00On Wednesday, the Government reported that Pakistan’s economic performance during the current fiscal year remained lower than expected and inflation is expected to recede further to around 6% in November.
Despite this positive news, the industrial sector, particularly large-scale manufacturing (LSM) continues to face significant challenges. The finance ministry’s monthly inflation outlook demonstrated that LSM remains under pressure. The growth in this sector still remains negative.
Inflation Outlook
Inflation is expected to remain within a range of 5.8% to 6.8% in November and could fall further to 5.6% to 6.5% by December. The disruption of supply chains brought on by the closure of highways and motorways may have an impact on prices in the early days of December. However, the government’s inflation forecasts for December were made before this. The slowdown in inflation can be attributed to factors like a high base effect from the previous year and improved food supply conditions. According to the Finance Ministry, last month’s inflation rate was 7.2%, mostly a result of a sizeable drop in the cost of goods like petrol, water and housing as well as perishable food.
Interest Rates and Economic Policy
In response to the faster decline in inflation than was expected, the Central Bank cut its policy rate by 2.5 percentage points, reducing it to 15% this month. This decision attempts to stimulate economic activity while inflation is within the central bank’s medium-term target range. Stable global oil prices and favourable gas tariffs have also supported the easing of inflationary pressures. These factors, along with the ongoing fiscal consolidation efforts, are expected to provide support to the economy in the coming months.
Economic Growth Target
The government has set an inflation target of 12% and an economic growth target of 3.6% for the fiscal year. Although political instability and the implementation of policies under the International Monetary Fund (IMF) package are expected to slow down economic activity, the government’s report points to several positive developments. Remittances and IT exports have shown significant increases, while the external and fiscal sectors have remained stable. The economic recovery, which is predicted to continue in all sectors, will also be supported by the interest rate decline, which will help the economy reach its growth goals in the months to come.
Challenges in Large-Scale Manufacturing in the Industrial Sector
The finance ministry stated that LSM-related indicators presented “a sector striving to recover”. There is proof of endurance, particularly in important industries like textiles and automobiles, where production is gradually increasing, even though the annual growth in LSM is still negative. Additionally, this slow recovery in industrial output is seen as crucial for overall economic growth. Without a sustained improvement in LSM, the economy’s broader recovery could face setbacks.
Positive Developments in Agriculture
On the agricultural side, the government is working to ensure that wheat sowing reaches its targeted area and production levels. The timely provision of key agricultural inputs to farmers at reasonable prices is a priority, and there have been notable developments in this area. “Input situation is encouraging,” said the ministry. Moreover, imports of agricultural machinery have increased by 70.9%, reaching $39.6 million, and the off-take of di-ammonium phosphate (DAP) fertilizer has surged by 92% for the 2024-25 season. These developments reflect the government’s support for farmers, especially with the disbursement of interest-free loans for the purchase of inputs such as seeds and fertilizers.
Read more: Understanding Inflation in Pakistan: What’s Driving the Price Surge?
Tax Revenue and External Trade
Despite the positive performance in agriculture and exports, the slowdown in LSM is impacting the Federal Board of Revenue’s ability to meet its tax targets. Weak enforcement measures are also contributing to this shortfall. On the trade front, however, the outlook for exports, imports, and remittances remains strong. Exports are expected to range between $2.5 billion and $3 billion, while imports may stay between $4.5 billion and $4.9 billion. Remittances are projected to be in the range of $2.8 billion to $3.3 billion for November. These trends in exports and remittances are providing some relief to the government and helping to improve the external account position, despite rising imports. Notably, the current account recorded a surplus of $218 million during the first four months of FY25, a stark contrast to the deficit seen during the same period last year.
Pakistan’s economy is showing signs of recovery, with inflation declining and key sectors such as agriculture and IT exports performing well. However, challenges remain, particularly in large-scale manufacturing, and political instability could affect future economic growth. Despite these challenges, the overall economic outlook remains cautiously optimistic, with sustained recovery expected to continue across various sectors in the coming months.
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