ISLAMABAD: Painting a positive overall macroeconomic picture, the caretaker government is now hoping for a downhill journey from the painful inflation rate and a further increase in economic activities over the coming months.

“Pakistan’s economy is on a gradual but promising path to recovery. The stride of economic revival initiatives is driving a surge in economic activity,” said the Economic Advisers’ Wing of the Ministry of Finance in its monthly Economic Update & Outlook, but warned that higher mark-up payments could put significant pressure on expenditures.

It said the positive economic signals and recovery indicators had triggered market sentiment, propelling the Karachi Stock Exchange Index by over 33pc in November and surpassing the 60,000-point mark for the first time in history.

It attributed the market sentiment to a sustained monetary policy stance and successful IMF staff review in November and noted that the exchange rate remained stable, owing to reforms in exchange companies and a reduction in illicit transactions, which exerted a positive impact on overall economic activity.

Surprisingly, the Ministry of Finance refrained from utilising the economic performance data, approved last week by the National Accounts Committee (NAC), that put the gross domestic product growth rate at 2.13pc for the first quarter of the current fiscal year, and continued to flag higher mark-up payments as major challenges to the fiscal position, albeit in a sugarcoated manner.

“Despite better fiscal accounts during the first quarter of the current fiscal year, higher mark-up payments may put significant pressure on the expenditure side. However, it is expected that effective fiscal management through robust growth in revenues and a cautious expenditure approach will navigate potential challenges and maintain positive momentum in the fiscal sector”, it said.

Similarly, although the Ministry of Finance released its monthly report in December, most of the data it used for economic performance pertained to October, although a lot of the data for November is now publicly available – particularly relating to inflation, imports, exports, foreign exchange position, revenues and so on.

During the first four months of FY2024, the overall performance of the economy is encouraging as the monthly economic indicator (MEI) continued to be positive in October 2023, driven by a notable improvement in key indicators of economic activity.

The outlook report said the better performance of the large-scale manufacturing (LSM) sector, fueled by positive trends in high frequency data, a steady uptick in imports, and improvement in composite leading indicator (CLI) of Pakistan’s major export markets were providing impetus to overall economic activity.

“All these gains are also reflected in improved fiscal and external accounts position”, it said, also noting the positive impact of the staff-level agreement reached with the IMF on November 15 on the feel-good environment.

The ministry said the IMF programme supported the government’s commitment to advance planned fiscal consolidation, accelerate cost-reducing reforms in the energy sector, complete the return to a market-determined exchange rate, pursue SOEs and governance reforms to attract investment and support job creation while continuing to strengthen social assistance.

At the same time, the execution of the FY2024 bu­d­get with continued adju­­s­t­ment of energy prices, and renewed flows into the foreign exchange (FX) market have lessened fiscal and external pressures.

Furthermore, inflationary pressures are receding and the outlook has improved. Inflation is expected to decline over the coming months amid receding supply constraints and modest demand. With all these positive developments, further improvement in domestic economic activities is anticipated in upcoming months.

The stability in the exchange rate, ease in supply disruptions due to the removal of import restrictions, and improved dollar liquidity contributed to this economic upswing particularly relating to return of the positive trend in LSM after several months of decline.

In the agriculture sector, the input situation shows positive signs. Farm tractor production and sales witnessed growth of 55.1pc (17,098) and 86.8pc (17,296), respectively during July-October FY2024 over the corresponding period last year.

On the fiscal front, healthy growth in revenues outpaced the growth in expenditure during the first quarter of FY2024. Both tax and non-tax collection attributed to a significant rise in total revenues, however, a substantial increase in non-tax collection on the back of higher receipts from petroleum levy remained the major source of the increase. Thus, with healthy growth in revenues relative to expenditures, the fiscal deficit reduced to 0.9pc of GDP in July-Sept FY2024 from 1pc of GDP last year.

It noted food, beverages, housing, gas, fuel, water, transport and household equipment as major drivers of sustained headline inflation but hoped that keeping in view the crop cycle of perishables, the supply pressures would be relieved from the end of November and onwards. Moreover, the stability/reduction in fuel prices would help further easing out inflationary pressures.

The monetary policy rate was maintained at 22pc, owing to the significant performance of high-frequency indicators and improved inflation outlook. “Overall, positive economic signals and recovery indicators are steering the improvement in the GDP outlook for the fiscal year”, it concluded.

Published in Dawn, December 4th, 2023

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