SBP sees FY25 inflation of 5.5–7.5pc, real GDP growth of 2.5-3.5pc
KARACHI: Pakistan's macroeconomic conditions strengthened further in the first half of this fiscal year (FY25), with key indicators showing marked improvement. Headline inflation fell to a multi-year low by March 2025, the current account recorded a surplus bolstering foreign exchange reserve, and the fiscal deficit was contained to its lowest level in two decades, supported by a record surplus in the primary balance.
According to the 'State of Pakistan's Economy', Half Year Report FY25, released by State Bank of Pakistan on Monday the calibrated monetary policy stance, fiscal consolidation, benign global commodity prices together with approval of IMF's Extended Fund Facility (EFF) program mainly underpinned these favorable outcomes. In addition, the upgrade of the country's credit rating by international agencies was mentioned as recognition of the improving macroeconomic environment.
The report highlighted that inflationary pressures have receded notably, as headline inflation reached a multi-decade low of 0.7 percent by March 2025. This steep disinflation was attributed to a confluence of factors, including tight monetary policy stance and fiscal consolidation that kept the domestic demand in check, improved supply conditions, respite in energy price adjustments, and subdued international commodity prices.
SBP likely to cut key policy rate by 50bps to 11.5%, brokerage house says
As a result of cooling inflationary pressures and improving inflation outlook, the SBP reduced the policy rate by 1000 basis points from June 2024 – February 2025. The report further noted that the consequent ease in financial conditions, coupled with a slight uptick in economic activity and ADR-related lending, contributed to a substantial growth in private sector credit during H1-FY25.
The moderation in real GDP growth was attributed to lower production of important Kharif crops and contraction in industrial activity during H1-FY25. A broad-based decline in Kharif crops was seen to be caused by falling area under cultivation and lower yields.
The report pointed to the key role of agriculture policy uncertainty, last year's low crop prices, unfavorable weather conditions, and lower use of certified seeds and other inputs for this lackluster performance.
It also mentioned that lower contraction in industry during H1-FY25 compared to the previous year was supported by small scale manufacturing, utilities and slaughtering, whereas mining & quarrying, construction and large-scale manufacturing contributed negatively. Moreover, the report observed that the services sector performed relatively better in H1-FY25, compared to the same period last year.
According to the report, a steady increase in exports and workers' remittances during H1-FY25 outweighed a notable increase in imports, leading to a surplus in the current account balance. These developments, together with the disbursement of the first tranche under the IMF's EFF and a slight pick-up in private inflows, were noted to have strengthened SBP's FX reserves.
The report also includes a special chapter titled 'Pakistan's Low Competitiveness: A Case for Investing in Productivity'. The analysis underscores that weak growth in labor productivity and total factor productivity has adversely affected the country's economic competitiveness over time, which has contributed to the frequent boom-bust cycles.
The chapter finds that Pakistan's performance over time across most drivers of productivity and underlying structural factors has been notably weak, when compared to peer economies. Therefore, emphasis is placed on addressing the macroeconomic and structural constraints to productivity growth. Different box items in various chapters of the report highlight the structural issues in the economy, with relevant recommendations in the light of cross-country experiences.
Reuters adds: Pakistan's average inflation in the fiscal year ending June 2025 is expected to be in the range of 5.5-7.5%, while there is no change in the projection for real GDP growth of 2.5–3.5%, Pakistan's central bank said on Monday in its half-yearly economic report.
Copyright Business Recorder, 2025
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