The State Bank of Pakistan (SBP) has released its Annual Report on the State of Pakistan’s Economy for the fiscal year 2023-24, highlighting signs of economic recovery fueled by stabilization policies, enhanced agricultural productivity, and collaboration with international financial institutions.
The report indicates that macroeconomic conditions improved in FY24, thanks to successful stabilization measures, fruitful negotiations with the IMF, and a favorable global economic landscape. Key agricultural gains, including record harvests of wheat and rice, as well as a resurgence in cotton production, significantly contributed to this recovery.
Agriculture-Led Economic Recovery and Narrowing Current Account Deficit
Pakistan’s real GDP growth has shown moderate recovery, primarily driven by the agricultural sector. Despite this rebound, the current account deficit has narrowed to a 13-year low, aided by robust remittances and export growth, which have compensated for a slight increase in imports. The IMF’s Stand-By Agreement also strengthened foreign exchange reserves, resulting in an appreciation of the exchange rate and a decrease in the public debt-to-GDP ratio.
Tight Monetary Policy and Foreign Exchange Reforms
Throughout FY24, the SBP maintained a tight monetary policy, keeping the policy rate at 22 percent. However, in June 2024, the rate was reduced by 150 basis points to 20.5 percent due to a consistent decline in inflation. Reforms in the foreign exchange market and administrative actions in commodity markets have also played a role in restoring stability.
Inflation Decline Amid Structural Challenges
Inflation fell from a peak of 38 percent in May 2023 to 12.6 percent by June 2024, with an average inflation rate of 23.4 percent for the year—significantly lower than FY23’s 29.2 percent. Despite these improvements, the report highlights persistent structural challenges that continue to impede long-term stability, including low investment, poor productivity, climate change risks, and inefficiencies in the energy sector and State-Owned Enterprises (SOEs).
Emphasis on Structural Reforms and SOEs
A special chapter in the report focuses on the reform of SOEs, identifying inefficiencies that strain fiscal resources. It calls for ongoing corporate governance reforms, the establishment of a competitive environment, and sector-specific policy changes. While the government has made progress in addressing energy sector issues, broader reforms are essential to tackle circular debt and enhance fiscal health.
Positive Outlook for FY25
Looking ahead, 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, improve Pakistan’s sovereign credit rating, and boost investor confidence. With steady global economic growth and lower commodity prices, the current account deficit is projected to remain between 0.0 and 1.0 percent of GDP in FY25.
Further Decline in Inflation Expected
Inflationary pressures are expected to ease further in FY25 due to ongoing fiscal consolidation and the effects of tight monetary policy. The SBP predicts that average inflation will fall below the previously projected range of 11.5 to 13.5 percent, with real GDP growth anticipated to recover in the range of 2.5 to 3.5 percent, driven by advancements in large-scale manufacturing (LSM) and the services sector.
