SBP Notes Further Improvements In Economic Conditions In H1FY25

Pakistan’s macroeconomic conditions improved further in the first half of fiscal year 2024-25 (H1-FY25) reflected by steep disinflation, surplus current account, and contained fiscal deficit, State Bank of Pakistan (SBP) pointed out in the State of Pakistan’s Economy, Half Year Report on Monday

KARACHI, (UrduPoint / Pakistan Point News - 28th Apr, 2025) Pakistan’s macroeconomic conditions improved further in the first half of fiscal year 2024-25 (H1-FY25) reflected by steep disinflation, surplus current account, and contained fiscal deficit, State Bank of Pakistan (SBP) pointed out in the State of Pakistan’s Economy, Half Year Report on Monday.

The headline inflation fell sharply, the current account balance turned into a surplus, and the fiscal deficit was contained to the lowest level since FY05, the H1-FY25 Report noted attributing these favorable outcomes to the calibrated monetary policy stance, fiscal consolidation, benign global commodity prices together with approval of IMF’s Extended Fund Facility (EFF) program.

SBP, in the half year report, projects FY25 Annual GDP growth in the range of 2.5 to 3.5%, average inflation between 5.5 to 7.5%, the current account balance to be in the range of -0.5 to 0.5% with continued strong momentum in workers’ remittances and exports.

The report observed that headline inflation reached a multi-decade low of 0.7 percent by March 2025 owing to a confluence of factors, including tight monetary policy stance and fiscal consolidation that kept the domestic demand in check, improved supply conditions, respite in energy price adjustments, and subdued international commodity prices.

As a result of cooling inflationary pressures and improving inflation outlook, the SBP reduced the policy rate by 1000 basis points from June 2024 to February 2025. The report noted that the consequent ease in financial conditions, coupled with a slight uptick in economic activity and ADR-related lending, contributed to a substantial growth in private sector credit during H1-FY25.

The SBP, in the report, kept the projection for real GDP growth unchanged in the range of 2.5 to 3.5 %, however, downside risks in the form of additional fiscal consolidation and less than expected wheat harvests were highlighted.

The central bank termed lower production of important Kharif crops and contraction in industrial activity during H1-FY25 as major causes of the moderation in real GDP growth. A broad-based decline in Kharif crops was seen to be caused by falling area under cultivation and lower yields, the report mentioned and pointed to “the key role of agriculture policy uncertainty, last year’s low crop prices, unfavorable weather conditions, and lower use of certified seeds and other inputs for this lackluster performance.

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Moreover, the report observed that the services sector performed relatively better in H1-FY25, compared to the same period last year. It also mentioned that lower contraction in industry during H1-FY25 compared to the previous year was supported by small scale manufacturing, utilities and slaughtering, whereas mining and quarrying, construction and large scale manufacturing contributed negatively.

According to the report, a steady increase in exports and workers’ remittances during H1-FY25 outweighed a notable increase in imports, leading to a surplus in the current account balance. These developments, together with the disbursement of the first tranche under the IMF’s EFF and a slight pick-up in private inflows, were noted to have strengthened SBP’s FX reserves.

The report notes a significant improvement in the outlook for inflation and the external sector. In view of steeper-than-anticipated disinflation, combined with an adequately tight monetary policy stance, continued fiscal consolidation and an ease in global commodity prices, the SBP projects average inflation for FY25 to fall in the range of 5.5 to 7.5 percent.

Similarly, the current account balance is now projected to be in the range of -0.5 to 0.5 percent of GDP. The report expects the strong momentum in workers’ remittances and exports to continue outpacing the increase in imports. This is expected to cushion against lower financial inflows and help strengthen external buffers.

The report also details risks to the medium-term outlook, largely stemming from global trade disruptions and related commodity price volatility in light of the reciprocal tariffs, changing geo-political situation, adjustments in administered energy prices, response of domestic aggregate demand to various fiscal measures, and spillover of movements in international currencies on the local currency.

The report also includes a special chapter titled ‘Pakistan’s Low Competitiveness: A Case for Investing in Productivity’, that analysed that weak growth in labor productivity and total factor productivity has adversely impact on the country’s economic competitiveness over time, which has contributed to the frequent boom-bust cycles.