Urgent Call for Enhanced Human Capital and Technological Innovation: Insights from SBP’s Annual Report

Focus Keyword: Economic Growth in Pakistan

The State Bank of Pakistan (SBP) has released its Annual Report on the State of the Economy for 2024-25, highlighting urgent needs for sustainable growth through improvement in human capital, technological advancements, and innovation. Persistent challenges such as fiscal imbalances, low domestic savings, and climate-related shocks remain significant barriers to economic stability and progress.

Current Economic Landscape: Projections for GDP Growth

The SBP forecasts a GDP growth of 3.25-4.25% for the fiscal year 2026, indicating that economic growth is likely to remain at the lower end of expectations. Additionally, inflation is projected to fluctuate between 5-7%, while the current account deficit remains stable at 0-1% of GDP. However, the central bank warns that agricultural losses from recent floods, soaring energy costs, and global trade uncertainties pose substantial risks to these projections.

Impact of Recent Floods on Agriculture

The floods in Punjab and Khyber-Pakhtunkhwa have submerged extensive farmland, significantly damaging vital kharif crops such as rice, cotton, maize, and sugarcane. This agricultural crisis may trigger supply chain disruptions, leading to inflationary pressures and challenges in obtaining raw materials for agro-based industries.

Underlying Economic Weaknesses: The Saving Dilemma

One of the SBP’s key concerns is the low domestic savings rate, which has seen a drastic decline over the past two decades, leaving Pakistan with one of the lowest savings levels among comparable economies. The report cites a blend of factors such as:

• Low per capita income
• High inflation
• Fiscal imbalances
• Weak financial intermediation

These factors collectively suppress the national savings rate, contributing to a worrying consumption-based economic model that constitutes around 92% of GDP.

Consumption-Driven Model: Risks and Consequences

While a reliance on consumption may yield short-term growth spurts—backed by foreign borrowing and remittances—it fails to establish a strong foundation for long-term economic expansion. The SBP emphasizes that the economy’s over-dependence on consumption has led to a growing savings-investment gap and entrenched fiscal deficits, resulting in a debt spiral where revenues barely cover current expenditure.

Public Sector Inefficiencies and Financial Intermediation

State-Owned Enterprises: A Fiscal Burden

Public sector inefficiencies, especially within state-owned enterprises, continue to burden the national exchequer. This drains crucial resources that could otherwise finance productive investments in key sectors such as health, education, and infrastructure.

Financial System Constraints

The SBP highlights significant challenges within Pakistan’s financial intermediation system:

• Heavy government borrowing hampers the banking sector’s ability to mobilize deposits.
• Shallow capital markets limit investor participation.

Despite demutualization efforts, the Pakistan Stock Exchange remains dominated by a few brokerage houses, diminishing overall investor confidence.

Need for Financial Inclusion

Pakistan’s financial depth—measured through private sector credit and deposit-to-GDP ratios—lags behind regional peers like Malaysia, Turkey, and even Bangladesh. The report emphasizes that without enhanced financial inclusion and support for capital market development, domestic savings will not be enough to sustain economic growth.

Structural Vulnerabilities: The Road Ahead

Diversifying Industrial Capacity

The SBP asserts the necessity for diversification within industrial capacities. Investments in sectors like petrochemicals, mining, and renewable energy are vital to reduce dependence on imported industrial inputs, thereby mitigating exposure to external shocks and currency volatility.

Agricultural Productivity Enhancements

In agriculture, improving productivity is critical. The report recommends modernizing irrigation systems and investing in climate-resilient crop varieties as crucial measures to combat looming threats of food insecurity and flood risks.

Trade Competitiveness: Breaking Barriers

Trade competitiveness is hindered by non-tariff barriers, limited product diversification, and an overreliance on low-value textile exports. The SBP encourages policymakers to broaden recent reforms aimed at reducing anti-export bias, advocating for regulatory and logistical changes to attract foreign investment and integrate local industries into global value chains.

Demographic Challenges: Investing in Human Capital

Pakistan’s economic stagnation can also be attributed to deep-rooted social and demographic challenges. With around 65% of the population under 30, high youth dependency coupled with inadequate job creation puts immense pressure on public spending and consumption. The pervasive poverty rate, estimated at 44%, combined with underinvestment in education and health, stifles productivity and the ability to save.

Prioritizing Human Capital Development

The SBP insists that prioritizing human capital development is essential for a sustainable future. Investment in vocational training, technology, and innovation is critical, as failure to do so could lead Pakistan to lag behind regional competitors that have effectively transitioned to knowledge-based economies.

Conclusion

The SBP’s Annual Report emphasizes the critical need for Pakistan to focus on human capital, technology, and innovation to drive sustainable growth. Addressing these issues holistically will not only help the nation overcome its persistent economic challenges but also lay a robust foundation for future prosperity. Without these essential changes, Pakistan risks stalling in its economic growth, unable to realize its full potential.