World Bank cuts growth projection to 2.7pc

ISLAMABAD: The World Bank has revised downward GDP growth rate projection by 0.1 percent for Pakistan to 2.7 percent for fiscal year 2025, against its earlier projection of 2.8 percent, saying growth and poverty challenges will persist in the medium term unless bold and sustained structural reforms are implemented to encourage private investment and export competitiveness.

The bank in its latest report, “Pakistan Development Update: Reimagining a Digital Pakistan”, said that macroeconomic outlook hinges on continued macroeconomic stabilisation and implementation of critical structural reforms underpinned by both the IMF-EFF program and URAAN Pakistan.

Projections are predicated on continued fiscal restraint, sound macroeconomic management, the realisation of expected rollovers and new external financing, and gradual progress with the structural reform agenda. Under these assumptions, real GDP growth is estimated to reach 2.7 percent in fiscal year 2025, supported by private consumption and investment, buoyed by lower inflation, increased credit to the private sector and higher business confidence.

IMF lowers Pakistan’s FY25 GDP growth forecast to 2.6%

While economic activity is expected to strengthen in fiscal year 2026 (3.1 percent) and fiscal year 2027 (3.4 percent), growth is expected to remain constrained by tight macroeconomic policies focused on rebuilding fiscal and external buffers and mitigating risks to economic stability. Persistent low growth will continue to hinder poverty reduction amid rapid population growth and constrained economic opportunities, it added.

Sustained medium-term growth acceleration can be achieved if the government: (i) implements reforms to credibly and consistently reduce bureaucratic red-tape in the business regulatory environment; (ii) makes bold reductions in the anti-export bias of the national tariff policy; (iii) pivots tax policy towards broad-based direct taxes; (iv) right-sizes not just government institutions but also the footprint of the SOEs in economic sectors; and (v) ensures that the market-determined exchange rate regime gets embedded into the core fabric of economic management rather than a reform to tinker with depending on political exigencies of the time. In such a scenario, Pakistan can experience the growth acceleration envisaged under URAAN Pakistan.

Consumer price inflation is projected to decline to 5.0 percent in fiscal year 2025, reflecting lower commodity and energy prices alongside a stable market-determined exchange rate. However, inflation is expected to slightly pick up to 6 percent in fiscal year 2026 and 7 percent in fiscal year 2027, driven by a recovery in domestic demand and investment, higher energy prices following sectoral reforms, and new taxation measures. Even with moderating inflation, and barring significant shifts in economic conditions, monetary policy is expected to remain tight in the near term.

The report noted that agricultural growth is projected to slow to 1.7 percent in fiscal year 2025 as the sector recovers from a weak H1. Over fiscal year 2026–27, an average medium-term growth rate of 3.0 percent is projected as the sector recovers from unfavorable weather conditions.

Industrial growth is expected to strengthen to 1.7 percent in fiscal year 2025 as the construction and electricity industries rebound from a decline in the previous year. In the medium term, industrial growth is forecast to strengthen to an average of 2.8 percent.

In fiscal year 2025, the current account is expected to close with a surplus of 0.2 percent of GDP, largely due to strong worker remittances, offsetting a wider trade deficit as imports continue to outpace exports. In the medium term, the current account is expected to move into a deficit with strengthening imports reflecting rising domestic demand and increased investment in the industrial sector.While exports are also expected to expand, their growth will likely be constrained by lower projected commodity prices and global trade uncertainty.

The fiscal deficit (excluding grants) is projected to remain unchanged at 6.8 percent of GDP in fiscal year 2025, reflecting the one-time transfer of SBP profits in the first half of the year and continued fiscal consolidation measures offsetting higher interest payments. The primary balance is projected to record a surplus of 1.8 percent of GDP in fiscal year 2025.

Gross financing needs will remain elevated throughout the forecast period, reflecting maturing short-term debt, repayments to multilateral and bilateral creditors, and upcoming Eurobond maturities. Public debt, including guaranteed debt, is projected to reach 74.6 percent of GDP in fiscal year 2025. Public debt is projected to peak in fiscal; year 2026 at 77 percent, before declining steadily over the forecast period.

The poverty rate, measured at the national poverty line, is estimated to have remained stagnant at 25.6 percent in H1 fiscal year 2025 compared to 25.4 percent in FY24. The stagnant poverty partly reflects a weak labor market, with the sectors that employ higher shares of the poor, (agriculture, construction and low quality services) experiencing weak or negative growth, resulting in little or no real increase in incomes for the poor in H1 fiscal year 2025. With annual population growth rates of nearly 2 percent, poverty is expected to remain broadly stagnant in the near term. With climatic conditions impacting overall agricultural production of key crops such as rice and maize, nearly 10 million people, mostly in rural areas, are expected to experience high levels of acute food insecurity in fiscal year 2025.

The bank said that Pakistan’s economic outlook remains fragile and contingent on the successful completion of the IMF-EFF program, strict fiscal discipline, access to new external financing, and political stability. Any setbacks in policy implementation or delays in structural reforms could dampen the nascent recovery in business and consumer confidence and intensify external pressures. The country’s significant external financing requirements, coupled with modest foreign exchange reserves and the elevated debt burden, also pose ongoing risks. Limited access to credit for households and small businesses, together with liquidity constraints in microfinance institutions, continues to limit financial inclusion, magnifying risks to households and the private sector.

The report further noted that rising protectionism and trade restrictions could reduce external demand and drive domestic inflation through impacts on global supply chains food and energy commodities—a large share of Pakistan’s import basket.

A slowdown in major economic partners, including China, may weaken foreign direct investment and trade. Tightening global financial conditions, with interest rate hikes in advanced economies in response to economic volatility and high domestic inflation, could raise external financing costs and pressure debt sustainability. Additionally, intensifying geopolitical conflicts in the Middle East and Eastern Europe could disrupt supply chains and investment flows. Climate change-induced weather events, particularly floods, continue to threaten agricultural productivity and infrastructure both domestically and abroad. A continued focus on strengthening policy buffers, boosting investments and exports, enhancing climate resilience, and actively fostering regional and global trade cooperation will help mitigate these risks.

The report also highlighted that slow implementation of an ambitious tariff reform plan, protectionist policies, and limited trade finance—exacerbated by the incomplete operationalisation of EXIM Bank—continue to hinder investment, competition, and productivity growth. Central bank exchange rate intervention creates temporary stability but leads to disruptive adjustments, deterring investment and undermining confidence. Inefficiencies and distortions associated with Government’s large presence in commercial sectors of the economy are well known. Lags with implementing plans for privatization or the introduction of private participation are contributing to a credibility gap, with negative impacts on sentiment and investment. Additionally, the business environment remains complex and costly.

The report noted that H1 fiscal year 2025 saw net external financing outflows, due to lower bilateral inflows (compared to net inflows in FY24). The Government continued to rely primarily on domestic financing sources. Amid significant financing needs, the total public and publicly guaranteed debt increased to Rs 80.6 trillion by the end of December 2024, compared to Rs 76.8 trillion at the end of June 2024. Of the total public debt, the share of external debt was 35 percent, implying an ongoing substantial exchange rate risk. Short-term debt accounted for 11.2 percent of total debt at end-December 2024.

“Pakistan’s key challenge is to transform recent gains from stabilization into economic growth that is sustainable and adequate for poverty reduction,” said Najy Binhassine, World Bank Country Director for Pakistan.

“High-impact reforms to prioritize an efficient and progressive tax system, support a market-determined exchange rate, reduce import tariffs to boost exports, improve the business environment and streamline the public sector would signal strong reform commitment, build confidence, and attract investment.”

Copyright Business Recorder, 2025

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