The Ministry of Finance predicts an increase in economic activity and a fall in inflation

• The Ministry of Finance gives a “positive picture” of the economy.
• The Ministry is seeking financing on favorable terms from multilateral sources.
• The report highlights the challenge of increased debt servicing costs.

ISLAMABAD: The finance ministry has painted a “positive picture” of the economy ahead of the International Monetary Fund’s (IMF) loan program review, predicting an improvement in overall economic activity throughout the fiscal year.

The finance minister predicted that overall economic activity would remain upbeat due to the recovery in domestic economic activities and improvement in inflationary pressures, The news reported on Wednesday.

Forecasts show that monthly Consumer Price Index (CPI) inflation is expected to decline from 31.4% in September to around 27%-29% in October 2023.

To address external financing requirements, the ministry is actively seeking concessional financing from multilateral sources such as the World Bank, Asian Development Bank (ADB) and Islamic Development Bank (IsDB), with a total target of $6.3 billion. Along with the IMF approval of $3 billion, bilateral aid of about $10 billion is also expected.

The government forecasts a recovery in remittances for October 2023, after spreads between interbank and open market narrowed below 1%.

However, the impact of global inflation on the disposable income of overseas workers has led to lower remittances. Ministry officials pointed to a slowdown in remittances to several countries, notably Bangladesh, India and the Philippines.

In the monthly economic report released on Tuesday, the Ministry of Finance said: “In the coming months, overall economic activity is expected to remain positive throughout the outgoing fiscal year due to the recovery in domestic economic activities and improvement in inflationary pressures. Recent concerted efforts by government agencies to address macroeconomic imbalances aim to achieve stabilization and promote sustainable and inclusive economic growth in the medium to long term.

“Significant progress in the fiscal and external accounts has begun to translate into an uptick in economic activity. Positive economic data and signs of an economic recovery led the PSX to rise 11% in October, surpassing the psychological benchmark of 51,000 points for the first time since May 2017.

“Both international and domestic bond markets also rallied 8% in October, boosted by expectations of easing inflationary pressures and a favorable outlook for the IMF staff review in November. The Pakistani rupee (PKR) appreciated 9% in October due to reforms initiated by foreign exchange companies and a crackdown on illegal trading.

“The Monthly Economic Index (MEI) for September 2023 marked the third consecutive month of positive gains in the index, reflecting growth momentum in high-frequency economic variables.

“GDP growth prospects have improved, showing positive momentum in manufacturing activity and a promising outlook for agricultural production. Recent Large Scale Manufacturing (LSM) data reported positive growth of 2.5% in August, reversing 14 months of declines in the manufacturing sector.

“Several factors, including the lifting of import restrictions, clearance of outstanding letters of credit (L/C) and improved dollar liquidity in the markets due to the increase in foreign exchange reserves of the State Bank of Pakistan (FX), contributed to the rise in economic activity. The recovery in the manufacturing sector includes the export sector, construction activity and consumer goods, all reflecting gains in August.

“Growth in various sectors such as readymade garments, cement, food, beverages, pharmaceuticals and power generation depicts a resilient economic recovery. In agriculture, increased cotton and rice production promises favorable prospects for exports and overall economic growth in 2024.

“Furthermore, positive trends in agricultural tractor production and sales, strong revenue performance in Q1 2024 and notable revenue collection in various sectors such as Federal Board of Revenue (FBR) and non-tax revenue contributed to the economic momentum” .

The report also highlighted challenges such as the increased cost of servicing public debt due to the State Bank of Pakistan (SBP) rate hike and the weaker PKR.

Despite these challenges, the government managed to contain spending growth through prudent measures, including reducing untargeted subsidies and spending on new projects. While headline inflation picked up significantly to 31.4% year-on-year in September 2023 from 27.4% in August, this was mainly attributed to a one-off adjustment in electricity tariffs in September 2022.

However, food inflation eased to 33% year-on-year in September from 39% year-on-year in August, with notable declines in prices of items such as tomatoes, chicken and cooking oil.

The Monetary Policy Statement (MPS) on 30 October showed an expected sharp decline in inflation in October, on the back of lower fuel prices, easing in the prices of key food staples and a favorable base effect.

The Monetary Policy Committee (MPC) has maintained that inflation will ease significantly in the second half of 2014, barring any major downside developments.

Externally, global markets remain volatile, although global growth prospects have improved. However, some economies have yet to fully recover to pre-pandemic levels due to factors such as geopolitical tensions, monetary policy adjustments, reduced fiscal support and extreme weather events.

In the first three months of the current fiscal year, the current account deficit (CAD) narrowed by 58% to $0.95 billion. Full-year CAD is expected to stabilize around $6.5 billion (1.5% of GDP) in 2024 as trade and investment flows smooth out. The State Bank of Pakistan’s foreign exchange (FX) reserves stabilized at about $7.5 billion, providing about 1.5 months of import cover.