Pakistan’s economic recovery continues to gather momentum, according to the State of Pakistan’s Economy, Half Year Report for FY25, released today by the State Bank of Pakistan (SBP). The report reveals a series of positive macroeconomic developments, including a sharp decline in inflation, a surplus in the current account balance, and the lowest fiscal deficit since FY05. These outcomes are largely attributed to a strategic blend of policies, including tight monetary measures, fiscal consolidation, and favorable global commodity prices, along with the approval of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) program.
A key highlight of the report is the dramatic reduction in inflationary pressures. Headline inflation, which had been a significant concern in previous years, reached a multi-decade low of just 0.7% by March 2025. This steep disinflation is credited to several factors, including the SBP’s tight monetary policy, fiscal discipline that restrained domestic demand, improved supply conditions, relief in energy price adjustments, and subdued international commodity prices. This combination of factors has played a vital role in taming inflation, leading to a more stable economic environment.
In response to the improving inflation outlook and easing financial conditions, the SBP reduced its policy rate by 1000 basis points between June 2024 and February 2025. This has contributed to a substantial rise in private sector credit during H1-FY25, alongside a slight uptick in economic activity. Despite this, the report acknowledges that real GDP growth has moderated, primarily due to lower production of key kharif crops and a contraction in industrial activity during the first half of FY25.
The decline in agricultural production, particularly in the kharif crops, was driven by a combination of factors, including reduced acreage under cultivation, lower yields, and adverse weather conditions. The report also points to agricultural policy uncertainty, last year’s low crop prices, and insufficient use of certified seeds as contributing factors. In the industrial sector, while small-scale manufacturing, utilities, and slaughtering showed some growth, larger sectors such as mining, quarrying, construction, and large-scale manufacturing struggled, contributing to a contraction in industrial output.
However, the services sector performed relatively better compared to the same period last year, providing some support to overall economic activity. On a more positive note, the report highlights the steady increase in exports and workers’ remittances, which outweighed the rise in imports, leading to a surplus in the current account balance. This, coupled with the disbursement of the first tranche under the IMF’s EFF and a slight recovery in private inflows, has strengthened the SBP’s foreign exchange reserves.
The report also includes a special chapter focusing on Pakistan’s low competitiveness and the need for increased investment in productivity. The analysis stresses that weak growth in labor and total factor productivity has significantly hindered Pakistan’s economic competitiveness. The report underscores the importance of addressing macroeconomic and structural constraints to boost productivity and reduce the frequent boom-bust cycles that have plagued the economy over time.
Looking ahead, the SBP’s outlook for inflation remains optimistic, projecting average inflation for FY25 to fall in the range of 5.5% – 7.5%. The current account balance is expected to stay in the range of -0.5% to 0.5% of GDP, supported by strong exports and remittances. However, risks to the medium-term outlook remain, including the potential impact of global trade disruptions, commodity price volatility, geopolitical tensions, and domestic fiscal adjustments.
Despite these challenges, the SBP maintains its real GDP growth forecast for FY25 at 2.5% – 3.5%. However, the report highlights downside risks, particularly related to additional fiscal consolidation efforts and the possibility of lower-than-expected wheat harvests.
Overall, Pakistan’s economic recovery appears to be gaining traction, and with the right policies in place, the country may be on track for a more stable and sustainable economic future. The SBP’s projections and the positive trends observed in the first half of FY25 indicate that Pakistan is taking significant strides toward stabilizing its economy and improving its macroeconomic fundamentals.