Pakistan’s economic landscape is currently marked by a delicate balance of challenges and opportunities. The Finance Ministry’s recent report sheds light on the nation’s economic prospects, emphasizing the growing inflationary pressures and the potential for export-driven growth.

The finance ministry expressed contentment with the fiscal performance and is optimistic that the economic recovery plan and prudent measures, including policies like the Special Investment Facilitation Council (SIFC) and IT policy, will attract fresh investments. These measures are expected to create a multiplier effect, leading to increased and more inclusive economic growth in FY2024 and beyond.

During July-August FY2024, the current account registered a deficit of $935 million, a significant improvement from the $2 billion deficit in the previous year. This improvement is mainly attributed to a better trade balance. However, the government is projecting a substantial increase in the inflation rate, expecting it to reach 31% due to the rising costs of electricity and fuel. This forecast aligns with recent international reports that have highlighted Pakistan as having the highest inflation rate in Asia.

In its monthly economic outlook, the Ministry of Finance stated that inflation is anticipated to range from 29% to 31%. This projection, as indicated in the report by the economic advisor wing, marks a reversal of the recent downward trend in inflation. In August, inflation had settled at 27.4% after reaching a peak of 38% in the last fiscal year. The report also mentioned a risk to the cotton crop due to pest attacks but noted that cotton arrivals are higher compared to last year. According to the Pakistan Cotton Ginners’ Association (PCGA), cotton arrivals as of September 15, 2023, increased by 80% to 3.93 million bales compared to 2.19 million bales during the same period last year, rebounding from the devastating floods that affected cotton production last year.

On the external front, the finance ministry anticipates an increase in foreign remittances due to government actions aimed at curbing speculative activity in the foreign exchange market. This crackdown is expected to have a positive impact on remittances, trade, and the current account balance. Furthermore, Pakistan’s primary export markets, including the US, the UK, the Euro Area, and China, are displaying positive trends in trade, indicating potential for export growth in the coming months. However, imports are expected to gradually rise to stimulate economic activities, which may help maintain a sustainable balance in the current account, according to the finance ministry.

Earlier this month, the Asian Development Outlook, the flagship publication of the Asian Development Bank, projected an average inflation rate of 25% for Pakistan in the current fiscal year. This projection places Pakistan’s inflation rate as the highest among all Asian economies, despite having the fourth-lowest economic growth rate. The finance ministry has warned that the recent upward adjustment in energy tariffs is likely to add to inflationary pressures in the months ahead. These price increases are expected to raise transportation costs and affect the prices of essential goods and services. As a result, inflation is expected to remain high, particularly due to a significant increase in fuel prices. Despite the government’s inflation target set at 21%, it is expected to be significantly missed due to the mounting inflationary pressures.

The report noted that the State Bank of Pakistan (SBP) has kept the policy rate unchanged due to well-anchored inflation expectations. While the double-digit base effect provides some relief to September’s inflation, its impact is limited by the substantial increase in fuel prices in September. Although international food prices saw a slight decline last month, this reduction was offset by the rising costs of rice and sugar. The ministry emphasized that the government’s strict measures against illegal foreign exchange traders and hoarders in the commodity markets are stabilizing the exchange rate, providing relief from imported inflation, and easing commodity prices. However, international crude oil prices are on track to reach $100 per barrel in the short term.

Furthermore, Pakistan’s primary export markets, including the US, the UK, the Euro Area, and China, are showing positive trends in trade, indicating potential for export growth in the coming months. However, imports are expected to gradually increase to stimulate economic activities, which may help maintain a sustainable balance in the current account, according to the finance ministry.

As Pakistan grapples with inflationary pressures, the government’s actions to stabilize the exchange rate and curb speculative activity are crucial steps in mitigating imported inflation. Additionally, the resilience of Pakistan’s cotton industry and the positive trends in major export markets hold promise for future economic growth. While challenges persist, a strategic approach to managing inflation and harnessing export potential can pave the way for a more stable and prosperous economic future for Pakistan.