Key points
- State Bank of Pakistan’s decision to cut policy rates to 12pc on 27 Jan underscored recent progress in taming CPI
- CPI fell to just over 2pc yoy in Jan 2025, down from an average of nearly 24pc in the fiscal year ended June 2024 (FY24)
- Pakistan’s current account has moved into a surplus of about $1.2bn in six months to Dec 2024
ISLAMABAD: Pakistan has continued to make headway restoring economic stability and rebuilding external buffers, says Fitch Ratings.
Progress on difficult structural reforms will be key to upcoming International Monetary Fund (IMF) programme reviews and continued financing from other multilateral and bilateral lenders.
The State Bank of Pakistan’s decision to cut policy rates to 12 per cent on 27 January underscored recent progress in taming consumer price inflation, which fell to just over two per cent yoy in January 2025, down from an average of nearly 24 per cent in the fiscal year ended June 2024 (FY24).
Falling interest rates
Rapid disinflation reflects fading base effects from earlier subsidy reforms and exchange rate stability, underpinned by a tight monetary policy stance, which in turn has subdued domestic demand and external financing needs.
Economic activity, having absorbed tighter policy settings, is now benefitting from stability and falling interest rates. We expect real value added to expand by 3.0 per cent in FY25. Growth in credit to the private sector turned positive in real terms in October 2024 for the first time since June 2022.
Current account surplus
Strong remittance inflows, robust agricultural exports and tight policy settings have allowed Pakistan’s current account to move into a surplus of about USD1.2 billion (over 0.5 per cent of GDP) in the six months to December 2024, from a similarly sized deficit in FY24. Foreign exchange market reforms in 2023 also facilitated the shift. When upgrading Pakistan’s rating to ‘CCC+’ in July 2024, we expected a slight widening of the current-account deficit in FY25.
Foreign reserves are set to outperform targets under Pakistan’s USD7 billion IMF Extended Fund Facility (EFF) and Fitch’s earlier forecasts. Gross official reserves reached over USD18.3 billion by end-2024, about three months of current external payments, up from around USD15.5 billion in June.
Primary fiscal surplus
There has been progress on fiscal reform, despite some setbacks. The primary fiscal surplus has outperformed IMF targets, although federal tax revenue grew less than required under the IMF’s indicative performance criterion in the first six months of FY25. All provinces have recently legislated higher agricultural income taxes, a key structural condition of the EFF, although delays mean that the programme’s January 2025 implementation deadline for the reform was missed.
In July, we noted that positive rating action could be driven by a sustained recovery in reserves and further significant easing of external financing risks, and/or implementation of fiscal consolidation in line with IMF commitments.
Meanwhile, deteriorating external liquidity, for example linked to delays in IMF reviews, could lead to negative action.
