LAHORE:
Pakistan’s economy continues to face challenges in achieving meaningful growth, with projections for the fiscal year 2024-25 indicating a slow recovery.
According to estimates from the Lahore School of Economics Modelling Lab, GDP growth is expected to reach only 2.44%, reflecting a slight improvement from the 1.7% growth recorded in the previous fiscal year but still remaining below par.
These projections broadly align with official figures, including a recent revision by the Pakistan Bureau of Statistics, which lowered its Q3 GDP growth estimate from 2.7% to 2.4%. While international institutions such as the World Bank, International Monetary Fund (IMF), and Asian Development Bank (ADB) have provided slightly higher projections ranging from 2.5% to 2.7%, the overall picture still reflects a sluggish economic recovery.
One of the main reasons for the weak growth outlook is the poor performance in key productive sectors, particularly manufacturing and agriculture. Large-Scale Manufacturing (LSM), which should ideally be a driving force for GDP growth, has contracted by 1.9% during the current fiscal year. This continues a trend of stagnation and decline observed over the past two years. In the absence of manufacturing growth, the economy has had to rely heavily on agriculture. However, the agricultural sector has also underperformed, growing at just 0.56%only a quarter of its historical trend rate.
The disappointing agricultural growth is largely due to a significant contraction in the production of major crops. Wheat production has dropped by 9%, from 32 million tonnes to 29 million tonnes, while maize has declined by 15%, from 10 million tonnes to 8 million tonnes. Sugarcane production fell by 4%, and rice saw a marginal decrease of 1.4%.
Cotton suffered the sharpest fall, contracting by 31%, with output reducing from 10 million to 7 million bales. Analysts argue that this sharp decline cannot be blamed on weather patterns, which have remained consistent. Instead, they attribute the drop to government policy changesmost notably, the removal of long-standing support prices for key crops, a decision that has likely discouraged production.
Furthermore, the Pakistan Bureau of Statistics (PBS) measures these crop contractions only in terms of volume, not monetary value. This may result in an underestimation of the actual impact on GDP. For instance, the price of wheat has declined by about Rs1,000 per 40 kg compared to the previous season, reducing the overall value of wheat production by nearly 25%. This translates to significant income losses for farmers and suggests that the real contraction in the agricultural sector could be even worse than officially reported.
On the inflation front, the situation has improved compared to previous years, but it still remains a concern. Inflation for FY202425 is projected at 8.37% by the Lahore School’s model, higher than the government’s upper-end estimate of 7.5% and significantly above the IMF’s estimate of 5.1%. The major driver of high inflation in recent years has been the depreciation of the exchange rate, which has now somewhat stabilised due to more effective monetary policies and intervention by the State Bank of Pakistan (SBP).
However, energy prices remain a key contributor to inflation. It is estimated that they add around 4% to the inflation rate, primarily due to increased government taxes rather than higher supplier costs.
There has been a trade-off between taming inflation and stimulating growth. The current low inflation has come at the cost of stifling agriculture, the only productive sector showing some promise in the absence of manufacturing growth. Experts warn that while bringing inflation down is important, it should not come at the cost of agricultural output, especially when manufacturing is already in decline.
Another structural challenge remains the current account deficit, which has long constrained Pakistan’s GDP growth. Historical data show that whenever GDP growth exceeds 5%, the current account deficit tends to widen sharply due to increased imports, which are highly sensitive to economic growth. While remittances provide temporary relief, they are not a sustainable solution. With global trade becoming more volatile due to tariff wars and changing regulations, the potential for export-led growth appears to be diminishing.
One proposed solution is to focus on investment-led growth by liberalising the import of investment goods. This would allow domestic industries to upgrade their capabilities and drive growth, provided that non-essential consumption imports are controlled to maintain current account balance.
Overall, the outlook for Pakistan’s economy remains cautious. While inflation is being brought under control, the country has yet to find a solid path to sustainable and inclusive growth. Both manufacturing and agriculture need policy support, and investment strategies must be realigned to address structural weaknesses in the economy, the LSE Modelling Lab added.
