Pakistan State Bank forecast GDP growth of 2.5% to 3.5% in FY25

Pakistan’s central bank expects the economy to grow by 2.5% to 3.5% this fiscal year, with inflation in the range of 11.5% and 13.5%.

The State Bank of Pakistan (SBP) said in its 2023-24 report that, as inflation drops, it has started lowering interest rates after a long period of high rates. Lower borrowing costs, a better external position, and cheaper global commodity prices are expected to boost industry and services in 2025.

High-frequency demand indicators show improvement since December 2023. However, agriculture may not keep up its growth in 2025 due to the latest information about kharif crops.

According to the preliminary estimates as of 1^st September 2024, cotton arrivals reported a 59.7% decline compared to the same period last year. In view of these developments, the real GDP growth is expected in the range of 2.5% – 3.5% in FY25.

Despite reduction in the policy rate, the real interest rates remain significantly positive. The tight monetary policy stance and continued fiscal consolidation, as envisaged in FY25 budget, are expected to keep inflation significantly contained during FY25.

Moreover, the headline inflation has maintained a general downtrend since June 2023, falling to 6.9% in September 2024, whereas core inflation has also declined considerably in recent months.

In view of the recent outturns, the average inflation in FY25 may even fall below the earlier projected range of 11.5 – 13.5%.

However, volatility in international oil prices, fiscal slippages and unplanned subsidies pose significant risks to this projection.

The SBP projects fiscal deficit in the range of 5.5% – 6.5% in FY25, compared to 6.8% of GDP in FY24. This improvement is expected to come from a sharp increase in both tax and nontax revenues.

While direct taxes are expected to continue the uptrend witnessed since last year, the continuing momentum in economic activity, which is anticipated to be led by industry and services sectors in FY25, and an uptick in imports are likely to further boost indirect taxes.

On the other hand, expenditures are also expected to continue to grow. The FY25 budget envisages notable increase in expenses for social protection.

In addition, the government has announced increase in salaries and pensions of government employees in view of the heightened inflation. Similarly, to give a boost to economic growth, the budget envisages substantial increase in development spending during FY25.

In line with the moderate expansion in industry and services sectors, imports are likely to increase in FY25. Moreover, while there are upside risks to global commodity prices due to rising geo-political tensions, commodity prices continue to be low.

On the other hand, both the exports and workers’ remittances are holding the trends observed in FY24. Incorporating these trends and expected future developments, the SBP expects the CAD to remain contained in the range of 0 – 1.0 percent of GDP in FY25.

On the other hand, the approval of US$ 7 billion EFF program and the realization of external inflows from multilateral and bilateral creditors are expected to further strengthen the external buffers.