IMF sees Pak economy growing 3.2% in FY25

Growth in Pakistan’s GDP has been forecast by the International Monetary Fund to be at 3.2 percent for fiscal year 2024-25, from the projected 2.4 percent in FY24. Recently, the IMF itself stated that it did acknowledge Pakistan’s achievement in stabilizing its economy with those key policy measures under the SBA for FY23-24. Economic growth rebounded to 2.4% in FY24, mainly spurred by agriculture, while inflation declined to single digits due to tight fiscal and monetary policies. Moreover, further stability in the foreign exchange markets and a contained current account have facilitated the rebuilding of Pakistan’s reserve buffers.

With these improvements, the State Bank of Pakistan responded with a 450 basis points cut in the policy rate since June, which was accompanied by a disciplined FY25 budget.

However, Pakistan still remains burdened with severe structural challenges. A tough business environment, weak governance, and large state sectors restrict investment, which is low relative to other countries. Its relatively narrow tax base hampers fiscal sustainability and fails to meet the country’s large social and development needs.

It still spends too little on healthcare and education to counteract poverty. Lacking investment in better infrastructure, the economy can only grow slowly and remains seriously vulnerable to further climate shocks. Without deeper reforms, Pakistan risks slipping yet further behind its peers.

Thanks to the progress made under the 9-month 2023 SBA, the authorities renew efforts to address all these problems to build resilience and support sustainable growth. Prior actions under the new EFF program will focus on:

– Building credibility for the policy and macro stability through more adequate implementation with enforcement of tax policies that have a fuller tax base.
– Improving competition, productivity, and competitiveness
– State-owned enterprise reform and viability of public service and energy sectors.
-Strengthening climate resilience.

Following the Executive Board discussion, Deputy Managing Director Kenji Okamura commented: “Sound policies have helped restore economy stability, reduce risks, and build confidence. Pakistan is moving forward—reserves are growing and inflation is being lowered—but a lot more in terms of structural reforms is needed for long-term resilience.”.

Fiscal consolidation in FY25 and beyond would be substantial and focus on raising revenue by broadening the tax base, scrapping special sectoral regimes, and ensuring that large-scale agriculture and industry pay their fair share. This will make room for important education, infrastructural, and social service investments.

Over time, subsequent reform measures would target integration of federal-provincial finances, improvements in tax administration, and efficiencies in management of public investment.

Current stabilization is happening in the energy sector through timely adjustments in tariff, but further cost-side reforms are needed for greater sustainability. The SBP’s policy cuts reflect the welcome decline in inflation and the buildup of foreign reserves should continue this time on the back of inflows from the EFF.

Urgent issues for structural reforms in Pakistan include low productivity, economic isolation, resource misallocation, and vulnerability to climate change. As Fattourchi et al. observes, now the current government needs to further accelerate reforms on state-owned enterprises, level-playing field for businesses, governance, and anti-corruption efforts, building greater resilience of climate, and attaining fiscal consolidation.