Pakistan’s economy has shown signs of recovery and resilience as the financial year progresses, particularly in its fiscal and external sectors. Key economic indicators reveal a reduction in the fiscal deficit and a surplus in the primary balance, while tax revenues have exceeded expectations. However, the agricultural sector remains a mixed bag, with challenges in cotton production and a notable decline in urea offtake. At the same time, improvements in exports and remittances offer hope for continued external account stability.

Pakistan’s economy began the new financial year on a promising note, laying the groundwork for sustained positive developments in the months ahead. However, maintaining the external sector’s stable outlook will depend on several factors, including a steady exchange rate, a revival in domestic economic activities, stronger agricultural output, lower commodity prices both domestically and globally, and increased foreign demand.

The large-scale manufacturing (LSM) sector is anticipated to continue its growth trajectory in FY2025, supported by improved external demand, a stable exchange rate, decreasing inflation, and a more relaxed monetary policy. Short-term inflation, as measured by the Sensitive Price Index (SPI), saw a year-on-year increase of 14.36% in the week ending September 12, driven primarily by rising prices of essential food items. After seven consecutive weeks of deceleration, SPI-based inflation saw a modest 0.01% increase from the previous week, according to data from the Pakistan Bureau of Statistics.

This rise in short-term inflation is largely attributed to higher prices of perishable food items like tomatoes and chicken, along with a week-on-week hike in electricity rates. However, fuel prices have slightly decreased over the past three weeks, reducing transportation costs for perishable goods. The government has also indicated that fuel prices are likely to drop in the upcoming week. Notably, weekly inflation reached a record high of 48.35% year-on-year in May 2023, before dropping as low as 24.4% in late August 2023, only to surge past 40% again by November 2023.

In the agricultural sector, the production outlook for Kharif 2024 is closely tied to weather patterns, which will play a pivotal role in determining crop yields. Recent rainfall could have mixed effects on crops like rice, sugarcane, cotton, fodder, and vegetables, depending on whether the rain inundates farmlands or not. On the external front, exports, imports, and workers’ remittances are all trending upward. It is projected that in August 2024, exports will range between $2.5 billion and $3.2 billion, imports between $4.5 billion and $5 billion, and workers’ remittances between $2.6 billion and $3.3 billion.

In July 2024, a drop in CPI inflation signaled that the economy might be on track to achieve single-digit inflation in the coming months. Both fiscal and external sectors have demonstrated resilience, primarily due to improved management practices. The current account balance has improved, and the Federal Board of Revenue (FBR) surpassed its tax collection target.

Additionally, agricultural credit disbursement increased by 24.8% during FY2024, reaching Rs2,216 billion compared to the previous year. A notable 122.8% surge in the import of agricultural machinery and equipment, amounting to $91.3 million in FY2024, indicates a sustained investment in farming technology, which is expected to enhance productivity and efficiency in the agricultural sector.

During the Kharif 2024 season (April-July), urea offtake totaled 1.822 million tonnes, a decline of 13.5% compared to Kharif 2023. However, diammonium phosphate (DAP) offtake showed an 8.2% increase, reaching 419,000 tonnes. According to the Pakistan Cotton Ginners Association, as of July 15, 2024, cotton arrivals had significantly declined, with total bales dropping from 0.86 million in 2023-24 to 0.44 million in 2024-25.

In Punjab, cotton arrivals fell to 0.11 million bales from 0.2 million bales the previous year, while Sindh experienced a decrease from 0.66 million bales to 0.33 million bales. The government has ensured the timely availability of inputs like agricultural credit, improved seeds, and fertilizers to meet production targets.

On the fiscal front, the government successfully reduced the fiscal deficit to 6.8% of GDP in FY2024, down from 7.8% the previous year. The primary balance also recorded a surplus of 0.9% of GDP, reversing a deficit of 1.0% in FY2023. This improvement was largely due to prudent fiscal measures. Total revenues surged by 38%, with tax and non-tax collections both witnessing substantial growth. Non-tax revenues jumped by 75.4%, reaching Rs3,183.3 billion in FY2024, up from Rs1,814.8 billion the previous year. The Federal Board of Revenue (FBR) exceeded its revenue target by Rs3.8 billion for July 2024, as net tax collections grew by 23%, totaling Rs659.8 billion compared to Rs538.4 billion in the same period last year.

The external account position saw improvement, driven by a marked rise in exports and remittances despite an uptick in imports. In July FY2025, the current account deficit shrank to $0.2 billion, down from $0.7 billion the previous year. Goods exports grew by 12.9%, reaching $2.4 billion, while imports increased by 16.3%, totaling $4.8 billion, compared to $4.1 billion the previous year. This led to a goods trade deficit of $2.4 billion, up from $2 billion in the previous year.

While Pakistan’s economic outlook is buoyed by fiscal improvements and positive trade developments, challenges in agriculture, particularly cotton and urea offtake, pose a concern. The government’s efforts to manage the fiscal deficit and increase revenues have paid off, and the external account is stabilizing. However, ensuring continued growth will require addressing agricultural setbacks and maintaining momentum in trade and remittances. As the country navigates these complexities, sustained economic reforms and prudent management will be crucial to securing long-term stability and growth.