ISLAMABAD - The Asian Development Bank (ADB) has projected Pakistan’s economy to grow at 2.8 percent in the ongoing financial year (FY2025) as the reform programme is expected to support economic activity by providing a more stable macroeconomic environment. According to the Asian Development Outlook (ADO) September 2024, an update to ADB’s flagship economic publication, Pakistan’s gross domestic product (GDP) growth is projected to have recovered modestly to 2.4% in FY2024 and should growth further by 2.8% in FY2025 accompanied by a decline in inflation. Adhering to the country’s economic reform program will be critical to strengthening macroeconomic stability and the continued recovery of growth, even as downside risks remain.
The reform programme is expected to support economic activity by providing a more stable macroeconomic environment. Private investment should rebound on more favorable macroeconomic conditions, including easier access to foreign exchange. This will also benefit manufacturing and services. However, higher personal income tax rates in the FY2025 budget and the government’s efforts to limit spending will constrain private and public consumption. In addition, growth in agriculture is projected to slow in FY2025 as higher administered prices for gas and lower subsidies raise the cost of fertilizer.
According to the ADB, in July 2024, the IMF and Pakistan reached a staff-level agreement on a 37-month Extended Fund Facility (EFF) arrangement worth about $7 billion that should catalyze significant international financial support for the underlying economic stabilization and reform program. Once approved by the IMF Executive Board, the arrangement should enhance macroeconomic stability. The program aims to consolidate public finances, expand social spending and protection, rebuild foreign exchange reserves, reduce fiscal risks from state-owned enterprises, and improve the business environment to encourage growth led by the private sector.
“The government’s medium-term fiscal consolidation effort envisages a multiyear strategy for revenue mobilization. The program aspires to create a more equitable tax system with reform to broaden the tax base and remove exemptions. The medium-term revenue mobilization program aims to bring the retail and export sectors under the regular tax regime and to align provincial agriculture income taxes with the federal personal and corporate income tax regime through legislative changes,” the ADB noted.
Fiscal consolidation targets tax measures equal to 3.0% of GDP over the EFF program period. With tax revenue measures equal to 1.5% of GDP already implemented through the FY2025 budget, tax revenue is projected to rise to 11.2% of GDP in FY2025. With nontax revenue forecast at 3.1% of GDP, total revenue is expected to increase to 14.3% of GDP by the end of this fiscal year. The government plans to achieve primary surpluses over the medium term to reduce public debt to a sustainable level. The EFF program targets a primary surplus equal to 1.0% of GDP in FY2025 and about 3.2% over the next 2 years to put the debt-to-GDP ratio on a sustainable declining path. The budget deficit in FY2025 is expected to equal 6.9% of GDP. Interest payments in FY2025 are projected to remain elevated at 7.9% of GDP, comprising about 57% of federal current expenditure and absorbing about 75% of federal taxes. Nevertheless, a disciplined fiscal stance is anticipated to significantly reduce these payments in the medium term. A robust revenue mobilization effort and some reduction in interest outlays will create the necessary fiscal space for much-needed social and development spending. Provincial spending will be restrained to achieve a cumulative provincial surplus equal to 1.0% of GDP in FY2025, and spending on defense and subsidies will be maintained at the FY2024 level in terms of GDP. The central bank has committed to maintaining an adequately tight monetary policy to meet its medium-term inflation target. The central bank has adopted a data-driven, forward-looking monetary policy framework and aims to keep real interest rates positive to bring inflation down to its target of 5%–7% over the medium term. Inflation is expected to rise from its recent lows due to the impact of fiscal measures in the FY2025 budget, including higher sales taxes on some items, and energy tariff adjustment required to ensure cost recovery in the energy sector.
The report further stated that with an appropriately tight monetary policy, reduced exchange rate volatility, and a stable outlook for international food prices, inflation expectations are anticipated to moderate later in the year. Therefore, average inflation is projected at 15.0% in FY2025. The current account deficit is expected to remain moderate but rise to 1.0% of GDP in FY2025. The trade deficit is expected to widen as imports grow more rapidly than exports, driven by ongoing recovery in domestic economic activity and the improved availability of imported inputs. The rise in the trade deficit will be partly offset by higher worker remittance inflows. In addition, the new IMF program has improved prospects for multilateral and bilateral financing. Investment is also expected to revive as investor confidence is restored with the implementation of the program. Thus, despite a larger current account deficit, international reserves are expected to increase from 1.8 months of import cover in FY2024 to about 2.1 months in FY2025. High downside risks cloud the economic outlook. With Pakistan’s sizeable external financing requirements, its economic outlook is vulnerable to any shortfall in external inflows, making timely disbursements from multilateral and bilateral partners crucial. Lapses in policy implementation could jeopardize these inflows, increasing pressure on the exchange rate and worsening sovereign debt vulnerabilities. The new government has committed to the necessary stabilization and structural reforms but faces challenges owing to elevated political and institutional tensions and the prospects of social unrest from a steep drop in real incomes.