IMF expects Pakistan’s economy to grow 3.2% in FY25

The International Monetary Fund (IMF) has forecast GDP growth for Pakistan of 3.2 percent for the current fiscal year 2024-25, up from 2.4 percent in FY24.

The lender’s management, in its latest statement on Pakistan, said the country has taken significant steps to restore economic stability with consistent policy implementation under the Stand-by Arrangement (SBA) for 2023-24.

Growth has recovered (2.4 percent in FY24), supported by agricultural activity, while inflation has fallen significantly to single digits, amid suitably tight fiscal and monetary policies. A controlled current account and calm conditions on the foreign exchange market have allowed the restoration of reserve buffers.

Reflecting disinflation and more stable domestic and external conditions, the State Bank of Pakistan has managed to cut policy rates by a total of 450 basis points since June, supported by an appropriately tight FY25 budget.

Despite this progress, Pakistan’s vulnerabilities and structural challenges remain formidable. A difficult business environment, weak governance and an excessive role of the state hinder investment, which remains very low compared to peer countries, while the tax base remains too narrow to ensure fiscal fairness and fiscal sustainability and meet Pakistan’s major needs in the areas of social and development expenditure.

In particular, spending on health and education has been insufficient to address persistent poverty, and inadequate infrastructure investment has limited economic potential and left Pakistan vulnerable to the effects of climate change. Without concerted adjustment and reform efforts, Pakistan risks falling further behind its peers.

Given the progress and stability achieved under the nine-month 2023 SBA, authorities are undertaking renewed efforts to address these challenges, build resilience and enable sustainable growth. Key priorities of the new EFF-supported program include:

1. rebuilding the credibility of policymaking and anchoring macroeconomic sustainability through consistent implementation of sound macro policies and broadening the tax base;
2. promoting reforms to strengthen competition and increase productivity and competitiveness;
3. reforming state-owned enterprises and improving public services and the viability of the energy sector; And
4. building climate resilience.

Following the Board of Directors discussion, Kenji Okamura, Deputy Director and Acting Chairman, made the following statement:

The implementation of sound policies over the past year has been critical to restoring economic stability, reducing short-term risks and restoring confidence. Growth has returned, external pressures have eased as reserves have doubled over the past year, and inflation has fallen significantly. However, despite this progress, significant structural challenges remain and ambitious and sustained efforts are needed to strengthen Pakistan’s resilience and economic prospects. The authorities’ EFF-supported program provides a crucial anchor for policy and structural reforms and provides a framework for partner financing.

Continued fiscal consolidation in FY25 and beyond, through better revenue mobilization and prudent expenditure management, is critical to safeguard fiscal sustainability and reduce crowding out of private investment. Increasing revenue mobilization by broadening the tax base, abolishing special sectoral regimes and imposing a fairer burden on previously undertaxed sectors (including industrialists, developers and large-scale agriculture) will increase fairness and efficiency and creating space for essential investments in human resources. capital, infrastructure and social expenditure.

Additional institutional and structural reforms will focus on strengthening federal-provincial institutional arrangements, improving tax administration and compliance, and making public investment management more effective.

Timely adjustments to energy rates under the previous program contributed to stabilizing the energy sector’s circular debts. Going forward, deep reforms on the cost side are crucial to ensure the sustainable viability of the sector and reduce costs.

The recent marked decline in inflation is very welcome, allowing the SBP to cut policy rates while maintaining appropriately tight monetary policy. The build-up of foreign exchange reserves should continue, supported by inflows under the Enhanced Arrangement, as well as by price formation in the interbank market, to help absorb external shocks, attract financing and protect competitiveness and growth. Strong measures to tackle undercapitalized financial institutions and, more broadly, vigilance over the financial sector are needed to ensure financial stability.

Overcoming Pakistan’s long-standing structural challenges—particularly low productivity and economic openness, resource misallocation, and climate fragility—requires faster implementation of structural reforms. Reform priorities include advancing the reform agenda of state-owned enterprises; reducing distortive incentives and promoting a level playing field for all companies; strengthening governance and anti-corruption institutions; and continue to build climate resilience.

The post IMF expects Pakistan’s economy to grow 3.2% in FY25 appeared first on ProPakistani.