Islamabad, July 17, 2024 – Fitch Ratings has raised alarm over the fragile economic state of Pakistan, citing significant risks stemming from both internal and external factors.
In its latest report, Fitch Ratings highlighted that the risks to Pakistan’s growth outlook are predominantly on the downside. The economy remains highly susceptible to external shocks. With 40% of the population employed in agriculture, any severe weather event, such as floods or droughts, could severely impact the economy.
The Fitch highlighted that the unstable political landscape adds to the economic uncertainty. The February elections resulted in a coalition government formed by the establishment parties. However, the strong showing by independent candidates, who have the backing of the jailed opposition leader Imran Khan, indicates widespread dissatisfaction with the current political regime. Potential protests in urban centers could further disrupt economic activities.
Economic Performance and Projections
Stronger-than-Expected Economic Activity: The Fitch said contrary to the expectations of many analysts, Pakistan’s economic performance in FY2023/24 (July 2023-June 2024) was stronger. Economic growth is anticipated to rise from 2.4% in FY2023/24 to 3.2% in FY2024/25, driven by monetary easing, improved agricultural output, and slowing inflation. However, the risks remain tilted towards the downside.
Current Account Deficit: The Fitch said Pakistan’s current account deficit is projected to stay modest but will likely increase from 0.8% of GDP in FY2023/24 to 1.0% in FY2024/25. The slight widening of the deficit is attributed to an expanding trade deficit, expected to grow from 7.5% of GDP in FY2023/24 to 7.7% in FY2024/25. A surge in oil prices or lower-than-expected grain production could exacerbate the deficit.
Stabilization of the Rupee: The Fitch said Pakistani policymakers have been relatively successful in stabilizing the rupee. Fitch forecasts a minor depreciation of the rupee, from PKR278/USD to PKR290/USD, over the rest of 2024. However, the risks are skewed towards a larger depreciation.
Inflation and Monetary Policy: The Fitch highlighted Easing inflation is anticipated to allow the State Bank of Pakistan (SBP) to reduce its key policy rate from 22.00% to 16.00% in 2024. The SBP is expected to continue loosening policy to 14.00% by the end of 2025. The primary risk to this outlook is higher-than-expected inflation, which could slow the pace of monetary easing.
Budget Deficit: Despite likely missing their ambitious budget targets, Pakistani policymakers are expected to reduce the budget deficit from 7.4% of GDP in FY2023/24 to 6.7% in FY2024/25. If the government adheres to its current policy path, it may secure a longer-term deal with the IMF. Nonetheless, the economic recovery remains fragile, and another shock could quickly escalate the cost of servicing Pakistan’s substantial government debt.
Political Stability and Reforms
Despite several successful legal challenges, opposition leader Imran Khan is expected to remain imprisoned for the foreseeable future. The PML(N)-led government is predicted to stay in power over the next 18 months, pushing through IMF-mandated fiscal reforms. In the unlikely scenario of a government change, a military-backed technocratic administration is considered more probable than fresh elections.
Fitch’s report underscores the precariousness of Pakistan’s economic recovery, emphasizing the need for prudent policy measures and political stability to navigate the challenging landscape ahead.