January 28, 2025 – Pakistan is poised for a significant economic boost as inflation is expected to stabilize around 7%, the long-term average. This moderation in inflation, following years of volatility, is seen as a crucial factor in facilitating further reductions in borrowing costs, which could spark increased investment and provide much-needed support for the economy, particularly in key sectors like large-scale manufacturing (LSM) and services.
According to the latest half-yearly report, “State of Pakistan’s Economy,” by the Finance Division, the stabilization of inflation is anticipated to create a favorable environment for business activity. With the policy rate potentially being lowered further, both businesses and consumers stand to benefit from reduced borrowing costs, thus helping to stimulate economic momentum in 2025.
One of the primary drivers of this recovery is expected to be a steady increase in remittance inflows, which are projected to continue their upward trajectory. This will provide a boost to household consumption, bolstering economic activity across various sectors. The report also highlights the government’s efforts to manage the fiscal side effectively, with reduced borrowing costs contributing to a significant decline in markup expenditures. This, in turn, will enhance fiscal sustainability and provide more room for growth.
After a slight contraction of 0.2% in FY2023, Pakistan’s economy showed resilience with a 2.5% growth in FY2024. This upward trend has continued into H1-FY2025, driven by improved macroeconomic management, effective inflation control measures, and a more stable fiscal and external account. The agricultural sector, although facing some challenges, has seen growth, albeit at a slower pace. The sector grew by 1.15% in Q1-FY2025, down from 8.09% in the same period last year. This slowdown was primarily due to the high base effect from the previous year and a decline in the production of key crops such as cotton, rice, and maize.
Despite these challenges, other agricultural segments have shown promise. Livestock, for instance, grew by 4.89%, surpassing the previous year’s growth rate of 4.56%. The government has remained committed to supporting agriculture, with a focus on ensuring timely access to essential farm inputs and a significant allocation of Rs23.9 billion under the Public Sector Development Program (PSDP) for FY2025 aimed at enhancing productivity and modernizing the sector.
In terms of industrial performance, Pakistan has seen mixed results. The large-scale manufacturing (LSM) sector showed a modest growth of 1% in FY2024. However, industrial output contracted by 1.03% in Q1-FY2025, although this was an improvement compared to the 4.43% contraction recorded in Q1-FY2024. The textile industry, which accounts for 18.2% of LSM output, rebounded, growing by 2.3% in Q1-FY2025 after a steep contraction of 12.7% the previous year.
The automotive sector has been a standout performer, with vehicle production surging by 28.3% and sales increasing by 28.2% in the first half of FY2025. The expansion of green energy initiatives, such as Dewan Motors’ local production of electric vehicles (EVs), marks a significant milestone in the country’s industrial evolution.
Despite positive developments, the construction industry continues to face challenges. Cement dispatches fell by 4% in H1-FY2025, driven by weak domestic demand amid subdued construction activity. However, cement exports showed impressive growth, rising by 31.7% over the same period.
The services sector has also displayed resilience, rebounding with a growth rate of 2.2% in FY2024, after a marginal contraction in the previous year. Although growth slowed to 1.43% in Q1-FY2025, the sector remains a critical driver of the economy, particularly with expanding digital and communication services. Trade volume in services grew by 8.3%, and remittance inflows saw a notable surge of 32.8%, which will further stimulate consumer spending and retail business activity.
With inflation under control, borrowing costs reduced, and key sectors showing signs of recovery, Pakistan’s economic outlook for 2025 is increasingly optimistic. The government’s prudent fiscal and monetary policies, combined with a favorable external environment, position the country for sustained growth in the near term.