Economic growth stagnant at 1.7%

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Economic growth stagnant at 1.7%​

Agri and industry sectors face challenges, services best-performing sector

Shahbaz Rana
March 27, 2025

Development of SMEs, youth entrepreneurship, and rigorous economic diplomacy would be vital for the quick revival of the economy, regional expert Dr Mehmoodul Hassan Khan said. photo: file


Pakistan's economy grew by only 1.7% during the second quarter of the current fiscal year, driven mainly by the livestock and services sectors, which benefited from a lower inflation rate. However, economic conditions remained tight due to limited room for any manoeuvring.

The productive sectorsagriculture and industryfaced severe challenges, including high interest rates, rising energy costs, and adverse weather patterns. Sugar production declined by 12.6% this year, raising concerns about potential supply shortages later in the year. Despite this, the government of Prime Minister Shehbaz Sharif approved the export of 796,000 metric tonnes of sugar in the past year.

The 112th meeting of the National Accounts Committee (NAC), responsible for approving economic output, savings, and investment rates, was held on Wednesday, chaired by Planning and Development Secretary Awais Manzur Sumra. The NAC approved a provisional gross domestic product (GDP) growth rate of 1.73% for the October-December quarter, slightly below the 1.8% recorded in the same period last fiscal year. The government's ambitious annual growth target of 3.6% for the 2024-25 fiscal year now appears unlikely to be met.

The NAC also revised the previous quarter's (July-September) economic growth upward to 1.34% from 0.9%. The average growth rate for the first half of the fiscal year stood at approximately 1.5%, far below the population growth rate, highlighting the economy's inability to generate sufficient jobs to address the expanding youth labour force.

The government's record tax imposition of Rs1.4 trillion and electricity price hikes of up to 51% in July significantly hurt industrial sector growth. While a reduction in interest rates is expected to provide some relief, the State Bank of Pakistan (SBP) missed an opportunity this month to lower interest rates below 10% despite a significant decline in inflation to 1.5%. However, fiscal constraints leave little room for any economic stimulus.

Meanwhile, the Power Division is struggling to meet the prime minister's directive to cut electricity prices by Rs6 per unit.

Agriculture sector

According to the NAC, the agricultural sector grew by only 1.1% in the second quarter, a sharp decline from the 5.8% growth recorded in the same period last fiscal year. The sector suffered due to the abrupt withdrawal of support price mechanisms and drought-like weather conditions, while input costs remained high.

Key crop production declined by 7.7% in the second quarter, with cotton output falling by nearly 31% to 7.1 million bales, a reduction of 3.1 million bales. Rice production declined by 1.4% to 9.7 million tonnes, maize output fell by 15.4%, and sugarcane production decreased by 2.3% to 85.6 million tonnes. Minor crop output showed minimal growth of 0.7%.



Cotton ginning output contracted by 20%, but the livestock sector expanded by 6.5%, benefiting from a lower cost of intermediate consumption, including dry and green fodder. Forestry declined, while fishing posted a marginal increase of 0.8%.

Industrial sector

The industrial sector, a key source of employment and taxation, remained under pressure, contracting by 0.2% in the second quarter.

According to the NAC, mining and quarrying shrank by 3.3% due to lower production of gas, oil, and coal. Large-scale manufacturing declined by 2.9%, primarily due to a 12.6% drop in sugar production, a 1.8% reduction in cement output, and an 18% decrease in iron and steel production.

Electricity, gas, and water supply grew by 7.7%, largely due to increased subsidies. However, the construction sector contracted by 7.2% due to reduced cement and steel production.

Despite room for interest rate cuts, the central bank maintained rates at 12%, limiting industries' ability to borrow and expand operations.

Services sector

The services sector recorded a growth of 2.6% in the second quarter, making it the best-performing sector of the economy. This was also higher than the 1.2% growth recorded in the same period last year. The primary reason for this improvement was the decline in inflation, which fell from 29% to 6.3% in the second quarter.

Wholesale and retail trade contracted by 1.1% due to reduced large-scale manufacturing output and lower imports. Transport and storage grew by 1.1%, supported by increased output in road, air, and water transport. Information and communication services expanded by 8.5%, benefiting from improved performance by mobile companies and lower inflation.

The finance and insurance sector posted a 10.2% increase, driven by a significant reduction in deflators and interest rates.

Real estate services expanded by 4.1%, public administration and social security by 9.1%, and education services by 4.8%, reflecting modest improvements in these areas.

 

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ADB cuts Pakistan growth to 2.5%​

Lender warns deviation from reforms, or climate shocks could derail recovery

Shahbaz Rana
April 10, 2025

The Asian Development Bank (ADB) on Wednesday cut Pakistan's economic growth forecast to 2.5% for this fiscal year, marking the slowest pace in South Asia, and cautioned that any deviation from the hard path of stabilisation could undermine the nascent recovery.

The lender also warned that any escalation in political tensions in Pakistan could erode business confidence, potentially hurting investment and growth prospects.

In its flagship biannual report, the Asian Development Outlook, the Manila-based agency also lowered Pakistan's inflation projection to 6% for this fiscal yearstill the second-highest rate in South Asia after Bangladesh.

The ADB said it finalised the report before new tariffs were announced by President Donald Trump. The World Bank cancelled this week's release of its Pakistan Development Outlook to reassess projections after Trump's announcement.

Trump's "liberation day" unilateral tariffs have triggered global uncertainty, retaliation, and fears about the future of the world economy and trade, according to independent economists and trade experts.

The ADB noted that the Asia-Pacific region "now faces a complex economic landscape, with increasing trade tensions, policy shifts, and geopolitical conflict."

Pakistan's growth is projected to stay at 2.5% in 2025 and rise to 3% in 2026, supported by reforms meant to strengthen private investment.

Just three months ago, the ADB had raised the forecast to 3% for the current year, which it has now cut. The 2.5% growth rate is the lowest in South Asia, even lower than war-torn and sanctions-hit Afghanistan.

Inflation in Pakistan is anticipated to drop to 6% this fiscal year and 5.8% in 2026, reported the lender, adding that the 6% rate still trails only Bangladesh's 10.2% in the region.

The inflation drop is expected to be driven by moderate domestic demand, declining global commodity prices, and a favourable base effect. Core inflation, while easing, remains elevated, it said.

However, inflation may rise in the coming months, partly due to planned reforms in the gas sector, including higher gas prices for captive power plants, which will likely raise input costs for these facilities.

Overall, the inflation outlook remains exposed to risks from volatile global commodity prices, adverse trade policy shifts, energy tariff adjustments, and additional measures to meet revenue targets. The central bank is expected to adopt a cautious approach to easing monetary policy.

Challenges to the outlook

The ADB said Pakistan's outlook faces major downside risks.

"An improved external position and a quicker-than-anticipated drop in inflation could encourage the government to relax macroeconomic policies, possibly triggering a reemergence of balance-of-payment pressures and jeopardising Pakistan's hard-earned macroeconomic stability."

The government also faces internal and private sector pressure to loosen fiscal policies and stimulate growth and jobs.

However, any deviation from fiscal consolidation due to weak revenue or spending pressures could raise debt, increase borrowing costs, crowd out private lending, and destabilise the exchange rate.

"Debt sustainability risks remain pronounced in the Lao PDR, Maldives, Pakistan, and Sri Lanka," the ADB noted.

Policy lapses could threaten disbursements from multilateral and bilateral partners, cutting financial inflows and pressuring the exchange rate.

Recovery in business confidence might also weaken if political tensions rise, limiting investment and consumption and hurting growth. Another risk to Pakistan's outlook is "insufficient rain and the potential for drought," which could damage food security and further suppress growth.

Growth in South Asia has slowed overall, with India's decelerationdue to delays in public investmentoffsetting recoveries in Pakistan and Sri Lanka.

The ADB said that reforms in Pakistan have progressed under the International Monetary Fund (IMF) Extended Fund Facility, launched in October 2024, helping to stabilise the economy. However, the country still faces serious vulnerabilities and structural challenges. The ADB stressed that consistent policy implementation is crucial for resilience and, sustainable and inclusive growth.

Provisional data from the first quarter points to a slow but sustained recovery, with performance in agriculture, industry, and services remaining lukewarm. Fiscal consolidation and weaker farm income, driven by an expected decline in major crop production, will likely constrain activity.

Effective implementation of reforms should foster a more stable environment and gradually remove structural obstacles. Strong remittances, lower inflation, and monetary easing should support private consumption and growth.

Sustaining fiscal consolidation and reducing risks from state-owned enterprises, particularly in the energy sector, are essential.

The current account deficit is expected to remain contained this fiscal year. However, imports are likely to rise in the remaining months, as economic activity picks up, supported by monetary easing and improved macroeconomic stability. This could erase the current account surplus.

Anticipated growth in remittances and expected financial inflows should lift official reserves to $13 billionequal to 2.9 months of import coverby June 2025, predicted the ADB in line with recent statements by Finance Minister Muhammad Aurangzeb.