NationalVOLUME 19 ISSUE # 33

Economic turbulence and strategies

As the fiscal year draws to a close amidst economic volatility, the government’s revised inflation forecast signals a challenging road ahead.

The Ministry of Finance’s recent report highlights a marginal increase in the inflation outlook for June 2024, attributing it primarily to rising prices of perishable goods driven by Eidul Azha. This adjustment comes at a critical juncture, with market analysts predicting a significant wave of inflation as the new budget is implemented. Despite efforts to stabilize prices, the economic landscape remains fraught with uncertainty.

As the tempestuous fiscal year looms, the government has escalated the inflation projection for the concluding month to 13.5%—exceeding the forthcoming fiscal year’s annual aim of 12%, heralding persistently arduous economic conditions. The inflationary forecast for June 2024 has modestly ascended relative to the preceding month, as per the Ministry of Finance’s monthly economic overview, attributing this rise chiefly to escalated costs of perishable commodities precipitated by Eidul Azha.

Economic pundits foresee a formidable surge in inflation at the inception of the new fiscal year, concomitant with the enactment of the new budget. The administration aims to accrue an additional Rs3.6 trillion from citizens and enterprises. Despite elevated perishable item prices, the finance ministry anticipates that governmental measures to diminish transportation costs will confine June inflation within the 12.5% to 13.5% band.

Fuel costs are also poised to escalate following a transient reduction phase. The government has augmented the petroleum levy on petrol and diesel to Rs70 per litre. The fiscal year concludes on a dour note as the administration, alongside the State Bank of Pakistan (SBP), failed to constrain the average inflation rate to 21% this fiscal year despite imposing historically high interest rates.

For the approaching fiscal year, the government has set an inflation target of 12%, though the International Monetary Fund (IMF) and autonomous economists predict a higher rate than the government’s official goal. The Economic Advisor wing of the finance ministry articulated that the government was enacting diverse administrative, policy, and relief strategies to manage inflationary pressures. These actions, along with efforts to enhance the availability of food items, underscore the government’s resolve to mitigate inflation, it added.

In stark contrast to these lofty aspirations, the government has imposed levies on infant milk, packaged milk, dairy farm milk, a 10% tax on poultry feed, and an 18% tax on imported fruits and vegetables. The finance ministry stated that by regulating supply and demand, the government aims to stabilize prices and alleviate market volatility, presenting a more hopeful inflation outlook.

The rate of price escalation decelerated to 11.8% in May, attributable to the higher base effect of May 2023 and stability in perishable goods prices. The finance ministry reported that economic activities gained momentum in the latter half of the outgoing fiscal year, with a declining trend in inflationary pressures, stabilization in external accounts, and a gradual resurgence in industrial activities due to various policy and administrative measures. It added that these stabilizing factors, coupled with improvements in foreign demand, have collectively provided substantial impetus to domestic economic activities.

The ministry elaborated that exchange rate stability, reinforced by advancements in the external account and incoming external flows, coupled with an anticipated decline in global oil and commodity prices, is rejuvenating the confidence of economic participants, thus catalyzing economic expansion. However, challenging agricultural conditions persist. Farmers are advised to take precautions in light of recent severe heatwave events, as soil moisture remains strained across most regions of the country. Consequently, seasonal crops such as cotton, peanuts, sugarcane, seasonal vegetables, and orchards are experiencing water stress and necessitate additional irrigation across numerous areas, the ministry noted.

Despite the highly restrictive economic policies, the ministry observes a positive trajectory in industrial growth. Large-scale manufacturing recorded a modest increase of 0.8% during the July-April period of this fiscal year, with this recovery expected to continue in the forthcoming months due to heightened external demand, improved business confidence, and the lifting of import restrictions. Furthermore, the alleviation of inflationary pressures and a shift in monetary policy are anticipated to bolster business confidence, thereby positioning large-scale manufacturing on an upward growth path in the remaining months as well as in the next fiscal year.

The finance ministry highlighted that the Federal Board of Revenue (FBR) is exerting maximum effort to achieve its annual tax revenue target, while on the expenditure side, the government maintains a cautious stance to keep the fiscal deficit within manageable bounds. The ministry expressed optimism that this fiscal year would conclude on a path of economic stabilization with improved macroeconomic indicators, adding that Pakistan’s growth prospects for the next fiscal year are projected to remain promising.

The budget for the fiscal year 2025 targets sustainable and inclusive growth, with an emphasis on high-potential sectors such as information technology, small and medium-sized enterprises (SMEs), mining and minerals, tourism, exports, and agriculture. However, fiscal discipline and effective implementation of indigenous growth programs, along with bilateral and multilateral cooperation, will be imperative for maintaining a sustainable growth trajectory in the coming years.

The government’s proactive measures to stabilize the economy, including stringent fiscal policies and targeted efforts to boost industrial growth, paint a cautiously optimistic picture for the future. While challenges persist, particularly in the agricultural sector, the anticipated improvements in exchange rates and external account stability offer a glimmer of hope. The budget for the fiscal year 2025 underscores a commitment to sustainable and inclusive growth, focusing on key sectors poised for expansion. Achieving these ambitious goals will require fiscal discipline, effective policy implementation, and robust cooperation on both bilateral and multilateral fronts. As Pakistan navigates this complex economic terrain, the government’s multifaceted approach aims to steer the nation towards a path of stabilization and growth.