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Overview

Poverty has increased slightly amid recent shocks, despite some economic stabilization. Pakistan made significant progress towards reducing poverty between 2001 and 2018 with the expansion of off-farm economic opportunities and increased external remittances. However, this has not fully translated into improved socio-economic conditions: over one-third of school-age children across Pakistan were found to be out of school; nearly two-thirds of those in school in FY24 were learning deprived; and alarmingly high rates of stunting - 40 percent in FY23 - persist. Critical constraints, including recurrent fiscal and current account deficits, protectionist trade policies, unproductive agriculture, a difficult business environment, a heavy state presence in the economy, and a financially unsustainable energy sector, have remained largely unaddressed, leading to slow and volatile growth. Amid the COVID-19 pandemic, the catastrophic 2022 floods and macroeconomic volatility, poverty has increased. The estimated lower-middle income poverty rate is 40.5 percent (US$3.65/day 2017 PPP) for FY24 with an additional 2.6 million Pakistanis falling below the poverty line from the year before.

Pakistan has made recent progress towards macroeconomic stabilization, but risks remain extremely high and faster sustained growth will require substantial reform. At the beginning of FY24, Pakistan's economy faced a potential economic crisis in the face of political uncertainty, global monetary policy tightening, and fiscal and external imbalances, that led to pressures on domestic prices and foreign reserves. To preserve reserves, measures to manage imports and capital outflows were introduced, which disrupted local supply chains, economic activity and exacerbated inflationary pressures. Under the interim government, an IMF Stand-By Arrangement was approved in July 2023. Consequently, exchange rate flexibility was restored, import controls were relaxed, and steps were taken to contain the fiscal deficit. Political uncertainty also diminished with the successful conduct of the general elections. Coupled with favorable weather conditions and easing external conditions, the economy began recovering in FY24. Consequently, growth of real GDP at factor cost is estimated to have risen to 2.5 percent in FY24, after contracting by 0.2 percent y-o-y in FY23. Downside risks remain high, with the outlook predicated on a new IMF-EFF program being implemented, continued fiscal restraint, and additional external financing. Heavy banking sector exposure to the sovereign, domestic policy uncertainty, geopolitical instability and delays in global monetary easing pose significant risks to the outlook. Robust economic recovery over the medium term will require the steadfast implementation of much broader fiscal and economic reforms.

GDP growth is projected to gradually recover but remain below potential. Economic activity is expected to continue recovering, with real GDP growth reaching 2.8 percent in FY25, as the economy benefits from the availability of imported inputs, easing domestic supply chain disruptions and lower inflation. Business confidence will also improve with credit rating upgrades, reduced political uncertainty, and fiscal tightening measures, such as the devolvement of constitutionally mandated expenditures to the provinces and higher agricultural income taxes. However, output growth will remain below potential as tight macroeconomic policy, elevated inflation, and policy uncertainty continue to weigh on activity. Limited growth in real wages and employment will keep the poverty rate near 40 percent through FY26. However, with continued progress on reforms and macroeconomic stability, poverty reduction is expected to gradually resume. With high base effects and lower commodity prices, inflation will slow to 11.1 percent in FY25 but remain elevated due to higher domestic energy prices, expansionary open market operations, and new taxation measures. On the external front, the CAD is forecast to remain low at 0.6 percent of GDP in FY25 but widen as domestic demand recovers. The fiscal deficit is projected to increase to 7.6 percent of GDP in FY25 due to higher interest payments but gradually decrease on fiscal tightening and falling interest payments.

The Government continues to face a challenging economic environment while maintaining progress towards macroeconomic stabilization and critical structural reforms. Downside risks to the outlook remain high, with the recovery expected to continue but predicated on the new IMF-EFF program remaining on track and on additional external financing inflows. Continued fiscal restraint will dampen aggregate demand, income, employment, and poverty alleviation. Heavy banking sector exposure to the sovereign, domestic policy uncertainty, federal-provincial government political misalignments and geopolitical instability pose significant risks. To manage these risks, it will be critical to adhere to sound overall economic management and buttress market sentiment, including through articulating and effectively implementing a clear strategy for economic recovery; constraining fiscal expenditures and carefully targeting any new expenditures; maintaining a flexible exchange rate; and remaining on-track with critical structural reforms, including those in the energy sector.

Last Updated: Oct 03, 2024
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