Pakistan's inflation rate to drop in next fiscal year: Fitch

• Rating agency predicts inflation will remain at 12% in Pakistan in FY25. 
• Fitch says govt debt looks set to decline to 68% of GDP by end of FY24. 
• Agency expresses doubts whether government’s fiscal targets will be hit.

Fitch Ratings has said it expected inflation and interest costs to decline in Pakistan during the upcoming fiscal year 2024-25, in the light of recently presented federal budget FY25. 

The rating company has predicted that the inflation will remain at 12% in the country as it struggles to avert an economic crisis.

The State Bank of Pakistan (SBP) last week cut its key interest rate by 150 basis points in a widely expected move, marking its first rate reduction in nearly four years in its effort to boost growth amid a sharp decline in retail inflation.

The decision to cut the key rate to 20.5% came a week after data showed inflation slowed to a 30-month low of 11.8% in May.

“Government debt looks set to decline to 68% of GDP by FYE24 due to high inflation and deflator effects, offsetting soaring domestic interest costs. We expect inflation and interest costs to decline in tandem, with economic growth and primary surpluses driving government debt/GDP gradually lower,” the rating agency added.

It also forecast the FY25 policy rate at 16%.

Fitch Ratings further stated that the “ambitious FY25 budget” strengthened Pakistan’s prospects to strike a bailout agreement with the International Monetary Fund (IMF).

It expressed doubts whether the government’s fiscal targets will be hit but predicted a drop in the fiscal deficit even if the said budget is only partially implemented.

“This should reduce external pressures, albeit at a cost to growth,” it said, adding that tight policy settings may depress growth more than the government expects.

The ratings agency said that the growth rate is expected to remain at 3% in the FY25, despite some improvements in short-term indicators of economic activity.

As per Fitch, Pakistan’s external position has continued to improve since February’s election.

It said that the The current account deficit is on track to narrow to 0.3% of GDP (just USD1 billion) in FY24, from 1.0% in FY23.

Moreover, the subdued domestic demand has compressed imports, while exchange rate reforms have attracted remittance inflows back to the official banking system.

The rating agency also expressed optimism about the economic situation with the help of strong agricultural exports.

While gsross reserves of the country, including gold now stood at USD15.1 billion, over two months of external payments, up from USD9.6 billion at FYE23, Fitch stated.