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The World Bank has projected that Pakistan’s economic activity will keep getting better with GDP growth to hit 2.8 per cent in FY25, slightly up from the previous projection of 2.3 per cent.

These insights were mentioned in a report named Pakistan Development Update: The Dynamics of Power Sector Distribution Reforms.

The report mentions several positive factors for Pakistan’s economy, including the removal of import restrictions, easing of domestic supply chain disruptions, and falling inflation ratings.

Also, business confidence is likely to improve with upgrades in Pakistan’s credit rating and lesser political uncertainty.

Pakistan’s agriculture sector is also projected to grow at average rate of 2.4 per cent during FY25–26. The World Bank said that the absence of import controls will enhance the availability of farm inputs, which will support recovery in agricultural sector over the medium term.

The report also predicts that growth in agriculture and industry will benefit the services sector, which is projected to grow by an average of 3.2 per cent during FY25–26.

This growth will be led by key sub-sectors including wholesale and retail trade, along wit transport and storage, which are expected to recover with the revival of imports and surging demand.

Output growth is forecasted to drop to 3.2 per cent in FY26 due to stricter macroeconomic policies, high inflation, and lingering policy uncertainties.

On the inflation front, the World Bank expects consumer price inflation around 11.1 per cent in FY25, slowing further to 9 per cent in FY26, driven by lower commodity prices, tight macroeconomic policies, and high base effects.

Still, inflation is expected to remain high in the short term due to increasing energy prices, an increase in money supply through open market operations (OMOs), and new tax measures as a part of ongoing fiscal consolidation efforts.

Externally, Pakistan’s current account deficit is also expected to remain low at 0.6 per cent of GDP in FY25, inching up slightly to 0.7 per cent in FY26, as local demand improves and import restrictions remain lifted.

Pakistan’s foreign currency reserves have risen to $15.98 billion, of which $5.28 billion are held by commercial banks and $10.7 billion by the State Bank of Pakistan (SBP). This is the highest level of reserves in 30 months achieved via the inflow of the IMF loan: A sign of short-term stability.

Pakistan’s economic woes seem to be coming to a close with the upcoming Shanghai Cooperation Organization (SCO) summit in Islamabad, which begins October 16-17.

Foreign investments, including possible multi-billion dollar settlements from Saudi Arabia in the Reko Diq mining operation and loans for the ML-1 railway project, are expected to come to Pakistan. These funds are expected to immediately give relief to the economy but will also alter the value of the PKR.

It is possible that the foreign investment funds will increase the value of the PKR. This happens because when foreign funds arrive, they have to be converted into PKR before they are to be invested in local projects. As a result, the demand for PKR shoots up and the value of the PKR goes up. However, this appreciation is usually short-lived. Once the foreign funded projects are completed, the PKR tends to lose value again.

This historical pattern is linked to Pakistan’s huge trade deficit, which was $24.09 billion for just the fiscal year 2023-24 alone. This is due to Pakistan importing much more than it exports.

The imports that exceed exports are responsible for the outflow of foreign reserves which causes the PKR to depreciate.

Historically, to prevent the PKR from depreciating too much, the SBP has come in and started selling off foreign currency reserves to support the value of the PKR when it starts to depreciate. However, the sale of reserves is not a viable option to stabilize the PKR value in the long term as Pakistan runs a persistent trade deficit.

The more PKR the SBP buys, to artificially increase the value of the PKR, the more it depletes its reserves. Without any rise in the inflow of foreign currency from exports, this practice of artificially propping up the PKR is not sustainable.

The recent rise in reserves and the temporary boost from the SCO summit may give a sense of stability, but they don’t address the core underlying economic problems. Structural changes in exports and imports will help the rupee to remain under pressure unless the trade deficit is curbed.

While the SBP interventions may provide immediate relief, they only treat the symptoms, not the cause. To achieve true economic stability, the government needs to enforce reforms. Reducing the trade deficit by increasing exports to build sustainable foreign reserves is the need of the hour for Pakistan.

While the 30 month foreign reserves high is a reprieve for the state bank, it’s just that: A reprieve. The real question, though, is whether Pakistan will be able to grow when world leaders leave Islamabad after the conclusion of the SCO.