ISLAMABAD: Presenting a mixed bag of economic stabilisation apparently at the cost of manufacturing stagnation, the government on Thursday hinted at further cuts in the interest rate amid rising inflation estimates.

In its monthly review, the Ministry of Finance (MoF) also confirmed struggling tax revenues to meet budget targets, yet overwhelming growth in non-tax revenues, particularly earned through peak interest rate-based State Bank profit and highest-ever petroleum levy driving primary budget surplus and tepid fiscal deficit, at 3pc and 2.2pc of GDP, respectively.

“Large-Scale Manufacturing (LSM) recovery remains elusive,” said the MoF in its Monthly Economic Update and Outlook for April, adding that LSM continued to be under pressure, “with output declining by 1.9pc during July-February FY25, compared to a 0.4pc contraction last year. In February, LSM registered a month-on-month (MoM) decline of 5.9pc and a year-on-year (YoY) decrease of 3.5pc”.

It said the manufacturing outlook “may improve gradually in coming months, with recovery expected to be gradual amid continued YoY contraction and recent MoM decline”. Nonetheless, it said that improvements in high-frequency indicators — such as rising automobile output, raw material imports, and a more accommodative monetary stance — indicate cautious optimism.

Finance ministry hints at further cuts in interest rate

The MoF said that improved weather conditions and increased water availability would likely support higher crop yields and better farming conditions, contributing to overall economic growth, notwithstanding warnings from the Indus River System Authority (Irsa) and Met Office about drought-like conditions.

The government anticipated the inflation to remain between 1.5-2pc in April, possibly rising to 3-4pc in May. Exports and remittances are expected to maintain their upward trend in the coming months, keeping the current account within the manageable range.

The monthly report said Pakistan’s macroeconomic indicators showed signs of overall stabilisation, supported by improved fiscal performance, strengthened external account, and receding inflation. Revenue mobilisation and restrained current spending have contributed to a narrower fiscal deficit and a surplus primary balance. Despite claiming restrain, total expenditure still jumped by more than 23pc.

The MoF said the current account registered a higher surplus, driven by remittances and export growth, while reserves improved, and the exchange rate remained stable and aligned with the market. “Inflation has reduced to its lowest level, creating space for a more supportive monetary policy in upcoming months”, the MoF said, speculating further policy rate cuts by the central bank.

It expressed satisfaction that fiscal consolidation was on track as net revenue receipts grew by 43.3pc in the first eight months (July-February) to Rs6.78 trillion, driven by a 73pc surge in non-tax revenues, which reached Rs3.922tr, mainly from dividends, PTA, Post Office, SBP profits, gas surcharges, and petroleum levy.

On the other hand, FBR tax collection increased by 25.9pc to Rs8.453tr during July-March FY25. Total expenditures rose by 23.2pc to Rs10.359tr, with current spending up 17.2pc to Rs9.564tr, markup payments (18.2pc) and non-markup expenditures (15.7pc). Development spending surged by 50.3pc, the MoF claimed. These trends reduced the fiscal deficit to 2.2pc of GDP (from 3.1pc) and improved the primary surplus to Rs3.452tr (3pc of GDP) from Rs1.834tr (1.7pc).

Published in Dawn, April 25th, 2025