FeaturedNationalVOLUME 19 ISSUE # 33

Economic stabilisation and prospective growth

The last fiscal year was a pivotal period for Pakistan, characterized by a complex interplay of economic challenges and strategic policy measures. As the government grapples with inflationary trends and agricultural adversities, it remains optimistic about fostering sustainable growth.

Amid acknowledging an intensified inflationary trajectory for the last month and impending adversities for seasonal agriculture, the government remains optimistic about fostering sustainable growth through fiscal policy initiatives for the new fiscal year. “The inflation projection for June has seen a modest uptick compared to the preceding month, yet it remains significantly below the figures from the same month the previous year. This increment is predominantly attributable to elevated costs of perishable goods driven by Eidul Azha,” the Ministry of Finance articulated in its monthly economic update and outlook.

In the ‘Seasonal Agro-Climate Outlook for June-August 2024’, the Pakistan Meteorological Department has recommended that agriculturists adopt strategies in response to recent severe heat wave phenomena. The prevailing soil moisture levels are critically low in most regions of the nation. “Consequently, seasonal crops such as cotton, peanut, sugarcane, seasonal vegetables, and orchards are experiencing hydric stress, necessitating augmented irrigation across much of the country,” the ministry elucidated.

The report asserted that FY24 was drawing to a close with “a trajectory towards economic stabilization, accompanied by enhanced macroeconomic indicators.” The alleviating inflationary tensions, stability in external accounts and exchange rate, fiscal consolidation, and a gradual resurgence in industrial activities are rekindling the confidence of economic agents, thus propelling economic growth, it elaborated. It indicated that the 2024-25 budget was crafted to usher in an era of sustainable and inclusive growth, with the government emphasizing sectors with high growth potential like IT, SMEs, mining, minerals, tourism, exports, and agriculture. These sectors are poised to yield substantial returns and fortify the nation’s balance of payments stance.

“In tandem with this, fiscal prudence, the effective execution of an indigenous growth program, along with bilateral and multilateral cooperation, will be imperative for realizing sustainable growth in the ensuing years,” the ministry projected. The government took credit for the recent fuel price reductions, although it merely transferred the effects of international price fluctuations. Conversely, the government disclaims responsibility when these prices escalate more frequently than they diminish.

The ministry asserted it was “enforcing various administrative, policy, and relief measures to mitigate inflationary pressures. Notably, the government decreased petrol prices by Rs4.74 per litre and diesel by Rs3.86 per litre on June 1, with additional reductions of Rs10.20 per litre for petrol and Rs2.33 per litre for diesel effective from June 15.” These measures, coupled with efforts to enhance the availability of food items, underscore the government’s dedication to curbing inflation. However, the report omitted the specifics of measures to augment food item availability, despite having authorized the export of sugar amid rising prices and ongoing lobbying for wheat export approval. “By managing supply and demand, the government aims to stabilize prices and mitigate market volatility, presenting a more optimistic inflation outlook,” it asserted.

Simultaneously, the ministry cited the Food and Agriculture Organisation’s food price index, a pivotal metric tracking the prices of globally traded food commodities, which registered a 0.9% increase in May over the revised April level. “This marks the third consecutive monthly rise following a seven-month downturn. Nonetheless, it remains 3.4% lower than its value from the previous year,” the ministry noted, adding that despite the increased prices of perishable goods in June, government measures to reduce transport costs are expected to keep June inflation within the range of 12.5-13.5%.

Citing a modest Large-Scale Manufacturing (LSM) growth of 0.45% during July-April FY24, the report anticipated “this reversal” to persist in the forthcoming months, driven by heightened external demand, improved business sentiment, and the lifting of import restrictions. Furthermore, diminishing inflationary pressures and adjustments in monetary policy are likely to enhance business confidence, projecting LSM to follow an upward growth trend in the remaining months of FY24 and into the next fiscal year.

Additionally, the report highlighted that economic activities had gained momentum in the latter half of FY24, attributing this to a downward trend in inflationary pressures, stability in external accounts, and a gradual recovery in industrial activities. These improvements were due to various policy and administrative measures taken by the government, coupled with increased foreign demand.

In May 2024, the current account deviated from its previous trend, showing a deficit of $270 million. Imports of goods and services surged significantly, by 25.3% and 12.2% on a year-over-year (YoY) and month-over-month (MoM) basis, respectively. Similarly, exports of goods and services expanded by 15.4% and 12.7% on a YoY and MoM basis, respectively. Consequently, the robust increase in imports diluted the export growth, resulting in a trade deficit increase of 45.9% and 11.4% on a YoY and MoM basis, respectively. Another contributing factor to the current account deficit was a primary income debit of $1.5 billion ($646 million in April 2024). On a positive note, workers’ remittances rose by 15.3% on a MoM basis, significantly mitigating the current account deficit. It is anticipated that the current account will remain within sustainable limits.

During July-April FY2024, fiscal accounts improved, driven by consolidation efforts that boosted revenues from both tax and non-tax collections. However, higher interest payments exerted significant pressure on expenditure management. To address rising expenditures, the government implemented a prudent expenditure management strategy, controlling both current and development spending. These measures improved the primary balance surplus to 1.5% of GDP, well above the target of 0.4% of GDP. Similarly, the fiscal deficit was contained at 4.5% of GDP. Looking ahead, on the revenue side, the Federal Board of Revenue (FBR) is making every effort to meet its full-year tax revenue target, while on the expenditure side, the government maintains a cautious approach to keep the fiscal deficit within manageable limits.

As FY2024 concludes, it follows a path of economic stabilization, marked by improved macroeconomic indicators. The easing inflationary pressures, stability in external accounts and exchange rate, fiscal consolidation, and gradual recovery in industrial activities are restoring the confidence of economic agents, thereby facilitating economic growth. Looking forward, Pakistan’s growth prospects remain promising. The FY2025 budget is poised to transition towards an era of sustainable and inclusive growth. To achieve this, the government is concentrating on high-potential sectors such as IT, SMEs, mining, minerals, tourism, exports, and agriculture. These sectors are expected to yield substantial benefits and support the country’s balance of payments position. Complementing this, fiscal discipline, effective implementation of an indigenous growth program, along with bilateral and multilateral cooperation, will be essential for achieving a sustainable growth trajectory in the coming years.

As FY2024 draws to a close, Pakistan stands at a crucial juncture in its economic journey. The efforts to stabilize macroeconomic indicators, manage inflationary pressures, and foster industrial recovery are beginning to bear fruit, rekindling confidence among economic agents. Looking ahead, the government’s focus on high-potential sectors, coupled with fiscal discipline and strategic cooperation, sets the stage for sustainable and inclusive growth. The budget is poised to build on these foundations, steering the nation towards a more prosperous and resilient economic future.