On October 17, 2024, the State Bank of Pakistan (SBP) released its Annual Report on the State of Pakistan’s Economy for the fiscal year 2023-24, revealing positive developments in the country’s macroeconomic situation. The report attributes this improvement to a combination of stabilization policies, successful negotiations with the International Monetary Fund (IMF), reduced uncertainty in economic conditions, and a favorable global economic environment.
One of the key drivers of this recovery is an increase in domestic agricultural productivity. The report highlights a robust agricultural output during FY24, characterized by a record harvest of wheat and rice, alongside a rebound in cotton production. This agricultural growth played a significant role in bolstering the overall macroeconomic indicators.
Notably, the report indicates that the real GDP experienced a moderate recovery, primarily led by the agricultural sector. As economic activity began to stabilize, the current account deficit further narrowed, reaching a 13-year low. This improvement can be attributed to a substantial increase in remittances and exports, which outpaced a slight uptick in imports. The ongoing Stand-By Agreement with the IMF has also facilitated inflows from various multilateral and bilateral sources, contributing to the buildup of foreign exchange reserves and fostering positive sentiment in the foreign exchange market.
Throughout the fiscal year, the SBP maintained a tight monetary policy, keeping the policy rate unchanged at 22 percent for the majority of FY24. This cautious approach, combined with the introduction of reforms in foreign exchange companies, followed by administrative measures from the government, has helped stabilize foreign exchange and commodity markets. Furthermore, the government’s continued efforts toward fiscal consolidation resulted in a primary balance surplus for the first time in 17 years.
The report notes that declining global commodity prices, alongside improved global economic activity and trade, positively influenced key macroeconomic indicators. Inflation, which peaked at 38 percent in May 2023, saw a significant decline, averaging 23.4 percent during FY24 compared to 29.2 percent in the previous fiscal year. The latter half of FY24 witnessed a consistent reduction in both headline and core inflation, which enabled the SBP to lower the policy rate by 150 basis points to 20.5 percent in June 2024.
Despite these promising developments, the report underscores the existence of various structural impediments that continue to challenge sustained macroeconomic stability. Issues such as falling investment amid low savings, an unfavorable business environment, limited research and development, and low productivity remain significant barriers to the economy’s growth potential. Additionally, longstanding inefficiencies in the energy sector have led to the accumulation of circular debt, further complicating the economic landscape.
While the government has initiated measures to address these challenges through substantial price adjustments in the energy sector, there is a pressing need for broader policy and regulatory reforms. This includes tackling inefficiencies in State-Owned Enterprises (SOEs), which have historically drained fiscal resources, particularly given the low tax-to-GDP ratio.
The report also features a special chapter on “Reforming SOEs in Pakistan,” which reviews the country’s historical and current experiences with SOE reforms. This chapter offers recommendations for a successful reform agenda, grounded in international best practices, emphasizing the importance of effective implementation of corporate governance reforms, the establishment of a competitive environment, and ensuring robust regulation, all supported by a broad political consensus.
Looking ahead, the SBP anticipates that the improvements in Pakistan’s macroeconomic conditions during FY24 will continue into FY25. The approval of the Extended Fund Facility (EFF) program with the IMF in September 2024 is expected to further bolster the country’s external account position, improve its sovereign credit rating, and enhance investor confidence.
Additionally, Pakistan is poised to benefit from a supportive global economic environment, with declining inflation in advanced economies and steady global economic growth. While there are some upside risks to global commodity prices due to geopolitical tensions, prices remain low, helping to keep the current account deficit within the 0.0 to 1.0 percent of GDP range for FY25.
The continuation of fiscal consolidation efforts and the lagged impact of the tight monetary policy stance are projected to further mitigate inflationary pressures in FY25. Recent data suggest that average inflation may fall below the earlier forecast range of 11.5 to 13.5 percent. Furthermore, the ongoing fiscal consolidation is likely to support a continued decrease in inflation, while lower borrowing costs and a gradual recovery in the Large Scale Manufacturing (LSM) and services sectors are projected to facilitate real GDP growth in the range of 2.5 to 3.5 percent for FY25.