Recent developments in Pakistan’s economy have been marked by a sharp inflationary surge, influenced by budgetary measures that have driven up the cost of essential goods. Simultaneously, the Ministry of Finance remains hopeful about the continued growth of large-scale manufacturing, despite concerns surrounding the agricultural sector due to unpredictable weather patterns.

Externally, positive trends in exports, imports, and remittances have been complemented by a timely upgrade in Pakistan’s sovereign credit rating by Moody’s, signaling a cautiously optimistic outlook for the nation’s financial future. In a calculated maneuver, the government has revised its August inflation forecast, now anticipating a descent into single-digit territory—a shift poised to amplify pressure on the central bank to implement a significant cut in interest rates during its forthcoming monetary policy conclave.

Amidst the stabilization of economic indicators, the Ministry of Finance, in its latest economic outlook, predicts that inflation will oscillate between 9.5% and 10.5% in August, with a further tapering to 9% to 10% projected for September. This adjustment marks a departure from the previously estimated 11% for August, as postulated by the ministry’s economic advisory division last month. Pakistan’s weekly inflation barometer, gauged through the Sensitive Price Indicator (SPI), registered a 0.62% decline on a week-on-week basis, driven by a downturn in food prices and marking a third successive week of deceleration. Data from the Pakistan Bureau of Statistics (PBS) revealed that the inflationary momentum decelerated to a 27-month trough of 15.34% in the week concluding on August 29, relative to the same period in the prior year. Although inflation remains entrenched in double digits, it is poised to breach the single-digit threshold, bolstered by the central bank’s stringent monetary stance—a pivotal factor in curbing price surges.

The finance ministry has allocated Rs9.8 trillion for interest payments in the current fiscal year, predicated on an average interest cost of 18%. Nonetheless, SBP Governor Jameel Ahmad, in a parliamentary session, asserted that the actual interest burden should be assessed net of the Rs2.5 trillion profit the central bank is expected to remit to the federal government within this fiscal period. The finance ministry’s report emphasized that the easing of monetary policy is a consequence of subdued inflationary forces. During the inaugural month of FY25, the money supply (M2) contracted by 3.2%, a sharper decline compared to the previous year.

The report underscored that adjustments in the policy rate would help anchor inflationary expectations and foster a sustainable economic resurgence throughout the year. The ministry highlighted that Pakistan’s economy commenced the current fiscal year on a firm footing, exhibiting positive momentum likely to persist in the coming months. The report noted a dip in CPI inflation last month, signaling that the economy is on course to achieve single-digit inflation in the near future. Both fiscal and external sectors have demonstrated resilience, owing to enhanced management practices. The report further noted improvements in the current account and tax collection exceeding targets in July.

Inflation was recorded at 11.1% year-on-year in July, while on a month-on-month basis, it witnessed a 2.1% uptick. Last month’s inflation surged sharply, driven by budgetary measures that caused the prices of essential goods to skyrocket. The ministry remains optimistic that large-scale manufacturing will continue its positive growth trend in the current fiscal year, supported by improved external demand, a stable exchange rate, declining inflation, and the easing of monetary policy.

However, the agricultural outlook for Kharif 2024 hinges on weather patterns specific to each crop, which will significantly influence yields. The ministry cautioned that recent and ongoing rains could have both positive and negative effects on rice, sugarcane, cotton, fodder, and vegetable crops, depending on whether the showers devastate farmlands. During Kharif 2024 (April-July), urea offtake was 13.5% lower than in Kharif 2023, while the offtake of di-ammonium phosphate (DAP) saw an 8.2% increase.

Externally, the ministry noted that exports, imports, and workers’ remittances were trending upwards. It is anticipated that in August 2024, exports will range between $2.5-3.2 billion, imports between $4.5-5 billion, and remittances between $2.6-3.3 billion. Moody’s recent decision to upgrade Pakistan’s long-term sovereign credit rating from Caa3 to Caa2 came at a fortuitous moment. Alongside this upgrade, the agency has revised its outlook for the nation’s struggling economy from stable to positive. This upgrade, following a similar one by Fitch, reflects Pakistan’s improving macroeconomic situation, particularly in liquidity and external balances, which have rebounded from severely weakened levels amid a staff-level agreement with the IMF for a new $7 billion bailout.

Despite the upgrade, the new rating remains within Moody’s “speculative grade” category and continues to underscore the country’s “very weak debt affordability, which poses a high risk to debt sustainability.” Nonetheless, Moody’s acknowledged that Pakistan’s default risk has diminished, even though the country’s interest payments are expected to consume nearly half of government revenues over the next two to three years. The enhancement of Pakistan’s investment risk profile, as evidenced by the back-to-back upgrades by two major agencies within a month, should help lower the country’s risk premium and boost investor confidence.

Crucially, this development should facilitate the government’s re-entry into global bond markets and negotiations with commercial banks for fresh funding it plans to secure by the next fiscal year for budgetary support and to cover the substantial external financing gap—a key reason for the delayed IMF approval. With an improved rating, the government would be in a stronger position to negotiate more favorable terms and lower interest rates with foreign commercial banks, with whom it is discussing raising $4 billion.

However, Moody’s, like Fitch, has warned of lingering uncertainty regarding the government’s ability to sustain and implement reforms. The agency is concerned that the coalition government may lack the electoral strength to consistently implement revenue-raising measures without igniting social unrest.

In essence, the government cannot afford any deviation from the IMF-prescribed reforms, including revenue-generating measures, if it hopes to secure timely reviews of the Fund program, continuously unlock financing from official partners to meet its external debt obligations, and further strengthen its foreign exchange reserves. Pakistan’s economy has made significant progress from where it stood a year ago, but it remains heavily reliant on multilateral and bilateral assistance to sustain itself.

Pakistan’s economic landscape is at a critical juncture. While inflationary pressures and agricultural uncertainties pose significant challenges, the nation’s improving credit ratings and positive trends in external trade offer a glimmer of hope. The government’s ability to sustain and implement necessary reforms will be crucial in navigating these complexities. As Pakistan strives to stabilize its economy, it must remain vigilant in adhering to international financial commitments to ensure continued support and recovery.