Pakistan's economy on the mend, challenges persist: WB

ISLAMABAD: The World Bank (WB) says Pakistan’s economy is stabilising, but medium-term growth and poverty challenges will persist unless bold and sustained structural reforms are implemented to encourage private investment and export competitiveness.

In its Pakistan Development Update released on Wednesday, the bank has projected that Pakistan’s economy continues to stabilise and is expected to grow by 2.7 percent in the current fiscal year ending June 2025, up from 2.5 percent in the previous year.

The macroeconomic outlook, according to the bank, hinges on continued macroeconomic stabilization 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, realization 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 FY25, supported by private consumption and investment, buoyed by lower inflation, increased credit to the private sector and higher business confidence. While economic activity is expected to strengthen in FY26 (3.1 percent) and FY27 (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,” says the WB.

Persistent low growth will continue to hinder poverty reduction amid rapid population growth and constrained economic opportunities.

Growth is expected to accelerate in the medium term but remain relatively low. Agricultural growth is projected to slow to 1.7 percent in FY25 as the sector recovers from a weak H1. Over FY26–27, an average medium-term growth rate of 3.0 percent is projected as the sector recovers from unfavorable weather conditions. In addition, the farmers are expected to shift to high value-added crops as they diversify away from wheat amid growing public and private investments that enhance agricultural productivity.

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.

Consumer price inflation is projected to decline to 5.0 percent in FY25, reflecting lower commodity and energy prices alongside a stable market-determined exchange rate. However, inflation is expected to slightly pick up to 6.0 percent in FY26 and 7.0 percent in FY27, 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 public debt-to GDP ratio is projected to decline over the medium term, the WB has projected.