Pakistan's Fiscal Policy and Economic Outlook in FY25

In recent projections by Fitch, Pakistan's government debt is expected to see a significant reduction by the end of FY24, decreasing to 68% of GDP. This positive trend is attributed to factors such as high inflation and deflator effects, which help offset rising domestic interest costs. Fitch Ratings also anticipates a decrease in inflation and interest costs in the coming years, driven by economic growth and primary surpluses.

On 10 June, the State Bank of Pakistan took a crucial step by cutting policy rates for the first time in five years, reducing them by 150 basis points to 20.5%. This move is expected to further lower inflation, with a projected rate of 12% for FY25, and aims to bring the policy rate down to 16% by the end of FY25.

Prime Minister Shehbaz Sharif's coalition government unveiled the FY25 budget on 13 June, targeting a headline deficit of 5.9% of GDP and a 2.0% primary surplus. The budget includes tax hikes and fiscal efforts at the provincial level, with a growth rate goal of 3.6% in FY25.

Despite potential challenges, the budget aligns with targets and projects a primary surplus of 0.8% for FY25. Fitch's revised fiscal forecasts have adjusted the growth forecast to 3.0%, considering possible revenue shortfalls and increased current spending.

While progress is being made on reducing the current account deficit and increasing gross reserves, Pakistan still faces challenges in external liquidity and funding. Efforts towards securing a new IMF Extended Fund Facility are underway, with the current account deficit expected to narrow to 0.3% of GDP in FY24 and gross reserves rising to USD 15.1 billion, covering over two months of external payments.

However, Pakistan's funding needs continue to exceed its reserves, exposing the country to external funding conditions and policy risks. The 'CCC' rating reaffirmed in December 2023 highlights Pakistan's high external funding risks amidst significant financing requirements in the medium term.

As Pakistan navigates its fiscal challenges, the government's proactive measures and economic policies are aimed at stabilizing the economy and reducing debt burdens. With a focus on sustainable growth and prudent financial management, Pakistan is working towards improving its fiscal outlook and securing stable external funding sources for long-term stability.