The economic landscape presents a mixed picture, with GDP growth estimates and positive momentum in certain sectors tempered by challenges in fiscal management and industrial output.

The Ministry of Finance has cautioned about the increasing strain on spending due to higher interest payments, posing significant hurdles for fiscal management. In its latest monthly economic report, the ministry noted some positive developments in fiscal performance, driven by substantial revenue growth. However, the mounting pressure on expenditures from increased interest payments remains a notable challenge for fiscal management. To stabilize the situation, it is crucial to ensure fiscal consolidation, laying the groundwork for sustainable economic growth. Therefore, the government is rigorously focusing on fiscal consolidation measures to enforce fiscal discipline. Consequently, the surplus in the primary balance continues to improve during the first eight months of FY2024.

Additionally, the ministry has forecast a further decline in Pakistan’s inflation rate, with projections indicating it will range between 18.5-19.5 percent in April 2024. According to the report, this downward trend in inflation is attributed to favorable base effects from the previous year and enhancements in the domestic supply chain of essential goods. The government remains committed to curbing inflation through strict administrative measures. Despite the increase in international crude oil prices prompting domestic petrol price hikes, the government’s initiatives to reduce wheat flour prices and implement administrative measures are expected to counterbalance the impact.

Inflation is anticipated to decrease further to 17.5-18.5 percent in the current month. Import activities are expected to gain momentum, stimulating economic growth, while exports are forecast to maintain their upward trend. Remittances are expected to remain stable at $2.3-2.5 billion. Considering these factors, the current account is expected to remain within sustainable limits.

The fiscal performance in July-Feb FY2024 shows positive developments alongside various challenges. Revenue collection, especially non-tax revenue, has notably increased. Tax collection has not only met but exceeded targets from Jul-Mar FY2024, indicating improved economic activity, effective tax administration, and compliance measures. The government is striving to sustain this momentum to achieve FY2024 targets through an effective revenue mobilization strategy.

However, the growing pressure on expenditures, primarily due to higher interest payments, presents a significant challenge, widening the fiscal deficit during the first eight months of the fiscal year. Nevertheless, the improving primary balance surplus suggests the government can cover its primary expenditures. To address these challenges, the government is intensifying efforts to enhance revenue collection, control expenditures, and maintain fiscal discipline. The first nine months of the fiscal year have shown signs of moderate macroeconomic recovery, supported by agricultural growth, easing inflation, and external account stability.

According to available quarterly estimates, GDP growth in the first and second quarters of FY2024 is estimated at 2.5 percent and 1 percent, respectively. The positive momentum in the Large Scale Manufacturing (LSM) sector since December 2023 is expected to persist for the rest of FY2024, primarily due to a substantial increase in agricultural output, heightened export demand, improvement in the Composite Leading Indicator of Pakistan’s major export markets, and anticipation of exchange rate stability.

While fiscal performance shows some positive trends driven by significant revenue growth, the mounting pressure on expenditures due to higher interest payments poses significant challenges for fiscal management. To chart a stable course, it’s crucial to prioritize fiscal consolidation, laying the groundwork for advancing towards sustained economic growth.

Investing in agricultural infrastructure, diversification, and climate resilience strategies remains pivotal. Other priority areas include enhancing market access, developing value chains, and promoting livestock to ensure a sustainable agriculture sector. Although the LSM cycle typically mirrors cyclical movements in major trading partners, its focus on key industrial sectors rather than total GDP makes it somewhat more volatile than the cyclical component of GDP in Pakistan’s primary export markets.

The economic situation in major export markets has been improving since October 2022, with their cyclical GDP component consistently above the neutral 100 benchmark for three consecutive months, as indicated by the aggregate Composite Leading Indicator (CLI) of those markets. Despite challenges faced by the industrial sector, the cyclical component of LSM surpassed the potential level in December and January FY2024. However, it fell below potential in February mainly due to year-on-year negative growth in high-frequency variables such as cement dispatches, automobile production, and textile output.

Nevertheless, it is anticipated that LSM output will exhibit positive year-on-year growth in the remaining months of the fiscal year due to better crop production and increased foreign demand. Short-term growth in LSM will also benefit from low base effects in corresponding months of FY2023.

The next few months present both opportunities and challenges for Pakistan’s economy. While GDP growth estimates and positive momentum in sectors like agriculture and exports offer promise, fiscal management and industrial output remain areas of concern. Prioritizing fiscal consolidation, investing in critical sectors like agriculture, and enhancing market access are crucial steps towards ensuring sustained economic growth in the coming fiscal year.

The economic analysis reveals a complex scenario marked by both promising indicators and notable challenges. GDP growth estimates for the first two quarters indicate a moderate pace of expansion, with growth rates of 2.5 percent and 1.0 percent respectively. While this suggests a degree of resilience, it also reflects a slower growth trajectory compared to previous periods, indicating potential headwinds.

A key area of strength lies in the Large Scale Manufacturing (LSM) sector, which has exhibited positive momentum since December 2023. This momentum is attributed to several factors including increased agricultural output, heightened export demand, and improvements in the Composite Leading Indicator of Pakistan’s major export markets. However, the cyclical nature of the LSM sector, coupled with volatility in industrial output, presents challenges for sustained growth.

Fiscal management emerges as a significant concern, with growing pressure on expenditures attributed primarily to higher interest payments. Despite significant growth in revenues, the fiscal performance is overshadowed by the challenge of managing expenditures within sustainable limits. Addressing this issue requires a focus on fiscal consolidation to lay the foundation for higher and more sustainable economic growth.

To face the challenges, prioritizing investment in agricultural infrastructure, diversification, and climate resilience strategies is essential. Additionally, enhancing market access, value chain development, and livestock promotion are identified as critical measures to ensure the sustainability of the agriculture sector, which remains a key driver of the economy. Looking ahead, the economic outlook hinges on effectively addressing these challenges while leveraging opportunities for growth. This necessitates a comprehensive approach encompassing fiscal discipline, targeted investments, and policy measures aimed at bolstering key sectors. By adopting a proactive and strategic approach, the country can position itself for more robust and inclusive economic growth in the coming fiscal year and beyond.