Pakistan economy expected to grow by 2.8% in FY25: World Bank

The World Bank expects Pakistan may continue on the path of recovery during the current fiscal year, with its economy posting 2.8% growth, and inflation at around 11.1%.

In a report titled ‘Pakistan Development Update’ released on Thursday, the World Bank said GDP growth will reach 2.8% in fiscal year 2024-25 (FY25), as the economy benefits from the absence of import controls and lower inflation.

Business confidence is expected to improve with the recent credit rating upgrades on account of the International Monetary Fund (IMF) program, reduced political uncertainty, and implementation of planned fiscal reforms, such as the devolution of constitutionally mandated expenditures to the provinces.

However, output growth is expected to remain below potential at 3.2% in FY26 as tight macroeconomic policy, elevated inflation, policy uncertainty, and unaddressed structural constraints continue to weigh on activity.

Growth is expected to gradually accelerate over the medium term. However, policy uncertainty, high refinancing needs, limited buffers for shocks, and financial sector risk pose substantial risks to the outlook.

Sectoral growth

According to the World Bank, agriculture sector growth is expected to slow to 1.9% in FY25 due to a high base effect.

In the medium term, the agriculture sector is projected to grow at an average rate of 2.4% over FY25–26. As supply chain challenges continue to subside with easing import controls, availability of farm inputs such as certified seeds and fertilizers will improve.

Additionally, the significant increase in the import of agricultural machinery and implements in FY24 indicates growing investment in farming technology, which is expected to enhance productivity and efficiency in the sector over the near term.

The World Bank report added that with the suspension of import management measures and improved confidence, industry is projected to begin recovering, growing at 3.1% in FY25 and further to 3.2% in FY26.

Together with lower inflation rates, growth in the agricultural and industrial sectors will spill over to the services sector, which is anticipated to grow by 3% in FY25.

This growth will be led by recovery in the largest sub-sectors of wholesale and retail trade, and transport and storage amid the revival of imports and aggregate demand.

With inflationary pressures easing further, the services sector is expected to strengthen to 3.3% in FY26.

With high base effects, lower commodity prices, and continued tight macroeconomic policies, consumer price inflation is expected to slow to an average of 11.1% in FY25 and to 9% in FY26. Inflation will remain elevated in the short term due to higher domestic energy prices.

Poverty rate

Separately, the World Bank estimates the poverty rate rose to 40.5% in FY24 from 40.2% in FY23.

This increase is attributed to sluggish economic growth, high inflation, reduced public investment spending, and a decrease in the real value of social protection benefits. These factors combined have negatively impacted employment and overall economic stability.

In June, the SBP reduced the policy rate by 150 basis points, followed by 100 basis points in July and another cut of 200 basis points in September, bringing the rates down to 17.5% from a peak of 22%.

Looking ahead, based on the continued moderation in inflation, further cuts in the policy rate are likely.

Current and fiscal deficits

World Bank expects Pakistan's Current Account Deficit (CAD) to remain around 1% of GDP over FY25–26.

The CAD is forecast to increase to 0.6% of GDP in FY25 and further to 0.7% in FY26, with imports projected to grow faster than exports, leading to a wider trade deficit.

Without any import management measures, imports are expected to continue surging with the recovery of investment, domestic demand, and industrial sector activity.

Meanwhile, exports are also projected to increase, although at a slower rate in FY25 as agriculture sector exports moderate after the agricultural boom last year.

Additionally, worker remittances are expected to slow due to base effects and slower growth in host countries.

Despite a higher CAD, gross reserves are expected to improve marginally over FY25–26, supported by new inflows under the IMF-EFF.

The fiscal deficit, excluding grants, is projected to increase to 7.6% of GDP in FY25 due to higher interest payment expenditures, before decreasing over the medium term as interest payments gradually decrease and fiscal consolidation and revenue mobilization measures take effect.

The primary balance is projected to record a surplus of 0.7% of GDP in FY25, primarily due to the projected windfalls from the exceptionally high central bank dividends.

These dividends reflected one-off profits from high policy rates in FY24, to be transferred to the government as non-tax revenues in FY25.

The primary balance is projected to turn into a deficit of 0.2% of GDP in FY26.

Public debt, including guaranteed debt, is expected to reach 73.8% of GDP in FY25 and increase further to 74.7% of GDP in FY26.

Sustaining comprehensive fiscal consolidation measures over the medium term is essential to restore fiscal and debt sustainability, according to the report.