In the latest “Pakistan Country Risk Report,” BMI, a Fitch Solutions company, projects Pakistan’s GDP growth to reach 3.2% for the fiscal year FY2024-25. This forecast, although slightly below the government’s target of 3.6%, reflects a cautiously optimistic outlook. Following the devastating floods of 2023 and subsequent recovery efforts, the report highlights key factors contributing to this anticipated growth, including agricultural resurgence, easing inflation, and potential policy adjustments.

“Our outlook on Pakistan remains more buoyant than the majority of analysts, and we maintain an optimistic stance that GDP will advance by 3.2% in FY2024/25 (July 2024 to June 2025),” stated the report released following the staff-level accord with the International Monetary Fund (IMF). The report noted that although the growth rate is marginally less vigorous than initially anticipated at the outset of 2024, recent data has corroborated our fundamental belief that the economy will persist in its recovery post the catastrophic floods of 2023.

It further observed that preliminary data from the government indicates a 2.4% expansion in FY2023/24, surpassing the 1.8% consensus forecast aggregated by Focus Economics.

BMI identified three pivotal factors contributing to its optimistic forecast for FY25: advancements in agriculture, reduced inflation, and policy relaxation. “Primarily, we anticipate continued recovery in the crucial agriculture sector,” the report detailed. The analysis highlighted that Pakistan’s economic plight in 2023/24 stemmed from calamitous floods which severely disrupted agricultural activities.

The report emphasized the severe economic impact on a nation where 40% of the populace is engaged in agriculture. “Agricultural production saw a resurgence in 2024, and our agribusiness division expects favorable conditions to persist through the 2025 harvest season. Conversely, cotton production is projected to decline from 6.7 million 480-pound bales in 2024 to 6.5 million bales in 2025,” the report detailed.

“Nevertheless, production will remain comparatively high by recent benchmarks, marking the second-largest harvest since 2019,” the report noted. BMI posited that robust agricultural output will bolster exports, enhance rural incomes, and contribute to controlling inflation. Additionally, a reduction in foreign exchange shortages will facilitate increased ginning and processing activities.

“Secondly, we predict a significant easing of inflation, with rates dropping from 11.8% year-over-year in May 2024 to a mere 6.2% by December 2024. This deceleration in inflation will partly reflect improvements in agricultural production,” it added.

Moreover, BMI foresees that the substantial devaluations of Pakistan’s currency are likely behind us, and a relatively stable exchange rate will mitigate inflationary pressures. “This disinflation will safeguard consumer incomes and is a principal reason for our forecasted increase in consumer spending from 2.6% in FY2023/24 to 3.4% in FY2024/25,” the report stated.

“Thirdly, we anticipate a relaxation of policies in late 2024 extending into 2025. With inflation tapering off, we believe policymakers at the State Bank of Pakistan (SBP) will continue to ease monetary policy. We project the key policy rate will be reduced from 20.5% in June 2024 to 16.00% by December 2024, and further to 14.00% by December 2025.”

However, fiscal policy will continue to tighten, the report conceded. Despite these positive projections, the report warned that Pakistan’s economy remains highly vulnerable to external shocks. “The authorities have very limited fiscal buffers, and the World Bank’s recent Crisis Preparedness Gap Analysis rated the country as ‘basic’ or below on all five of its key metrics.”

“Given that 40% of Pakistan’s workforce is employed in agriculture, another flood or drought would pose a significant risk to the economy,” it stated. The report also noted that Pakistan’s tenuous political situation could hinder economic recovery. “While the establishment parties successfully formed a new coalition government after the February election, the strong electoral performance of independent candidates supported by jailed opposition leader Imran Khan indicates significant public dissatisfaction with the current political elite. Another wave of protests in urban areas could disrupt economic activity,” it concluded.

Despite the promising growth forecast, Pakistan’s economy remains frail and susceptible to external shocks. Limited fiscal buffers and a volatile political climate pose significant risks. The potential for natural disasters like floods or droughts threatens the agricultural sector, a vital component of the economy. Moreover, political instability, evidenced by public discontent with the current leadership, could derail economic progress. While the outlook for GDP growth is optimistic, the country must navigate these challenges carefully to sustain and enhance economic stability.

The report highlights agriculture as a pivotal sector driving growth. Following the 2023 floods, agricultural output, particularly grains production, has rebounded. However, a slight decline in cotton production is expected. The overall positive trend in agriculture is crucial, given that 40% of Pakistan’s workforce is employed in this sector. This recovery is anticipated to bolster exports, rural incomes, and help control inflation.

Inflation is projected to decrease significantly, from 11.8% in May 2024 to 6.2% by December 2024. This reduction is partly attributed to improved agricultural productivity, which stabilizes food prices and reduces inflationary pressures. Lower inflation will protect consumer incomes and is expected to stimulate consumer spending, projected to rise from 2.6% in FY2023/24 to 3.4% in FY2024/25.

The State Bank of Pakistan (SBP) is expected to continue easing monetary policy in response to declining inflation. The key policy rate is projected to be reduced from 20.5% in June 2024 to 16.00% by December 2024, and further to 14.00% by December 2025. This policy easing is aimed at stimulating economic activity and supporting growth.

Despite the positive growth projections, Pakistan’s economy remains vulnerable to external shocks due to limited fiscal buffers. The World Bank’s Crisis Preparedness Gap Analysis rates the country as ‘basic’ or below on all five key metrics, indicating a lack of resilience to economic shocks.

Given the significant portion of the workforce employed in agriculture, another natural disaster such as floods or droughts could severely impact the economy. The dependency on agriculture makes the economy particularly susceptible to climatic events.

The report warns that Pakistan’s fragile political situation could derail economic recovery. The formation of a new coalition government following the February election has not quelled public dissatisfaction, as evidenced by the strong electoral performance of independent candidates backed by jailed opposition leader Imran Khan. Potential political unrest and protests could disrupt economic activities and hinder growth.

The report presents a nuanced view of Pakistan’s economic prospects. While there is a cautiously optimistic outlook for GDP growth driven by agricultural recovery, easing inflation, and monetary policy adjustments, significant risks remain. Limited fiscal resilience, the potential for natural disasters, and political instability pose substantial challenges. To sustain and enhance economic stability, Pakistan must address these vulnerabilities while capitalizing on the projected growth drivers.