Karachi: Fitch Ratings said it expects inflation and interest costs to decline in Pakistan in the upcoming fiscal year 2024-25, based on the recently presented FY25 federal budget.
The rating agency predicts inflation will remain at 12% in the country as it struggles to avoid recession.
The State Bank of Pakistan (SBP) last week cut its key interest rate by 150 basis points in a much-anticipated move, marking the first rate cut in nearly four years in an effort to boost growth amid a sharp drop in retail inflation.
The decision to cut the key rate to 20.5% came a week after inflation showed a 30-month low of 11.8% in May.
“Government debt is expected to decrease to 68% of GDP to cover domestic interest costs due to the effects of inflation and deflation. “We expect inflation and interest costs to decrease, with economic growth and a gradual decrease in government debt/GDP as the main advantage,” he said.
It also expects the FY25 policy to be 16%.
Fitch Ratings also noted that a “difficult FY25 budget” boosts Pakistan’s prospects for a bailout deal with the International Monetary Fund (IMF).
He expressed doubt that the government’s fiscal targets would be met, but predicted that the fiscal deficit would be reduced even if the proposed budget was only partially implemented.
“Even if there is a cost to growth, we need to reduce external pressures,” he said, adding that tighter policy measures could slow growth more than the government expects.
The rating agency said growth is expected to slow to 3% in FY25, despite some improvements in short-term indicators of economic activity.
According to Fitch, Pakistan’s external situation has continued to improve since the elections in February.
The current account deficit is expected to narrow to 0.3% of GDP (only $1 billion) in FY24 to 1.0%.
In addition, subdued domestic demand has squeezed imports, while the exchange rate reform has attracted the flow of remittances to the official banking system.
The rating agency expressed optimism about economic conditions, helped by strong agricultural exports.
Fitch noted that the country’s foreign exchange reserves, including gold, currently stand at $15.1 billion, but external payments for the two months were $23 billion.
