts. However, empirical substantiation of this claimed surge remains scarce, casting doubt on the validity of such projections.
The decision to preserve the policy rate at its current level could ripple unfavorably through the yet-to-be-ratified federal budget for 2025-26. Notably, the budget projects a 738.677 billion-rupee reduction in debt servicing costs compared to the revised estimates of the outgoing fiscal year — a bold assumption in light of ballooning government borrowing, which stands at a staggering 3.438 trillion rupees. This disconnect may ultimately undermine fiscal equilibrium.
On a more affirmative note, the MPS highlighted two significant macroeconomic gains. First, the successful conclusion of the IMF’s first program review unlocked a $1 billion tranche, bolstering foreign reserves — though these remain overwhelmingly reliant on borrowed inflows. Second, a primary surplus amounting to 2.2 percent of GDP was achieved this year — a key IMF benchmark — with an even more ambitious 2.4 percent targeted for 2025-26. However, maintaining this surplus target may become untenable should the policy rate remain unmoved, especially amid evolving geopolitical uncertainties in the Middle East and slight détente in US-China trade relations, which the MPS acknowledges as potential variables.
The State Bank of Pakistan (SBP), under IMF directives, must refine its public messaging. The Fund, in its first review, emphasized the importance of enhanced central bank transparency, urging “greater clarity on the MPC’s assessment of the current and desired policy stance.” Such communication, it argues, is vital to aligning public expectations with central bank actions between policy meetings. For now, this ambition remains aspirational — a blueprint still being assembled rather than a completed structure.
While the MPS outlines some favorable developments — such as improved foreign reserves and adherence to IMF-set fiscal benchmarks — these are largely debt-fueled and may prove unsustainable if underlying structural issues remain unaddressed. The lack of credible data transparency, continued reliance on informal economic activity, and ambiguous central bank communication only exacerbate uncertainty. As the government prepares its next fiscal roadmap, clarity in monetary policy and realism in growth projections are urgently needed to restore both market confidence and macroeconomic stability.