IMF-backed reforms to boost Pakistan’s growth to 2.8% in FY25: ADB

The International Monetary Fund (IMF)-backed reform agenda is expected to boost Pakistan’s economic growth in fiscal year 2025 (FY25), according to the Asian Development Bank's (ADB) Asian Development Outlook September 2024 report.

The Manila-based lender projects a moderate growth rate of 2.8% for Pakistan in FY25, driven by the 37-month Extended Fund Facility (EFF) agreement between Pakistan and the IMF.

The ADB reported that growth in Pakistan rebounded to 2.4% in FY2024, while inflation was lower than anticipated.

Inflation has seen a significant decline, averaging 23.4% in FY 2024, down from 29.2% the previous year.

This economic improvement was attributed to fiscal discipline, a market-driven exchange rate, and enhanced efficiency in the energy sector.

Furthermore, increased agricultural income and higher remittances supported private consumption, while improved crop production helped control food prices.

The ADB also highlighted that the IMF-supported reform programme is expected to create a more stable macroeconomic environment, promoting economic activity.

Private investment is forecasted to rebound due to better macroeconomic conditions, including easier access to foreign exchange, which will benefit the manufacturing and services sectors.

However, the ADB raised concerns about higher personal income tax rates and the government’s spending restrictions, which could limit both private and public consumption in FY25.

Additionally, growth in the agricultural sector is expected to slow due to increased gas prices and reduced fertiliser subsidies.

The report noted that public debt is expected to decline as a percentage of GDP, though interest payments have reached nearly 60% of fiscal revenues.

Inflation in Pakistan is projected to moderate to 15% in FY25, supported by tighter monetary policies and stable global commodity prices.

Pakistan’s current account deficit is anticipated to remain moderate but may rise to 1% of GDP in FY25.

The trade deficit is likely to expand as domestic economic activity recovers, leading to higher imports. However, higher remittances and improved access to multilateral and bilateral financing due to the IMF programme will help offset some of the deficit.

Despite a larger current account deficit, international reserves are expected to grow to 2.1 months of import cover by FY25.

The ADB warned that Pakistan's economic outlook remains vulnerable to shortfalls in external financing and potential lapses in policy implementation, which could lead to increased pressure on the exchange rate and worsen debt vulnerabilities.

The report also noted that external risks, including geopolitical tensions, higher food and oil prices, and tighter global financial conditions, could impact Pakistan’s macroeconomic stability.

However, improved global financing conditions and lower international food and fuel prices would help reduce fiscal and external vulnerabilities.

Pakistan’s economy has shown notable improvement, supported by a combination of economic discipline, increased agricultural income, and remittances from abroad.

These factors have contributed to a steady recovery, with the GDP projected to grow by 2.8% during the 2024-2025 fiscal year, up from 2.4% in the previous year.

The decline is largely attributed to enhanced agricultural production and more stable food prices.

Looking ahead, the Asian Development Bank (ADB) forecasts that inflation will continue to fall, reaching as low as 15% by 2025.

This reduction is expected to be driven by stable monetary policies, improvements in the exchange rate, and the stabilization of global food prices.

Furthermore, financial discipline and an improved business environment have been crucial in stabilizing Pakistan’s economy.

These factors are laying the groundwork for private-sector-led growth, although challenges persist in the agricultural sector.

The ADB emphasises that for Pakistan to maintain this positive trajectory, it must continue implementing economic reforms, particularly in state-owned enterprises, and encourage private investment.

These steps are essential for avoiding financial risks and ensuring long-term, sustainable growth.