Subtle economic perspective
The Pakistani economy still remains cautious about its growth recovery track, as stabilizing inflation coupled with an upbeat signal from industrial and services growth, is something that the country has started to realize in the recent quarter.
There is considerable improvement mainly because of fiscal consolidation, friendly engagement with the IMF and softening commodity prices globally. However, vulnerabilities continue to prevail. Structural problems and inefficiencies in the energy sector pose a risk to the economy regarding long-term growth and stability. This subtle economic perspective reflects the extent of progress and the remaining challenges.
Pakistan’s economy is likely to maintain its positive trend seen thus far and is also going to make a significant recovery both in the industrial as well as services sector in FY25. But whereas an agriculture-led economy has been seen in FY24, agriculture may not equally contribute in FY25. The State Bank of Pakistan (SBP), in its Annual Report on the State of Pakistan’s Economy for FY2023-24, observed, “The latest information about kharif (summer) crops suggests that the agriculture sector may not sustain its growth momentum into FY25.”
Preliminary estimates as of September 1, 2024 show a 59.7% decline in cotton arrivals compared to the same period last year, which bodes ill for the agriculture sector. While much of what was being felt in macro conditions would therefore be suggestive of further and better improvements, at high frequencies the SBP continues suggesting improvement for FY25 on the overall macro scenario. Growth would be 2.5% to 3.5% on the growth of real GDP in the year. Also, given the context, the contribution of workers remitting would increase more this year around $32-33 billion from $30.25 billion recorded in the past year.
Recent approval of the Extended Fund Facility (EFF) by the International Monetary Fund (IMF) Board in September 2024 may also boost investor sentiment due to its positive implications for Pakistan’s credit rating and external funding from multilateral institutions and private investors. Apart from this, a downtrend in global commodity prices is also reported and steady global growth as depicted by the IMF’s World Economic Outlook also goes well with Pakistan’s near-term positive economic development prospects. However, the SBP warned that “inherent volatility in global energy prices may pose some risks to this outlook.”.
While the policy rate has been cut, real interest rates are still positive. The tight monetary policy in conjunction with fiscal consolidation that is expected to ensue from the FY25 budget will help keep the lid on inflation. Headline inflation has been on a general downturn since June 2023, reaching 6.9% in September 2024, and core inflation too has declined sharply during the last few months.
The State Bank of Pakistan (SBP) has estimated that on recent trends, average inflation for FY25 could come in below the initial estimate of 11.5% to 13.5%. However, it cautioned that volatile global oil prices, fiscal slippages, and unplanned subsidies could upset this outlook. Meanwhile, weekly inflation edged up as the Pakistan Bureau of Statistics said it increased to 15.15% year-on-year for the week ending October 24, from 15.02% the previous week. The Sensitive Price Indicator, which measures price changes in essential goods, reported a 0.22% week-on-week decrease, though annualized inflation edged up. The SPI monitors the prices of 51 items in 50 markets covering 17 cities and recorded falls in commodities such as chicken, which declined by 7.12 percent, onions had a fall of 5.07 percent, and a fall of 1.16 percent in wheat flour was reported, while other commodity items registered marginal increases in price.
The International Monetary Fund (IMF) has estimated that Pakistan’s inflation rate, which came down from 29 percent to 12.6 percent this year, will go down further to 10.6 percent by 2025. According to Jihad Azour, IMF’s Director for the Middle East and Central Asia, the economy of Pakistan is going to grow at 3.2 percent in fiscal year 2024-25, meaning that it is slowly emerging out of the doldrums. Azour said that the Pakistan reform package seeks fiscal stability, higher revenues and smaller deficits through better revenue realization and systemic issues correction. He emphasized the reforms in state-owned enterprises for more scope of the private sector, foreign investment inflows, and export potential enhancement. According to Azour, current fiscal policies are easing inflationary pressures and facilitating capital flows, thereby reducing the burden on Pakistan’s current account.
During FY24, the macro environment improved owing to stabilization policies supported by the IMF, combined with an easing in the world market prices of all major global commodities. It reads: “Real economic activity rebounded, led by agriculture, while inflation dropped significantly, especially in the second half of the year.” CAD remained tight but narrowed further with higher flow of financial inflows increasing foreign exchange reserve building leading to pressure being released against the rupee. Fiscal consolidation measures have yielded success as the primary balance has recorded a surplus for the first time in 17 years, which brings down the debt-to-GDP ratio for FY24.
Despite these, the structural issues as pointed out in the report of SBP continue to affect sustained macroeconomic stability. The latter includes, among others, declining investments, low savings, and an unfavorable business climate coupled with weak levels of research and development productivity. Significant risks related to climate change and inefficiencies in the energy sector – particularly that of circular debt – affect long-term economic resilience.
While the macroeconomic indicators of Pakistan remain in a good shape, current trends suggest that Pakistan would benefit from structural reforms for a sustained growth with resilience. It will help the government consolidate gains made by keeping inflationary risks under check, investment deficit and sectoral inefficiency under the control. By focusing in this manner prior to FY25, it would give the nation the capacity and structure to establish a better and more just economy.