FeaturedNationalVOLUME 19 ISSUE # 4

FY2024 outlook: A resilient economic rebound

In the fiscal landscape, Pakistan’s economy has demonstrated remarkable resilience and signs of recovery. Against a backdrop of ongoing adjustments and renewed confidence in the foreign exchange market, the outlook for the coming months appears promising.

Presenting an optimistic outlook on the macroeconomic landscape, the interim government is now anticipating a smoother trajectory following the challenging inflation rates, with expectations of further economic growth in the upcoming months. According to the Economic Advisers’ Wing of the Ministry of Finance’s monthly Economic Update & Outlook, “Pakistan’s economy is steadily on the path to recovery. The momentum from economic revitalization initiatives is fostering increased economic activity.” However, the report also cautioned that elevated mark-up payments could exert considerable pressure on expenditures.

The report highlights that positive economic signals and recovery indicators have bolstered market sentiment, leading to a remarkable 33% surge in the Karachi Stock Exchange Index in November. The index surpassed the historic 60,000-point mark for the first time, attributed to a consistent monetary policy stance and a successful IMF staff review in November. The report also noted the stability of the exchange rate, credited to reforms in exchange companies and a reduction in illicit transactions, positively impacting overall economic activity.

Interestingly, despite the National Accounts Committee (NAC) approving economic performance data, which pegged the gross domestic product growth rate at 2.13% for the first quarter of the current fiscal year, the Ministry of Finance refrained from incorporating the information. Instead, it continued to highlight higher mark-up payments as a significant challenge to the fiscal position, albeit in a more optimistic tone.

“While higher mark-up payments may pose a significant pressure on the expenditure side, effective fiscal management through robust revenue growth and a cautious expenditure approach is expected to navigate potential challenges and maintain a positive momentum in the fiscal sector,” the report said. Similarly, despite the Ministry of Finance releasing its monthly report in December, most of the economic performance data used pertained to October. Even though data for November, particularly concerning inflation, imports, exports, foreign exchange position, and revenues, is now publicly available.

The outlook report emphasized the encouraging overall performance of the economy during the first four months of FY2024. The Monthly Economic Indicator (MEI) remained positive in October 2023, driven by notable improvements in key indicators of economic activity. The report highlighted the positive trends in the large-scale manufacturing (LSM) sector, a steady increase in imports, and improvements in the composite leading indicator (CLI) of Pakistan’s major export markets, all contributing to the impetus in overall economic activity.

“All these gains are also reflected in an improved fiscal and external accounts position,” noted the ministry, acknowledging the positive impact of the staff-level agreement reached with the IMF on November 15, contributing to a favorable economic environment.

The ministry underscored that the IMF program supported the government’s commitment to advancing planned fiscal consolidation, expediting cost-reducing reforms in the energy sector, returning to a market-determined exchange rate, pursuing reforms in state-owned enterprises (SOEs) and governance, attracting investment, supporting job creation, and concurrently strengthening social assistance.

Simultaneously, the implementation of the FY2024 budget, along with ongoing adjustments to energy prices and renewed inflows into the foreign exchange (FX) market, has alleviated fiscal and external pressures. Additionally, inflationary pressures are subsiding, and the overall outlook has improved. Inflation is anticipated to decrease in the coming months as supply constraints diminish and demand remains moderate. With these favorable developments, a further enhancement in domestic economic activities is expected in the upcoming months.

The stability in the exchange rate, the alleviation of supply disruptions due to the removal of import restrictions, and enhanced dollar liquidity have contributed significantly to this economic upswing, particularly in the positive trend seen in Large-Scale Manufacturing (LSM) after several months of decline.

In the agriculture sector, positive signs are evident in the input situation. Farm tractor production and sales experienced growth of 55.1% (17,098) and 86.8% (17,296), respectively, during July-October FY2024 compared to the corresponding period last year.

On the fiscal front, healthy growth in revenues has outpaced expenditure during the first quarter of FY2024. Both tax and non-tax collections contributed to a substantial increase in total revenues. Non-tax collection, driven by higher receipts from the petroleum levy, emerged as a major source of this increase. Consequently, with robust revenue growth relative to expenditures, the fiscal deficit decreased to 0.9% of GDP in July-Sept FY2024 from 1% of GDP last year.

The report identified food, beverages, housing, gas, fuel, water, transport, and household equipment as major drivers of sustained headline inflation. However, it expressed optimism that, considering the crop cycle of perishables, supply pressures would ease from the end of November onwards. Additionally, the stability or reduction in fuel prices is expected to further alleviate inflationary pressures.

The monetary policy rate was maintained at 22%, attributing this decision to the notable performance of high-frequency indicators and an improved inflation outlook. In conclusion, the report affirmed that overall positive economic signals and recovery indicators are steering the improvement in the GDP outlook for the fiscal year.

As we conclude this assessment of Pakistan’s economic trajectory in FY2024, the indicators point towards a robust and encouraging outlook. The strategic handling of the budget, coupled with adjustments in energy prices and renewed foreign exchange market activity, has effectively mitigated fiscal and external pressures. Declining inflationary trends, supported by receding supply constraints, set the stage for improved economic activities in the near future. Sectors such as agriculture and manufacturing exhibit positive momentum, contributing to a healthier fiscal position. In the face of these positive economic signals, the report underscores the resilience of Pakistan’s economy and anticipates continued improvement in the GDP outlook for the fiscal year.