LAHORE:
Pakistan’s economy is expected to post modest growth in FY2024-25, with GDP projected to rise by only 2.44%, according to the latest estimates from the Lahore School of Economics (LSE) Modelling Lab. While this represents a slight improvement from last year’s 1.7% growth, it remains well below the country’s historical average and signals a sluggish recovery.
The LSE’s projections are in line with the Pakistan Bureau of Statistics’ (PBS) revised Q3 estimate, which was lowered from 2.7% to 2.4%. Although multilateral institutions such as the IMF, World Bank, and ADB project growth in the 2.5% to 2.7% range, the overall outlook remains tepid.
Sectoral Weaknesses Undermining Growth
A primary drag on growth has been the continued weakness in key productive sectors, particularly manufacturing and agriculture. Large-Scale Manufacturing (LSM) has shrunk by 1.9% this fiscal year, extending a trend of decline seen over the past two years. In the absence of a manufacturing rebound, the economy has leaned heavily on agriculture—but this sector has also underperformed, growing at just 0.56%, only a quarter of its historical trend rate.
This underperformance is largely due to significant contractions in the production of major crops. Wheat output dropped 9%, from 32 to 29 million tonnes, maize declined 15%, and sugarcane fell by 4%. Rice production edged down by 1.4%, while cotton saw a dramatic 31% contraction—from 10 million to 7 million bales.
Experts argue these declines are not weather-related, but the result of recent policy decisions—most notably, the removal of long-standing support prices, which may have disincentivized farmers from planting key crops.
Furthermore, PBS reports these agricultural declines in physical volume rather than monetary value. This likely understates the economic impact. For example, wheat prices have fallen by around Rs1,000 per 40 kg compared to last season, reducing the overall value of wheat output by nearly 25%—a significant income loss for farmers, and a deeper real contraction in agriculture than official figures suggest.
Inflation Cooling, But Pressures Remain
Inflation is projected at 8.37% for FY2024-25, according to LSE models—higher than the government’s 7.5% target and significantly above the IMF’s 5.1% estimate. The recent stabilization of the exchange rate, helped by tighter monetary policy and State Bank of Pakistan (SBP) intervention, has eased inflationary pressure somewhat. However, energy prices remain a major inflation driver, contributing roughly 4 percentage points—primarily due to increased taxation rather than supply-side costs.
Analysts warn of a policy trade-off: while reducing inflation is important, it should not come at the expense of agricultural output—especially as manufacturing continues to contract. Suppressing the only sector showing signs of resilience could further undermine growth.
Structural Constraints Limit Growth Potential
Pakistan’s long-standing structural issues—particularly the current account deficit—continue to constrain GDP growth. Historically, growth above 5% has widened the deficit due to a surge in imports. While remittances offer some relief, they are not a long-term solution. In an era of rising trade protectionism and global uncertainty, the potential for export-led growth appears increasingly limited.
To address these constraints, LSE researchers suggest prioritizing investment-led growth. This could involve easing restrictions on the import of capital goods to help domestic industries upgrade, while simultaneously curbing non-essential consumption imports to maintain external balance.
Outlook: Fragile Recovery Demands Policy Rethink
In conclusion, while inflation is showing signs of stabilization, Pakistan has yet to chart a clear path to sustainable and inclusive economic growth. Both the manufacturing and agricultural sectors require urgent and targeted policy support. Structural reforms and a shift toward investment-driven growth are essential to overcoming current constraints and setting the economy on a stronger footing, the LSE Modelling Lab emphasized.
