Pakistan’s Economic Progress Amid Structural Reform Challenges

February 7, 2025 (Reuters) – Pakistan is continuing to make significant strides toward restoring economic stability and rebuilding its external buffers, according to a recent note from Fitch Ratings published on Thursday. The international ratings agency highlighted the country’s efforts to regain its financial footing, although it emphasized that further progress on difficult structural reforms would be crucial for upcoming reviews of the International Monetary Fund (IMF) program, as well as for maintaining continued financing from both multilateral and bilateral lenders.

In particular, Fitch pointed to the recent decision by the State Bank of Pakistan (SBP) to reduce the policy rate to 12% on January 27, a move that the agency described as reflecting the progress made in controlling inflation. The reduction in the policy rate follows a notable decline in consumer price inflation, which fell to just over 2% year-on-year in January 2025, a sharp contrast to the nearly 24% average inflation rate recorded in the fiscal year ending June 2024 (FY24).

Fitch noted that the rapid disinflation was driven by a combination of fading base effects from earlier subsidy reforms, exchange rate stability, and a tight monetary policy stance. These factors helped suppress domestic demand and reduce the country’s external financing needs. As a result, inflationary pressures have been subdued, and the economy is now benefiting from improved stability and falling interest rates.

“Rapid disinflation reflects the fading effects of earlier subsidy reforms and the stability of the exchange rate, supported by the central bank’s tight monetary policy, which has also reduced external financing needs,” Fitch wrote in its analysis.

Fitch also pointed out that the country’s economy is showing signs of recovery, with economic activity gaining traction in line with the decline in interest rates and the absorption of tighter policy settings. The ratings agency forecasts real value-added growth of 3.0% in the fiscal year 2025 (FY25), indicating a gradual recovery despite previous challenges.

One of the key developments highlighted by Fitch was the positive turn in private sector credit growth. For the first time since June 2022, private sector credit growth turned positive in real terms in October 2024, a sign of improved confidence in the economy and the potential for further private sector investment.

While acknowledging the progress made, Fitch warned that continued structural reforms remain necessary to ensure sustainable economic growth and secure ongoing support from international financial institutions, including the IMF. The upcoming IMF reviews, which will assess Pakistan’s commitment to implementing reforms, will be critical in determining the country’s ability to access further financial assistance.

In conclusion, while Pakistan is making notable progress in addressing economic challenges, significant hurdles remain. The success of the country’s efforts will depend largely on its ability to navigate the complex landscape of structural reforms and manage relationships with international lenders and stakeholders.