World Bank Forecasts Pakistan’s GDP to Grow by 2.8% in FY25

The World Bank has projected Pakistan’s GDP growth at 2.8 percent for fiscal year 2025, up from 2.5 percent in 2024. However, it cautioned that this level of growth is insufficient to reduce poverty rates, which increased from 40.2 percent in 2023 to 40.5 percent in 2024, and to significantly improve living standards.

The Bank’s latest report, “Pakistan Development Update: The Dynamics of Power Sector Distribution Reform,” released on Thursday, stated that economic activity strengthened in fiscal year 2024 due to strong agricultural output, lower inflation, prudent macroeconomic measures, and reduced political uncertainty, following a recession in fiscal year 2023.

Despite these improvements, the report highlighted significant downside risks. The economic outlook hinges on the successful continuation of the new IMF-EFF program, ongoing fiscal restraint, and additional external financing. Potential policy slippages, reform reversals, and increased policy uncertainty could undermine business confidence and elevate external financing constraints and costs.

External Financing Risks

The report identified substantial risks arising from high external financing needs, modest foreign exchange reserves, high debt, the banking sector’s heavy exposure to government debt, geopolitical instability, and vulnerability to climate shocks and natural disasters.

Even if risks are mitigated, the economic outlook remains challenging. With rapid population growth, projected economic growth will only support marginal improvements in incomes and living standards over the medium to long term. Fiscal constraints and low private investment will hinder improvements in service delivery and job creation, leaving Pakistan’s human capital crisis (including high rates of child stunting and learning poverty) largely unaddressed. Consequently, little progress is expected in reducing current high poverty levels.

Poverty

The poverty rate is estimated to have risen to 40.5 percent in FY24 from 40.2 percent in FY23 (US$3.65/day 2017 purchasing power parity [PPP] per capita), driven by low economic growth, high inflation, and declining labor incomes. Although official remittances increased by 10.7 percent in FY24, the real value of transfer incomes has declined due to exchange rate appreciation and elevated inflation.

Public spending on infrastructure and construction has decreased, and social protection expenditures have not kept pace with inflation. The economic slowdown and fiscal challenges have limited investments in human capital.

“Pakistan’s stabilizing economy is on a path to recovery. To sustain and strengthen this positive momentum, steady implementation of the Government’s structural reforms plan addressing long-standing constraints to faster growth will be key. These include reforming an inequitable and distortive tax system, reducing inefficient expenditures and untargeted subsidies, lessening the large state presence in the economy, reducing barriers to trade and investment, and cutting losses in the energy sector,” said Najy Benhassine, World Bank Country Director for Pakistan.

“Implementation of planned structural policy reforms, supported by a strong national political consensus and increased private sector participation, is critical to mitigating risks, supporting stronger private-led growth, and reducing poverty.”

Economic Stabilization

As economic stabilization continues, macroeconomic risks remain high due to high financing needs, modest foreign exchange reserves, high debt and debt servicing costs, financial sector vulnerabilities, and a loss-making power sector burdening public finances.

“Pakistan’s recovery is expected to continue, with real GDP growth reaching 2.8 percent in fiscal year 2025,” said Mukhtar ul Hasan, lead author of the report. “However, output growth is expected to remain below potential over the medium term due to tight macroeconomic policy, elevated inflation, and policy uncertainty. Faster growth is needed to support significant improvements in living standards.”

The macroeconomic outlook depends on the effective implementation of the new IMF-EFF program, continued fiscal restraint, realization of expected rollovers and fresh external financing, absence of further major policy disruptions, and no further significant domestic or external shocks. Under these assumptions, recovery is expected to continue, with real GDP growth reaching 2.8 percent in FY25, as the economy benefits from the absence of import controls and lower inflation.

Business confidence is expected to improve with recent credit rating upgrades due to the IMF-EFF program, reduced political uncertainty, and implementation of planned fiscal reforms, such as the devolution of constitutionally mandated expenditures to the provinces. Even with these assumptions, output growth is expected to remain below potential at 3.2 percent in FY26, as tight macroeconomic policy, elevated inflation, policy uncertainty, and unaddressed structural constraints continue to weigh on activity. Policy uncertainty, high refinancing needs, limited buffers for shocks, and financial sector risks pose substantial risks to the outlook.

Positive Agriculture Growth

Agriculture sector growth is expected to slow to 1.9 percent in FY25 due to a high base effect. In the medium term, the agriculture sector is projected to grow at an average rate of 2.4 percent over FY25–26. As supply chain challenges subside with easing import controls, the availability of farm inputs such as certified seeds and fertilizers will improve.

The significant increase in the import of agricultural machinery and implements in FY24 indicates growing investment in farming technology, which is expected to enhance productivity and efficiency in the sector over the near term. With the suspension of import management measures and improved confidence, the industry is projected to begin recovering, growing at 3.1 percent in FY25 and further to 3.2 percent in FY26.

With lower inflation rates, growth in the agricultural and industrial sectors will benefit the services sector, which is anticipated to grow by 3.0 percent in FY25, led by a recovery in wholesale and retail trade, and transport and storage amid the revival of imports and aggregate demand. With inflationary pressures easing further, the services sector is expected to strengthen to 3.3 percent in FY26.

Consumer price inflation is expected to slow to an average of 11.1 percent in FY25 and to 9.0 percent in FY26, due to high base effects, lower commodity prices, and continued tight macroeconomic policies. However, inflation will remain elevated in the short term due to higher domestic energy prices, expansionary open market operations, and new taxation measures as fiscal consolidation efforts continue.

Further Cut in SBP Policy Rate Likely

In June 2024, the State Bank of Pakistan (SBP) reduced the policy rate by 150 basis points, followed by 100 basis points in July and another cut of 200 basis points in September, bringing the rates down to 17.5 percent from a peak of 22 percent. Further cuts in the policy rate are likely, based on continued moderation in inflation.

Current Account Deficit

The current account deficit (CAD) is forecast to increase to 0.6 percent of GDP in FY25 and further to 0.7 percent in FY26, with imports projected to grow faster than exports, leading to a wider trade deficit. Without any import management measures, imports are expected to strengthen with the recovery of investment, domestic demand, and industrial sector activity. Exports are also projected to increase, although at a slower rate in FY25 as agriculture sector exports moderate after the agricultural boom last year.

Remittances, Fiscal Deficit, Public Debt

Worker remittances are expected to slow due to base effects and slower growth in host countries. Despite a higher CAD, gross reserves are expected to improve marginally over FY25–26, supported by new inflows under the IMF-EFF.

The fiscal deficit, excluding grants, is projected to increase to 7.6 percent of GDP in FY25 due to higher interest payment expenditures, before decreasing over the medium term as interest payments gradually decrease and fiscal consolidation and revenue mobilization measures take effect.

The primary balance is projected to record a surplus of 0.7 percent of GDP in FY25, primarily due to projected windfalls from the exceptionally high central bank dividends. These dividends reflected one-off profits from high policy rates in FY24, to be transferred to the Government as non-tax revenues in FY25. The primary balance is projected to turn into a deficit of 0.2 percent of GDP in FY26. Gross financing needs will remain sizeable throughout the projection period due to maturing short-term debt, multilateral and bilateral repayments, and Eurobond maturities.

Public debt, including guaranteed debt, is expected to reach 73.8 percent of GDP in FY25 and increase to 74.7 percent of GDP in FY26. Sustaining comprehensive fiscal consolidation measures over the medium term is essential to restore fiscal and debt sustainability