Pakistan’s macroeconomic landscape improved in the fiscal year 2023-24, fueled by various factors, including productive collaboration with the International Monetary Fund (IMF).
In its Annual Report on the State of Pakistan’s Economy for FY 2023-24, the State Bank of Pakistan (SBP) noted that, in addition to the IMF engagement, stabilization policies, reduced uncertainty, and a favorable global economic environment also bolstered the economy.
The report highlighted an increase in domestic agricultural productivity, contributing to better macroeconomic outcomes during the year. Real GDP experienced a moderate, agriculture-driven recovery in FY24, primarily due to record wheat and rice harvests and a rebound in cotton production.
Despite the recovery in real economic activity, the current account deficit further narrowed to a 13-year low, as a robust increase in remittances and exports outweighed a slight uptick in imports. The Stand-By Agreement with the IMF catalyzed inflows from other multilateral and bilateral sources, aiding in the build-up of foreign exchange reserves and stabilizing sentiments in the foreign exchange market.
The gradual appreciation of the exchange rate, combined with higher-than-expected fiscal consolidation, led to a significant decline in the public debt-to-GDP ratio in FY24.
Tight Monetary Policy
The SBP maintained a tight monetary policy stance throughout FY24, keeping the policy rate unchanged at 22%. It also implemented reforms in foreign exchange companies following government actions aimed at stabilizing the foreign exchange and commodity markets. The government continued fiscal consolidation, achieving a primary balance surplus for the first time in 17 years.
These measures, alongside a decline in global commodity prices amid improved economic activity and trade, positively impacted key macroeconomic indicators. Inflation fell from a peak of 38% in May 2023 to 12.6% in June 2024, averaging 23.4% for FY24, down from 29.2% in FY23. A consistent decrease in both headline and core inflation in the latter half of FY24 allowed the SBP to lower the policy rate by 150 basis points to 20.5% in June 2024.
Challenges to Sustaining Stability
Despite these positive developments, the report indicated that several structural impediments continue to challenge the sustainability of macroeconomic stability. Falling investment amid low savings, an unfavorable business environment, insufficient research and development, and low productivity, alongside climate change risks, continue to hinder the economy’s growth potential.
Moreover, long-standing inefficiencies in the energy sector have led to the accumulation of circular debt. While the government has begun to address these challenges through substantial price adjustments, a broader approach is needed, including sectoral policy and regulatory reforms to tackle inefficiencies in state-owned enterprises (SOEs), which drain fiscal resources already limited by a low tax-to-GDP ratio.
‘Reforming SOEs’
In light of these challenges, the SBP report included a special chapter on “Reforming SOEs in Pakistan,” discussing the country’s historical and current experiences with SOE reforms. The chapter proposed measures for a successful reform agenda based on international best practices. This includes a focus on sectoral policy, effective implementation of recently introduced corporate governance reforms, fostering a competitive environment, and ensuring effective regulation, all supported by broad political consensus.
Current Account Deficit
The SBP anticipates that the improvement in Pakistan’s macroeconomic conditions during FY24 will continue into FY25. The approval of the Extended Fund Facility (EFF) program with the IMF in September 2024 is expected to further bolster the country’s external account position, enhance its sovereign credit rating, and boost investor confidence.
Additionally, the country stands to benefit from a supportive global economic environment, characterized by declining inflation in advanced economies and steady global economic growth. Despite potential upside risks to global commodity prices from rising geopolitical tensions, prices remain low, which is likely to keep the current account deficit within the range of 0% to 1% of GDP in FY25.
Inflationary Pressures
The report suggests that ongoing fiscal consolidation efforts and the delayed effects of a tight monetary policy are expected to further alleviate inflationary pressures in FY25. Recent data indicates that average inflation may fall below the previously projected range of 11.5% to 13.5% for FY25.
Moreover, continued fiscal consolidation is likely to support a further decline in inflation. A lower borrowing cost, coupled with a gradual recovery in the large-scale manufacturing and services sectors, is projected to facilitate real GDP growth in the range of 2.5% to 3.5% in FY25.
