SBP sees resilience in growth momentum: Forecasts real GDP to grow 2.5-3.5pc for FY25

KARACHI: The State Bank of Pakistan said on Thursday that it expects the country’s macroeconomic conditions to continue improving, with the economy projected to grow 2.5 to 3.5 per cent in the fiscal year 2025.

The central bank has released its latest economic projections following the International Monetary Fund’s (IMF) revision of its real GDP growth forecast for Pakistan. The IMF has lowered its growth forecast for the country from 3.5 per cent revealed in May to 3.2 per cent for FY25 due to lower-than-expected growth in the agriculture sector, particularly in cotton and wheat crops.

The FY25 budget includes a significant increase in development spending, which is expected to further boost economic activity, as stated in the SBP’s annual report on the State of Pakistan’s Economy for the fiscal year 2023-24.

It indicated that due to decreasing inflationary pressures, the SBP has begun to reduce the policy rate after maintaining a tight monetary policy stance for an extended period. It is expected that the lower borrowing costs, along with improvements in the external position and the decline in global commodity prices, will help to boost growth in the industry and services sectors during FY25.

While high frequency demand indicators are showing signs of stabilising, there has been consistent improvement in large-scale manufacturing since December 2023. However, the latest information about kharif crops suggests that the agriculture sector may not maintain its growth momentum into FY25.

“In view of these developments, the real GDP growth is expected in the range of 2.5–3.5 per cent in FY25,” the SBP said. This is slightly lower than the government’s target of 3.6 per cent for the current fiscal year. The country’s economy grew 2.5 per cent in FY24.

The SBP’s report indicates that the approval of the 37-month $7 billion Extended Fund Facility programme with the IMF is expected to strengthen the country’s external account position, improve sovereign credit rating, and boost investor confidence. Additionally, the country is likely to benefit from a favourable global economic environment, with falling inflation in advanced economies and steady global economic growth. Although there are potential upward risks to global commodity prices due to rising geopolitical tensions, current commodity prices remain low. These factors are projected to keep the current account deficit within the range of 0.0 – 1.0 percent of GDP in FY25.

The IMF anticipates a current account deficit of $3.57 billion in FY25, which is equivalent to 0.9 per cent of the GDP.

The report also notes that ongoing fiscal consolidation efforts and the delayed impact of a tight monetary policy stance are expected to further ease inflationary pressures in FY25. Recent data indicates that average inflation is likely to fall below the previously projected range of 11.5–13.5 per cent in FY25. Furthermore, continued fiscal consolidation is anticipated to contribute to a further decline in inflation.

The IMF has lowered its inflation forecast for FY25 to 9.5 per cent from the previous 12.7 per cent. This is due to disinflation progressing at a faster pace than originally expected, supported by lower food and oil prices.

The SBP said that amid receding inflationary pressures, the SBP has already started to lower the policy rate, after maintaining the tight monetary policy stance for the longest period in recent past. Lower borrowing costs, combined with improving external position and fall in global commodity prices, are expected to support expansion in industry and services sectors during FY25.

However, the IMF has revised down its inflation for FY25 to 9.5 per cent from earlier 12.7 per cent as disinflation has been proceeding faster than initially anticipated, helped by lower food prices and falling oil prices.

The report highlights that a host of structural impediments continue to pose challenges to sustaining macroeconomic stability. Falling investment amid low savings, unfavourable business environment, lack of research and development, and low productivity, alongside climate change risks continue to constrain the economy’s growth potential.

In addition, longstanding inefficiencies in the energy sector have resulted in the accumulation of circular debt. While the government has started to address energy sector challenges through substantial price adjustments, there is a need to broaden the scope of these efforts by introducing sectoral policy and regulatory reforms.