Pakistan’s economy is expected to maintain positive momentum in FY2024-25, driven by recovery in the industrial and services sectors. However, challenges in agriculture, which played a central role in growth last year, may temper the overall pace of expansion. Amid supportive fiscal measures, a lower policy rate, and improved external conditions, the macroeconomic outlook appears favorable. Nonetheless, the economy faces structural hurdles that could hinder sustained long-term stability.

The economy is expected to maintain its current pace in FY2024-25, driven by recoveries in the industrial and services sectors. However, unlike the previous fiscal year (FY2023-24), where agriculture was the key growth driver, the sector may not contribute as strongly this year. In its Annual Report on the State of Pakistan’s Economy for FY2023-24, the State Bank of Pakistan (SBP) noted, “The latest information about kharif (summer) crops suggests that the agriculture sector may not sustain its growth momentum into FY25.”

Preliminary estimates as of September 1, 2024, revealed a 59.7% decline in cotton arrivals compared to the same period last year, the report added. The SBP also pointed to “further improvement in macroeconomic conditions in FY25,” with real GDP growth projected between 2.5% and 3.5%, up from 2.5% in FY24. Additionally, workers’ remittances are expected to increase to $32-33 billion, up from $30.25 billion last year.

The approval of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) in September 2024 is expected to enhance investor confidence and improve Pakistan’s credit rating, potentially attracting external inflows from multilateral creditors and private investors. Meanwhile, global commodity prices are trending downward, and global growth is forecasted to remain stable, according to the IMF’s latest World Economic Outlook. These factors have bolstered Pakistan’s near-term macroeconomic prospects, although the SBP warned that volatility in global energy prices could still pose risks.

The central bank further noted that with moderate growth in the industrial and services sectors, “imports are likely to increase in FY25.” Despite rising geopolitical tensions, global commodity prices remain relatively low, and both exports and remittances are expected to maintain the positive trends seen in FY24.

The State Bank of Pakistan (SBP) expects the current account deficit (CAD) to remain contained between 0-1% of GDP in FY2024-25, bolstered by the approval of the $7 billion Extended Fund Facility (EFF) and anticipated external inflows from multilateral and bilateral creditors, which are likely to strengthen the country’s external buffers. Pakistan’s current account balance recorded a surplus of $75 million in August 2024, driven by robust inflows of workers’ remittances and an increase in IT exports. This marks a significant turnaround after three consecutive months of deficit, indicating that foreign currency inflows exceeded outflows, despite ongoing payments for pending imports. Data from the State Bank of Pakistan (SBP) shows that the August surplus helped reduce the cumulative current account deficit for the first two months (July-August) of FY2024-25 to $171 million—an 81% decline compared to the $893 million deficit during the same period last year.

To stimulate economic growth, the SBP has reduced its policy rate by 4.5 percentage points to 17.5%, making borrowing more affordable. Combined with an improved external position and falling global commodity prices, these factors are expected to support the expansion of the industrial and services sectors throughout FY25.

The FY25 budget also envisions a significant increase in development spending, further stimulating economic activity. The SBP noted that “high-frequency demand indicators continue to show signs of ‘bottoming out,’ with large-scale manufacturing showing consistent improvement since December 2023.”

Despite the rate cut, real interest rates remain notably positive, which, along with tight monetary policy and ongoing fiscal consolidation in the FY25 budget, is expected to keep inflation under control. Headline inflation has been on a general downward trend since June 2023, falling to 6.9% in September 2024, while core inflation has also declined substantially.

“Given recent trends, average inflation in FY25 may fall below the previously projected range of 11.5% to 13.5%,” the SBP stated, though it warned that volatility in global oil prices, fiscal slippages, and unplanned subsidies could pose risks to this forecast.

Macroeconomic conditions improved during FY24, driven by stabilization policies, successful engagement with the IMF, and falling global commodity prices. “Real economic activity rebounded, led by agriculture, while inflation dropped significantly, especially in the second half of the year,” the report highlighted.

The CAD further narrowed, and improved financial inflows helped build foreign exchange reserves, easing pressure on the rupee. Fiscal consolidation efforts resulted in the primary balance posting a surplus for the first time in 17 years, contributing to a reduction in the debt-to-GDP ratio.

Despite these positive developments, the report underscores several structural challenges that continue to impede sustained macroeconomic stability. These include declining investment, low savings, an unfavorable business climate, insufficient research and development (R&D), and low productivity. Additionally, climate change risks and chronic inefficiencies in the energy sector, particularly circular debt, remain significant hurdles.

While Pakistan’s economy is set to experience moderate growth in FY2024-25, bolstered by policy measures and external financial support, structural challenges remain significant. The positive trajectory of industrial and service sector growth, combined with easing inflation and a contained current account deficit, provides a solid foundation for near-term progress. However, addressing longstanding issues such as low investment, productivity, and inefficiencies in key sectors will be crucial for ensuring sustained economic stability and resilience in the face of global uncertainties.