Pakistan’s Macroeconomic Outlook Brightens for FY25, Says SBP

The State Bank of Pakistan (SBP) announced on Monday that the nation’s macroeconomic prospects for FY25 have notably improved, buoyed by enhanced economic indicators, more accommodating financial circumstances, and reinforced external balances. Consequently, the real GDP growth forecast for FY25 remains steady at 2.5 to 3.5 percent.

According to the “State of Pakistan’s Economy” report, a bi-annual publication by the SBP released on Monday, the macroeconomic outlook hinges on the fluctuating global economic and political landscape, pinpointing three significant risks: escalating protectionist trade measures impacting exports, remittances, and commodity valuations; repercussions from geopolitical unrest; and a resurgence of worldwide inflation stemming from tariffs and supply-chain vulnerabilities, potentially tightening financial conditions for developing economies.

However, the SBP cautioned that downside risks to growth persist. While diminished international oil prices could offer some upside, further fiscal tightening and a potentially weaker wheat harvest than anticipated may dampen growth.

A brokerage house anticipates that the SBP is poised to reduce the key policy rate by 50 basis points to 11.5%.

“The macroeconomic results and developments have considerably bolstered the overall forecast for FY25 relative to the start of the fiscal year. Although growth decelerated in the first half of FY25 compared to the corresponding period last year, recent high-frequency data implies that economic activity is gaining momentum,” the report stated.

Fueled by stronger growth in worker remittances, decreasing commodity costs, and sustained export momentum, the SBP projects the current account balance to range between -0.5 to 0.5 percent of GDP for FY25. This is expected to offer a cushion against diminished financial inflows and support external reserves.

Considering that the improvement in fiscal accounts in the first half of FY25 was largely facilitated by substantial SBP profit transfers and controlled subsidy disbursements, the fiscal deficit projection is maintained within the range of 5.5-6.5 percent for FY25.

Moreover, any further shortfall in tax revenue constitutes a significant upside risk. Fiscal prudence, a stringent monetary policy stance, abundant reserves of key food staples, and favorable global commodity price trends are anticipated to moderate overall inflationary pressures for the remainder of FY25, the report indicated.

The SBP noted that with a pronounced disinflationary trend and recent fluctuations in food and energy prices both domestically and internationally, the average inflation projection for FY25 has been substantially revised downward to 5.5-7.5 percent, from the prior estimate of 11.5-13.5 percent. These projections account for the anticipated increase in inflation during the final months of FY25 due to the waning base effect, it added.

Likewise, sales of vehicles, cement, and petroleum products have increased recently, and exports of high value-added textiles continue to show an upward trajectory. Easier financial conditions and reduced global energy prices are additional favorable factors anticipated to progressively support the industrial and services sectors. However, the agriculture sector’s growth remains sluggish, with recent estimates indicating diminished wheat production. Given that import volumes are rising in tandem with activity in certain major industries, any disruption to global commodity prices could represent an upside risk.

While inflation is projected to stabilize near the lower limit of the revised projection range in FY25, the report highlighted several risks to the medium-term outlook. These encompass global trade disturbances and associated commodity price volatility due to reciprocal tariffs, the timing and magnitude of adjustments in administered energy prices, new revenue measures, and pressures on the local currency resulting from movements in international currency values and weak financial inflows, the report conveyed.

The report concluded that the macroeconomic outlook depends on the evolution of the global economic and political climate, identifying three key risks.

  • First, the increasing adoption of protectionist trade policies is already taking effect. These tariffs are affecting geopolitical rivals and key trading partners. Higher tariffs could disrupt trade and economic activity, with consequences for emerging economies’ exports, remittances, and global commodity prices.
  • Second, the potential spillover effects of ongoing geopolitical conflicts on the global economy, and particularly on commodity prices.
  • Third, concerns about the resurgence of global inflation due to tariffs and potential supply-chain disruptions, and their implications for global financial conditions, which may negatively impact emerging economies.