The State Bank of Pakistan (SBP) has recently released its Annual Report on the State of Pakistan’s Economy for the fiscal year 2023-24, indicating early signs of economic recovery fueled by stabilization measures, enhanced agricultural productivity, and collaboration with international financial institutions. The report outlines improved macroeconomic conditions in FY24, bolstered by effective stabilization policies, successful negotiations with the International Monetary Fund (IMF), and a favorable global economic landscape. A significant factor in this recovery has been the rise in domestic agricultural productivity, highlighted by record wheat and rice yields and a resurgence in cotton production.
Pakistan’s real GDP growth demonstrated a modest rebound, primarily driven by the agricultural sector. Alongside this recovery, the current account deficit has narrowed to its lowest level in 13 years, thanks to robust remittance inflows and increased exports that compensated for a slight uptick in imports. The IMF’s Stand-By Agreement has also strengthened foreign exchange reserves, leading to an appreciation of the exchange rate and a reduction in the public debt-to-GDP ratio.
Throughout FY24, the SBP implemented a tight monetary policy, maintaining a policy rate of 22 percent. However, in June 2024, the rate was lowered by 150 basis points to 20.5 percent, following a steady decline in inflation. Reforms in the foreign exchange market, along with administrative measures in commodity markets, have also played a role in restoring stability.
Inflation decreased from a peak of 38 percent in May 2023 to 12.6 percent by June 2024, with the average inflation rate for the year at 23.4 percent, down from 29.2 percent in FY23. Despite these encouraging developments, the report identifies several structural challenges that continue to impede long-term stability, including low investment rates, poor productivity, climate change risks, and inefficiencies within the energy sector and State-Owned Enterprises (SOEs). A dedicated chapter in the report addresses the need for reforming SOEs, highlighting inefficiencies that strain fiscal resources. It advocates for ongoing corporate governance reforms, the establishment of a competitive environment, and sector-specific policy changes. While the government has made strides in addressing challenges in the energy sector, comprehensive reforms are essential to manage circular debt and enhance fiscal health.
Looking forward, the SBP report anticipates continued positive momentum into FY25. The approval of the Extended Fund Facility (EFF) with the IMF in September 2024 is expected to strengthen the external account, enhance Pakistan’s sovereign credit rating, and foster investor confidence. With steady global economic growth and declining commodity prices, the current account deficit is projected to remain between 0.0 and 1.0 percent of GDP in FY25. Furthermore, inflationary pressures are projected to ease further in FY25 due to ongoing fiscal consolidation and the effects of a tight monetary policy. The SBP expects average inflation to fall below the previously estimated range of 11.5 to 13.5 percent, while real GDP growth is anticipated to recover within the range of 2.5 to 3.5 percent, primarily driven by advancements in the large-scale manufacturing (LSM) and services sectors.
Overall, while the report presents a cautiously optimistic view of Pakistan’s economic landscape, it underscores the need for continued reforms and vigilance to address the structural challenges that could undermine this recovery.
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