KARACHI: Economic growth in the country will accelerate from 2.4 per cent in FY24 to 3.2pc in FY25, driven by monetary easing, improved agricultural output and slowing inflation, said a report, “Pakistan-Country Risk Report”, prepared by BMI, a FitchSolutions Company, and released on Thursday.
“The risks to our growth outlook are heavily weighted to the downside,” said the report, adding the economy remains very fragile in the face of external shocks. The uncertain political situation could also derail the recovery, the report warned.
“Risks to our forecasts are weighted to the downside.”
The report spelled out three reasons for an optimistic view about growth in 2024-25.
Inflation is likely to fall to 6.2pc, interest rate to 16pc by Dec
“We expect that the vital agriculture sector will continue to recover. The proximate cause of Pakistan’s economic crisis in 2023-24 was a devastating flood, which disrupted agricultural activity,” the report observed.
“Second, we think that inflation will ease sharply, slipping from 11.8pc year-on-year in May 2024 to just 6.2pc in Dec 2024,” it added.
“We also expect that the big falls in Pakistan’s currency are now behind us, and that a broadly stable exchange rate will reduce inflationary pressures.”
“We expect that the key policy rate will be cut from 20.5pc in June 2024 to 16pc by Dec 2024 and to 14pc by Dec 2025,” the report said.
“Risks to our forecast are weighted heavily to the downside,” the report added.
Pakistan’s economy remains very fragile in the face of external shocks and the authorities have very limited fiscal buffers, the report further observed.
According to the report, the World Bank’s latest “crisis preparedness gap analysis” rated the country as ‘basic’ or below on all five of its key metrics.
Risks are weighted towards a wider deficit, which could be caused by a jump in oil prices or lower-than-expected grain production. “Pakistani policymakers have had more success than we had expected in stabilising the rupee, and we now think that the big falls in the currency are behind us,” said the report.
The rating agency expects that the rupee will only weaken a touch over the remainder of 2024, slipping from 278 rupees to the dollar to 290.
“Risks remain weighted heavily towards a larger rather than a smaller depreciation,” said the report.
Inflation and policy rate
The report expressed the hope that easing inflation would provide the State Bank of Pakistan (SBP) with the space to cut its key policy rate from 22pc to 16pc.
“We expect that policymakers at SBP will continue to loosen policy over the longer term, to 14pc by end of 2025,” the report said. “We expect that policymakers will miss their ambitious budget targets, but we still expect that the deficit will slip from 7.4pc in 2023-24 to 6.7pc of GDP in 2024-25.”
The slightly wider overall current account deficit will be due to a larger trade deficit, which will widen from 7.5pc of GDP in 2023-2024 to 7.7pc in 2024-2025.
“We think that Pakistan’s current account deficit will be smaller than the IMF’s expectations, but will widen a touch compared to the previous year, from 0.8pc of GDP in 2023-2024 to onepc in 2024-2025 (IMF: 1.2pc of GDP),” said the report.
“Even with Pakistan’s overall current deficit remaining small, an average of just 1.1pc of GDP over the coming five years, Pakistan will face trouble financing this deficit,” the report concluded.
Published in Dawn, July 19th, 2024
