IMF macroeconomic projections
The press release of the 9th of May by the IMF highlights that the IMF Executive Board has completed the first review of the Extended Fund Facility arrangement with Pakistan. It also indicates the approval of the request for an arrangement under the Resilience and Sustainability Facility.
The last part of this statement includes a set of macroeconomic projections for 2024-25 and 2025-26. As highlighted below, these projections diverge significantly from the initial set of projections made at the start of the Extended Fund Facility in September 2024.
The objective of this article is to analyse these projections of GDP growth, employment, prices, general government finances, monetary and credit and the external balance of payments.
The IMF now expects that the GDP growth rate will be lower than originally projected. This reflects the relatively poor performance of the economy in the first three quarters of 2024-25. The Quantum Index of Manufacturing is down by 1.9 percent up to February 2025. The cotton crop is lower by over 20 percent, while there is no increase in the output of rice or wheat. Overall, electricity sales have fallen by 3 percent.
Consequently, the IMF has now projected the GDP growth rate at 2.6 percent, as compared to the expectation earlier that it would rise to 3.2 percent in 2024-25. Even the projection of 2.6 percent growth appears optimistic.
The projected growth rate originally for 2025-26 was 4 percent. This has now been brought down to 3.6 percent. Clearly, for a higher growth path, the level of private and public investment will have to rise sharply.
There has also been a significant downward revision in the projections of the rate of inflation by the IMF. This clearly reflects the extraordinary drop in the rate of inflation in 2024-25. It has come down every month in 2024-25, from 11.1 percent in July 2024 to only 0.3 percent in April 2025. The monthly average is at 4.8 percent.
The IMF expects the rate of inflation to average 5.1 percent in 2024-25. This implies a significant upsurge in the months of May and June, due to a 'low base' effect. The anticipation is of a significant upsurge in the rate of inflation to almost 8 percent.
Two projections by the IMF appear to be completely out of line with reality. The unemployment rate is estimated at 8 percent in 2024-25 and at 7.5 percent in 2025-26, with the rise in the GDP growth rate. However, the IMF probably does not know that the digital Population and Housing Census of 2023 has estimated the unemployment rate in Pakistan substantially higher: at 22 percent.
The other big understatement is that of the incidence of poverty in Pakistan by the IMF, at only 21.9 percent. This is despite the lack of increase in real per capita income and extremely high inflation in food prices in 2022-23 and 2023-24. The latest estimate of the incidence of poverty is by the World Bank at over 42 percent. This is almost twice the magnitude reported by the IMF.
The substantial understatement of poverty and unemployment by the IMF reveals the absence of a 'human face' to the Programme and a lack of sensitivity to the over 100 million people in Pakistan living below the poverty line. There is need for more focus on pro-poor interventions in the Programme.
Turning to the balance of payments projections for 2024-25 and 2025-26, we see here also a significant divergence from the original set of projections.
The current account deficit had earlier been projected at USD 3.6 billion in 2024-25 and at USD 3.8 billion in 2025-26. The projections now are at USD 0.4 billion deficit only in 2024-25 and at USD 1.6 billion in 2025-26.
Clearly, this is a reflection of the phenomenal growth in workers' remittances of 33 percent in the first nine months of 2024-25. However, it is unlikely that there will be a significant growth in remittances in 2025-26.
The big surprise is the optimism about the balance in the financial account. It is projected at USD 4.4 billion in 2024-25. There was actually a deficit in this account of USD 1.4 billion in the first nine months. Is the IMF expecting a very large inflow of USD 5.8 billion in the last quarter of 2024-25? This is extremely unlikely.
The consequence of this overstatement of the net inflow into the financial account in 2024-25 is a likely over-projection of the level of foreign exchange reserves at the end of the year of USD 13.9 billion. This is also significantly higher than the original estimate of USD 12.8 billion.
There is need for recognition of the negative inflow into the government account of loans net of debt servicing. There has been little success in mobilizing external financing through flotation of Euro/Sukuk bonds and borrowing from international commercial banks.
The optimism about the outcome of the balance of payments is retained for 2025-26. The latest projections reveal that the foreign exchange reserves will rise to USD 17.7 billion by the end of the year. Consequently, the import cover of reserves will come very close to three months. Pakistan will have emerged once again as a financially solvent country by the end of the second year of the ongoing IMF Extended Fund Facility.
Overall, the latest set of IMF projections for 2024-25 and 2025-26 reveals a degree of realism with regard to the growth rate of the economy and the rate of inflation. However, there is a degree of optimism with regard to the balance of payments projections.
Further, the IMF has revealed a degree of insensitivity by grossly understating the rate of unemployment and the incidence of poverty. This is in line with the lack of a 'human face' in the IMF programme.
The next article will take up an in-depth analysis of the public finance projections by the IMF and highlight in particular the implications for the federal and provincial budgets of 2024-25.
Copyright Business Recorder, 2025
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