January 28, 2025 – Pakistan’s economic landscape is showing signs of recovery as inflationary pressures ease and a significant policy rate cut paves the way for sustainable growth. According to a recent report by the Government of Pakistan’s Finance Division, Economic Adviser’s Wing, inflation, which had reached alarming levels during FY2023, has significantly reduced in FY2024, creating an environment conducive to economic recovery.
The government attributes the reduction in inflation to a combination of effective policy measures, falling global commodity prices, and enhanced exchange rate stability. These factors have opened the door for monetary easing, leading to a substantial 1000 basis-point cut in the policy rate, which now stands at 12%. This move is expected to provide much-needed support to industrial growth and consumer activity, creating a more favorable economic environment in the months to come.
Urban food inflation has seen a dramatic decrease, dropping to just 2.7% in H1-FY2025, a significant improvement from 33.2% in the same period last year. Similarly, rural food inflation has fallen to 0.4%, driven by improved domestic food supplies and a decrease in global food prices. These developments have contributed to a broader stabilization of inflationary pressures across both urban and rural areas.
In addition to food prices, non-food inflation has also declined significantly. Urban non-food inflation has decreased to 13.2%, while rural areas saw a reduction to 10.0%. This decline has been largely driven by lower energy costs, a stable exchange rate, and reduced petroleum prices since May 2024. Despite the overall drop in inflation, urban areas continue to experience higher inflation (8.7%) compared to rural regions (5.1%), primarily due to wage pressures and higher non-food inflation.
The broader economic indicators show encouraging trends as well. The Wholesale Price Index (WPI), a measure of inflation at the wholesale level, dropped significantly to 4.4% from 25.4% last year. Similarly, the Sensitive Price Indicator (SPI), which tracks the prices of essential goods, fell to 9.4% from 31.6%. These reductions highlight the stabilization of both wholesale and retail markets, further supporting the case for a recovering economy.
A major component of Pakistan’s economic strategy in FY2025 is the shift in monetary policy. The State Bank of Pakistan (SBP) made a bold move by slashing the policy rate by 1000 basis points, lowering it to 12% in January 2025. This accommodative monetary stance is designed to stimulate economic activity and boost business confidence, particularly in the wake of subdued growth in earlier quarters. The hope is that this policy shift will help foster macroeconomic stability and support a more robust recovery moving forward.
The broader money supply, measured as M2, contracted by 0.8% in H1-FY2025, compared to a 4.5% increase in the previous year. This contraction is attributed to mixed trends in Net Foreign Assets (NFA), which saw the SBP’s NFA rise by Rs652 billion, while the NFA of scheduled banks declined by Rs28 billion. On the domestic front, Net Domestic Assets (NDA) saw a decline of Rs923 billion, reflecting efforts to reduce fiscal deficits and streamline government borrowing for budgetary support.
On a more positive note, private sector credit surged in H1-FY2025, reaching Rs2,090 billion. This was largely driven by a significant rise in loans to businesses, which increased to Rs1,916 billion, up from just Rs443 billion last year. This surge in private sector borrowing signals a resurgence in business expansion and growing confidence in the economy, thanks in part to a favorable policy environment and a reduction in government borrowing.
In conclusion, the combination of declining inflation, a lower policy rate, and increased private sector activity suggests that Pakistan’s economy is on the path to recovery. While challenges remain, the government’s fiscal and monetary policy adjustments are setting the stage for sustainable growth in the near to medium term. With business confidence growing and inflation under control, the country is poised for a positive economic trajectory in FY2025.