World Bank projects 2.8% GDP growth rate

October 10, 2024 (MLN): The World Bank has projected Pakistan’s economy to grow 2.8% in fiscal year 2024-25 and 3.2% in fiscal year 2025-26.

Pakistan’s economy grew by 3.1% year-on-year in the second quarter of 2024. This marks the fourth quarter of expansion following a contraction in early 2023. Income generated by bumper crops of rice and wheat supported a robust pickup in private consumption.

Nevertheless, growth is less than half its long-run average, the lender said in its South Asia Development Update.

Pakistan’s recovery from the recent balance-of-payments crisis is expected to continue, it said. Growth in agricultural activity is expected to moderate after the bumper rice and wheat harvest in FY 2023-24.

Manufacturing activity is projected to pick up in FY 2024-25 as import controls and monetary policy are loosened, lifting growth forecast to 2.8% in FY2024-25 and 3.2% in FY2025-26.

The lender expects Pakistan's inflation to remain high in late 2024 because of rising administered energy prices, but projects it to ease in FY 2025-26 as this effect fades. The projected recovery assumes that the IMF-supported reform program remains on track.

South Asia (excluding Afghanistan) is projected to grow by 6.4% in 2024, 0.4 percentage point faster than projected in the April 2024 edition, reflecting better-than-expected growth in Bhutan, India, Nepal, Pakistan, and Sri Lanka.

Once again, South Asia is expected to be the fastest growing EMDE region.

Pakistan is expected to have a near-zero current account balance, while Nepal and Sri Lanka are projected to run current account surpluses in 2024, the report said.

Pakistan's exports have continued to recover from the floods of 2022. While import growth remains slow, notwithstanding some pickup in year-on-year growth in May and June 2024.

In Pakistan, headline inflation declined to 9.6% in August 2024 from a peak of 38% in May 2023, supported by a stabilizing currency, improved domestic supplies of perishables and staple foods, and a rebound in wheat and rice crops that were severely damaged by floods in 2022.

As a result, the State Bank of Pakistan lowered its policy rate to 17.5% in September from 22% in May 2024. Monetary policy still remains tight. In real terms, at around 8%, despite cumulative interest rate cuts of 4.5 percentage points in June–September 2024 as inflation declined even faster.

Growth of credit to the private sector accelerated from 1% in March to 3% in July, below pre-pandemic levels, with banks’ lending activities continuing to be constrained by sizable sovereign exposures.

Meanwhile, the lender noted that Pakistan’s high public debt, high interest-to revenue ratios, and low interesting reserve coverage leave the economy vulnerable to increases in global interest rates and high global energy prices.

Such shocks could lead to capital outflows currency depreciation, and a credit crunch that threatens the government’s ability to refinance maturing government debt, it noted.

Implications of Geoeconomic Fragmentation for South Asia

Pakistan’s geopolitical shift toward China has brought it geopolitically further from its main export markets in Europe.

This has increased the vulnerability of Pakistan’s exports while its portfolio investment and FDI vulnerabilities have fallen as a result of sharply higher inflows from other, geopolitically closer EMDEs (especially those in the Gulf).

Since 2016, India, Pakistan, Sri Lanka, and Bhutan have increased the diversity of their export markets, as well as their sources of FDI.

Pakistan has also widened its sources of portfolio investment.

The report noted that in Pakistan, robust remittance inflows offset deficits in goods trade, with goods trade deficits declining in FY2024 but remaining large.

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