In the fiscal year FY2024-25, Pakistan’s economy is anticipated to experience a growth of 3.2%, as projected by BMI, a Fitch Solutions company, in its comprehensive ‘Pakistan Country Risk Report.’ This growth forecast, while more optimistic than many other analysts’ perspectives, falls slightly below the government’s target of 3.6%.

Despite a cautious optimism bolstered by expected improvements in agriculture, a stable exchange rate, and easing inflation, significant vulnerabilities persist. The nation’s limited fiscal buffers and political instability pose substantial risks that could undermine economic recovery.

Pakistan’s Gross Domestic Product (GDP) expansion is anticipated to reach 3.2% in the current fiscal year FY2024-25. “We remain more optimistic than most analysts regarding Pakistan, maintaining an above-consensus perspective that GDP will grow by 3.2% in FY2024/25 (July 2024 to June 2025),” stated the report released following a staff-level accord with the International Monetary Fund (IMF).

The report elaborated that, although growth was slightly weaker than anticipated at the beginning of the 2024 calendar year, recent data have corroborated their primary view that the economy would persist in its recovery post the catastrophic floods of 2023.

Preliminary government figures indicate an economic expansion of 2.4% in FY2023/24, surpassing the consensus forecast of 1.8% gathered by Focus Economics. BMI highlighted three principal reasons for their optimistic outlook on FY25 growth: advancements in agriculture, reduced inflation, and policy relaxation. “Primarily, we anticipate the essential agriculture sector will continue its recovery,” the report specified.

BMI noted that the immediate cause of Pakistan’s economic turmoil in 2023/24 was the severe floods that disrupted agricultural activities. The report underscored that the disaster inflicted considerable economic hardship in a nation where 40% of the populace is employed in agriculture. “Grains production rebounded in 2024, and our agribusiness team expects favorable conditions to persist into the 2025 harvest year.”

Conversely, cotton production is expected to decline from 6.7 million 480-pound bags in 2024 to 6.5 million bags in 2025. “Nonetheless, production will remain high by recent standards, marking the second-largest harvest since 2019,” the report noted. BMI posited that robust output in the agricultural sector would enhance exports, bolster rural incomes, and help curb inflation. Meanwhile, alleviating foreign exchange shortages will facilitate increased ginning and other processing activities. “Secondly, we foresee a significant reduction in inflation, decreasing from 11.8% year-on-year in May 2024 to just 6.2% by December 2024. The reduction in inflation will partly reflect improved agricultural production,” the report indicated. Additionally, BMI expects that the substantial declines in Pakistan’s currency are behind us, and a generally stable exchange rate will mitigate inflationary pressures.

“The disinflation will safeguard consumers’ incomes and is a key reason we anticipate consumer spending growth will rise from 2.6% in FY2023/24 to 3.4% in FY2024/25,” it added. “Thirdly, we predict policy easing in late 2024 and into 2025. With inflation decelerating, we expect the State Bank of Pakistan (SBP) to continue relaxing monetary policy. We project the key policy rate will be reduced from 20.5% in June 2024 to 16.00% by December 2024 and to 14.00% by December 2025. However, fiscal policy will, admittedly, continue to tighten,” the report concluded.

Conversely, Pakistan’s economy remains exceedingly fragile when confronted with external disturbances, cautioned the report. “The authorities possess minimal fiscal buffers, and the World Bank’s latest Crisis Preparedness Gap Analysis rated the country as ‘basic’ or below on all five of its principal metrics.

“Given that 40% of Pakistanis are employed in agriculture, another flood or drought would pose a significant threat to the economy,” it remarked. The report also underscored Pakistan’s delicate political situation, which could potentially derail the recovery. “Although Pakistan’s established parties succeeded in forming a new coalition government following the February election, the strong electoral performance of independent candidates supported by imprisoned opposition leader Imran Khan indicates substantial discontent with the current political elite. “Another wave of protests in urban areas could disrupt economic activities,” it noted.

Fitch appears more optimistic about Pakistan’s ability to accelerate its economic growth rate to 3.2% during this fiscal year, up from last year’s 2.4%, compared to most other international agencies. The report posits that anticipated monetary easing, enhanced agricultural output, a relatively stable exchange rate, and decelerating inflation will drive growth this year. Nevertheless, the Fitch estimate remains below the government’s modest growth target of 3.5%. The report also suggests that the government will likely miss its ambitious budget targets, with “risks heavily skewed to the downside.” For instance, it predicts that while the budget deficit will narrow from 7.4% of GDP in FY24 to 6.7%, the target of 5.9% will still be missed. Similarly, the current account deficit will remain small but will widen from 0.8% of GDP to 1% due to an increased trade deficit, which is expected to expand from 7.5% of GDP to 7.7% because of a surge in oil prices or lower-than-anticipated grain production.

Despite a somewhat more optimistic outlook, the agency believes that “economic recovery is fragile, and another shock could swiftly increase the cost of servicing Pakistan’s substantial government debt burden.” The most significant threat to economic revival stems from ongoing political instability. This has been a recurrent theme in Fitch’s commentary on Pakistan’s economy since the contentious February elections, which resulted in a minority government supported by external partners. In addition to factors like a surge in global oil prices or an extreme climate event, the fragile political situation could also derail the recovery. Recent political developments have reinforced the impression that the current situation is becoming untenable for the minority PML-N government, despite backing from the security establishment. A resolution to the existing deadlock must be found sooner rather than later, or we may witness the economy deteriorate once again — and at a faster pace.

In summary, while Pakistan’s economic outlook for FY2024-25 reflects cautious optimism with a projected growth rate of 3.2%, the journey towards recovery remains fraught with challenges. External shocks, such as climatic events or surges in global oil prices, and internal political instability could quickly derail progress. The fragile political environment and the impending necessity for fiscal tightening underscore the precariousness of this recovery. As such, achieving sustainable growth will require not only favorable economic policies but also political stability and robust crisis preparedness. The path ahead is undoubtedly complex, necessitating vigilant economic and political management to ensure resilience and sustained growth.