KARACHI: “Falling investment amid low savings, an unfavourable business environment, lack of research and development, and low productivity, alongside climate change risks, continue to constrain the economy’s growth potential,” said the central bank’s annual report on the “State of Pakistan’s Economy”, released on Thursday.

According to the State Bank’s report, inefficiencies in the energy sector have resulted in the accumulation of circular debt. “While the government has started to address energy sector challenges through substantial price adjustments, there is a need to broaden the scope of these efforts by introducing sectoral policy and regulatory reforms,” said the report.

These reforms are also necessary to address inefficiencies in state-owned enterprises (SOEs) that continue to be a drain on fiscal resources, which are already constrained by a low tax-to-GDP ratio.

The SBP projected the GDP growth for FY25 to range between 2.5 and 3.5pc while it expects inflation to fall below the previous projections. The annual report paints a positive outlook for future economic growth and stability, with minimum current account deficit.

Projects GDP growth at 2.5-3.5pc for FY25

Inflation dropped from its peak of 38pc in May last year to 12.6pc in June this year. It averaged 23.4pc during FY24, considerably lower than 29.2pc in FY23.

“The continuation of fiscal consolidation efforts and the lagged impact of tight monetary policy stance are anticipated to further weaken inflationary pressures in FY25,” said the report.

The recent outturns suggest average inflation would fall below the earlier projected range of 11.5-13.5pc in FY25, said the central bank.

In addition, continued fiscal consolidation is also expected to support further decline in inflation, it added.

“A relatively lower borrowing cost and a gradual recovery in large-scale manufacturing (LSM) and services sector is projected to support real GDP growth in the range of 2.5-3.5pc in FY25,” the report said.

Agriculture leads the way

The real GDP registered a moderate agriculture-led recovery in FY24, according to the report. A record harvest of wheat and rice, and a rebound in the production of cotton, provided a boost to agricultural output during FY24.

Moreover, while there are upside risks to global commodity prices due to rising geopolitical tensions, commodity prices continue to be low.

“These factors would keep the current account deficit within the range of 0.0-1.0pc of GDP in FY25,” said the report.

Current account deficit

The current account deficit narrowed to a 13-year low in FY24 as strong growth in remittances and exports more than offset a slight increase in imports.

The report expressed hopes that approval of the IMF’s Extended Fund Facility last month would further strengthen the country’s external account position, improve sovereign credit rating, and enhance investor confidence.

At the same time, the country is expected to benefit from a favourable global economic environment, as inflation is falling in advanced economies, while global economic growth is expected to remain steady.

The gradual exchange rate appreciation during the year, together with a higher-than-envisaged fiscal consolidation, led to a notable decline in public debt to GDP ratio in FY24, said the report.

Published in Dawn, October 18th, 2024