The stabilization measures, encouraging business confidence coupled with exchange rate stability, contributed to a positive economic outlook for Pakistan, amidst ongoing challenges, the Finance Ministry said in a recent report.
“Last few months measures have restored market confidence and led to a pick-up in economic activity,” says monthly Economic Update and Outlook for February 2024, released by the finance ministry on Thursday.
According to the report, the Gross Domestic Product (GDP) growth accelerated to 2.1% in the first quarter (Q1) of Fiscal Year 2024, after two consecutive quarters of negative growth. The growth was broad-based with the agriculture sector posting 5% growth and manufacturing activity registering 2.5% growth. In particular, the removal of the import ban and other import restrictions have eased supply constraints, leading to the pick-up in economic activity.
Data from Quarter 2 FY2024 shows stronger performance of the manufacturing sector, with large scale manufacturing posting 8.2% increase over Q1. The report predicted Q2 FY2024 GDP growth to rise to around 3% on stronger manufacturing output and higher production of crops including cotton, which has increased by 75% to 8.35 million bales.
The caretaker government has taken steps to reduce unproductive expenditures and boost tax and non-tax income. During Jul-Dec FY2024, the government has run a primary surplus of Rs 1.5 trillion (1.4% of GDP) against International Monetary Fund Standby Agreement (SBA) target of 0.5% of GDP.
Difficult and unpopular measures including a reduction in the subsidy bill on power and gas through timely implementation of quarterly tariffs helped improve the primary account. No supplementary grants have been issued during this period and PSDP projects that fall under the provincial domain have been transferred to provincial ADPs.
At the same time, the release of funds has been increased for 9.3 million most vulnerable households.
On the revenue side, the FBR Tax collection grew by 30% to Rs 5.15 trillion during July-January FY2024 despite a slowdown in imports and 0% GST on petroleum products.
Overall growth in the domestic taxes has increased by 40%, with the rebound in economic activity and rise in profitability of companies including Banks, Oil & Gas, and the manufacturing industry.
Import taxes posted a growth of 16% due to improvements in the valuation of imports that yielded Rs 151 billion in collections as well as the anti-smuggling drive that witnessed almost 69% growth in FY2024. The improvement in the fiscal position has helped the government to reduce the accumulation of public debt. Net domestic borrowing has decreased by 67% to Rs 1.9 trillion, from Rs 5.8 trillion in the preceding period.
The lower domestic borrowing, lower cost of borrowing on margin (below the SBP policy rate) and extended maturity profile helped lower net domestic borrowing. Most of all the domestic debt profile has improved to 3.1 years in Jan 2024, from 2.7 months in Jun 2023. The government also successfully launched a 1 year Sukuk on the PSX, the first auction was held in November 2023, raising lower-cost debt from non-bank and retail investors. Similarly, external net borrowing fell to $ 0.3 billion, compared to $ 3bn in the preceding period.
At the heart of the economic challenges facing Pakistan today is the unsustainable public debt position, with Pakistan in breach of the Fiscal Responsibility & Debt Limitation Act (FRDL) since 2013. The government’s ability to service the public debt liabilities is hampered by weak tax collection, rising losses of SOEs, and highest interest rates since 1972.
The improvement in the fiscal position and other quantitative and structural benchmarks led to the successful first review of the IMF SBA in November 2023, and subsequent disbursement of $ 700 million in January 2024.
The measures taken to conclude the IMF staff review included the annual rebasing of power tariffs, the semi-annual gas tariff adjustment, and the SOE Policy to enhance governance and improve financial performance.
A comprehensive Circular Debt Management Plan (CDMP) was enforced that focused on reforms to reduce high costs, improve DISCO performance, and increase competition and green energy.
“Headline Inflation has remained persistently high, but we anticipate a significant fall in inflation in 2024 due to the economic measures taken by the caretaker government including improvement in the supply of imports of raw materials, higher food production, and stability in the exchange rate market.”
Assuming no exogenous shocks, including a rise in international oil prices, the SBP projects inflation to fall to 5% to 7% range by FY2025. During the month of February 2024 the weekly SPI inflation has declined to 30.7% compared to 44% in Jan 2024.
The markets have rallied due to improvements in the economic conditions and the PSX has rallied 40% from September with the KSE 100 index rising to 63,300 points by 26 February. Foreign buyers have invested $ 51.7 million in the PSX during FY2024, after 4 years of outflow. During the period, the Rupee has strengthened 8% to 280 levels.
The report says that to sustain these gains, it was imperative that the new government completed the last review of the IMF SBA. It emphasized that the new government reached an early agreement with the IMF staff on a new medium-term facility, providing an anchor to carry out the difficult reforms.
To achieve this, the report suggests the new government must take forward critical reforms on the restructuring of the FBR, privatization of the loss-making SOEs including PIA, and the implementation of the SOE policy for improved governance and financial performance.
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