Pakistan’s economic outlook for fiscal year 2025 is less than promising, with the country projected to experience modest growth in the range of 2.5% to 3.5%. This forecast, backed by the State Bank of Pakistan (SBP), the International Monetary Fund (IMF), and the Finance Ministry, paints a grim picture for an economy where population growth is closing in on 2.44%. Despite the optimistic rhetoric, this growth rate is hardly sufficient to drive significant progress or even maintain a stable standard of living, let alone propel the country toward prosperity. To achieve anything resembling sustainable economic growth, Pakistan requires a rate well above 5%. Yet, the SBP’s recent decision to keep interest rates high signals that such growth will remain out of reach without substantial policy changes.
At the heart of the SBP’s decision is the current state of Pakistan’s economy, which is struggling to break free from its reliance on imports. The central bank’s latest assessment notes that “import-based economic activity continues to gain traction,” referring to the fact that Pakistanis are once again spending heavily on imports. This is largely fueled by exchange rate stability and a drop in global commodity prices. From food staples like edible oil and pulses to industrial inputs such as plastics, iron, and cotton, demand for imports is rising, boosted by a mild recovery in real incomes and an uptick in home remittances. As a result, purchasing power has strengthened, and consumer spending on imported goods has returned.
However, while consumption is rising, Pakistan’s domestic production is stagnating. The agricultural sector is floundering, manufacturing remains sluggish, and high energy costs, coupled with persistently high interest rates and a burdensome tax regime, have made local production uncompetitive compared to imports. Consequently, Pakistan’s economy is tilted more toward consumption than production—a situation that limits the potential for sustainable growth.
The SBP’s policy pause comes in the wake of its efforts to stimulate bank lending to the corporate sector through the Advance-to-Deposit Ratio (ADR) regime. Instead of encouraging capital investments, this liquidity has fueled the import-driven growth, creating a paradox: large corporate lobby groups such as the Pakistan Business Council (PBC) and the Overseas Investors Chamber of Commerce & Industry (OICCI) have lauded the SBP’s decision, while smaller industry associations lament their inability to access credit without rate cuts.
Some economists argue that SBP could have pursued an alternative approach by cutting interest rates while allowing the currency to depreciate. This would have made imports more expensive and increased the competitiveness of Pakistani exports, potentially reducing the trade deficit and boosting foreign exchange reserves. However, the central bank has opted against this strategy, citing concerns that such a move could destabilize the rupee and invite chaos in the economy.
SBP is wary that significant depreciation of the rupee could result in decreased remittance flows, as overseas workers might hold off sending money in anticipation of better rates. Additionally, the risk of capital flight and the potential for a resurgence of parallel markets (hawala/hundi) are real concerns. This caution is further influenced by the Federal Reserve’s own cautious stance on rate cuts, which makes SBP reluctant to diverge too sharply from global monetary trends.
Despite these concerns, SBP’s stance on interest rates is rooted in a broader issue: structural reforms. While the central bank continues to maintain a high policy rate, it also recognizes that real economic growth cannot occur without significant structural changes. The SBP has warned Islamabad that without reforms, economic progress will remain elusive. However, after nearly two years of aggressive monetary tightening, Islamabad has yet to deliver the necessary reforms. The government seems more inclined to shoulder the burden of rising debt repayments than to make the politically difficult changes needed to reform the economy.
The Pakistan Business Council (PBC) has been vocal in its call for these reforms. According to Nadeem-ul-Haque, the government must fundamentally restructure the economy. This includes reducing the size of the bloated government, eliminating redundant ministries, reforming the tax system to focus more on direct taxes, and making industry competitive by lowering import tariffs and removing market distortions. Additionally, the privatization of state-owned enterprises should be expedited.
The SBP’s message is clear: it has done what it can, but the next phase of economic recovery is in the hands of Islamabad. If Pakistan is to achieve meaningful and sustainable growth, it must prioritize productivity-enhancing reforms. Anything less will only prolong the current cycle of stopgap measures and borrowed time, leaving the country running in place without progress.
In conclusion, the SBP has effectively told Pakistan’s policymakers that the time for reforms is now. Without decisive action on structural changes, the country will continue to face stagnant growth, escalating debt, and an economy that is unable to compete on the global stage. The ball is now firmly in the government’s court.