Fitch projects 3 per cent growth for Pakistan amid easing interest rates

ISLAMABAD: Pakistan’s economy is on track to grow by 3.0 per cent in the fiscal year 2025, according to a new report from Fitch Ratings. This positive outlook is largely due to stabilising conditions and a drop in interest rates.

Over the past year, the country has made progress in restoring economic balance and strengthening its financial reserves, creating room for gradual recovery.

In a sign of improving business confidence, credit to the private sector turned positive in real terms in October 2024, the first time this has happened since mid-2022.

However, the road ahead still depends on the government’s ability to implement key structural reforms, which will be crucial for the next reviews by the International Monetary Fund (IMF) and securing further financial support from international lenders.

The State Bank of Pakistan lowered its policy rate to 12 per cent on 27 January, following encouraging signs that inflation is under control. In fact, consumer price inflation has fallen sharply to just over 2 per cent in January 2025, down from nearly 24 per cent in the previous fiscal year.

This sharp decline is due to stabilising exchange rates and the effect of earlier subsidy reforms wearing off, which have helped reduce domestic demand and eased the need for external financing.

Economic activity is starting to benefit from these stabilising factors. Pakistan’s current account has shifted into surplus, reaching $1.2 billion in the second half of 2024, a significant turnaround from the previous year’s deficit.

This improvement has been supported by strong remittances, healthy agricultural exports, and strict financial policies, as well as reforms in the foreign exchange market.

Foreign reserves have also performed better than expected, growing to $18.3 billion by the end of 2024.

However, they remain below the level needed to cover the country’s significant external debt obligations, with over $22 billion of public external debt maturing this fiscal year.

While countries like Saudi Arabia and the UAE have rolled over $5 billion in deposits, securing enough external financing remains a challenge.

On the fiscal side, the government has made some headway, with a primary surplus surpassing IMF targets.

However, federal tax revenue growth has been slower than expected. Despite delays, provinces have implemented higher agricultural income taxes, an important step in the IMF programme, though the original reform deadline has been missed.

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