Jul-Oct 23: revenues surge, deficit shrinks; but there’s a catch

In the ‘Monthly Economic Update & Outlook’ report released by the Ministry of Finance, Pakistan’s economic trajectory continues to show promising signs, instilling confidence in businesses and investors alike.

The Pakistan Stock Exchange (PSX) emerged as a beacon of this optimism, delivering exceptional performance in November 2023. The sustained rise in the PSX index over the past five months reflects not only an improved economic health but also paints a positive outlook for the ongoing fiscal year.

REAL SECTOR DYNAMICS: A MIXED BAG

The real sector presents a nuanced picture with varying performances across economic sectors. In agriculture, the outlook is positive, with the Rabi season of 2023-24 witnessing wheat cultivation meeting planned targets. Punjab, notably, exceeded its sowing target by 2 per cent, underlining the sector’s performance. Farm inputs, including tractor production and sales, registered significant growth, with a 60.7 per cent and 98.2 per cent increase, respectively, during Jul-Nov FY2024.

Conversely, the Large Scale Manufacturing (LSM) sector reported a minor negative growth of 0.4 per cent during Jul-Oct FY2024. This contrasts with the contraction of 1.7 per cent in the previous year. A sectoral breakdown reveals a mixed trend, with 12 out of 22 sectors experiencing positive growth, including Food, Beverages, Chemicals, Pharmaceuticals, and Machinery. However, sectors such as Tobacco, Textile, and Automobiles faced negative growth.

INFLATIONARY PRESSURES AND FISCAL RESILIENCE

Inflation, as measured by the Consumer Price Index (CPI), rose to 29.2 per cent YoY in November 2023, up from 23.8 per cent in the same period last year. The uptick is attributed to increased costs in food, housing, utilities, and transport. On the fiscal front, the successful implementation of consolidation measures in the first four months of FY2024 resulted in a notable rise in total revenue receipts, surpassing expenditure growth. This led to a curtailed fiscal deficit of 0.8 per cent of GDP and an improved primary surplus of Rs 1,429.7 billion during Jul-Nov FY2024.

GLOBAL CONTEXT AND EXTERNAL TRADE RESURGENCE

Globally, economic growth is poised for improvement in 2023, driven by increased consumer spending in China and accelerated growth in the US. This positive shift has helped counterbalance Europe’s previous slowdown caused by an energy crisis.

Externally, Pakistan’s indicators show a robust recovery during Jul-Nov FY2024, with YoY exports surging by 21.5 per cent in November 2023 and imports increasing by 2.9 per cent. Eased import restrictions facilitated a smoother supply of raw materials for export-oriented industries, resulting in an improved trade balance and a Current Account deficit of $1.16 billion, a significant improvement from the $3.3 billion deficit the previous year.

FOREIGN INVESTMENTS AND MONETARY POLICY

Foreign Direct Investment (FDI) reached $656.1 million during Jul-Nov FY2024, marking an 8.1 per cent increase, largely attributed to Chinese investments. Year-on-year remittances grew by 3.6 per cent in November, propelled by structural reforms related to exchange companies and the convergence of exchange rates in the interbank and open market.

The Monetary Policy Committee (MPC), in its December 12th meeting, opted to maintain the policy rate at 22 per cent. The committee’s assessment indicates a positive real interest rate on a 12-month forward-looking basis.

Furthermore, the MPC expresses optimism that the headline inflation rate will decline in the upcoming months of FY2024. This anticipated decrease is expected to be driven by the easing of supply constraints, particularly in agricultural products, and a moderation in international commodity prices.

FISCAL RESILIENCE AND SURGING REVENUES

In the fiscal realm, the period of Jul-Oct FY2024 showcased a commendable fiscal discipline, marked by a substantial reduction in the fiscal deficit to 0.8 per cent of GDP, amounting to Rs 8,61.7 billion, down from 1.5 per cent of GDP (Rs 1,265.8 billion) in the preceding year.

The primary surplus also experienced an upward trajectory, reaching Rs 1,429.7 billion (1.4 per cent of GDP), a notable improvement from Rs 1,36.2 billion (0.2 per cent of GDP) in the same period last year. The surge in net federal revenue receipts to Rs 2,806.6 billion, compared to Rs 1,316.8 billion last year, was propelled by a remarkable growth in non-tax revenues, surpassing 300 per cent.

This positive trend was driven by a 32 per cent growth in domestic tax revenues, prominently led by a 62.8 per cent surge in FED and a 42.2 per cent rise in direct taxes. However, total expenditures also saw a 35 per cent increase, standing at Rs 3,706.7 billion during Jul-Oct FY2024, with current spending growing by 44 per cent, mainly attributed to a substantial rise in markup payments.

Overall, these fiscal indicators portray a resilient fiscal framework, with revenue growth outpacing expenditures, contributing to a strengthened fiscal position in the first four months of the current fiscal year.

THE CATCH

Pakistan’s current economic model is not working since it has fallen behind its peers, said World Bank Country Director Najy Benhassine.

In a Policy Vision article published in the latest UNDP publication, he underscores the reversal of significant progress in poverty reduction and the concentration of growth benefits among a narrow elite.

Benhassine points to policy failures and distortions in the critical agri-food and energy sectors as key issues that demand attention. Specifically, he calls for reforms in agriculture, aiming to address subsidies and price restrictions that trap smallholder farmers in a low-value farming system and promote resource-intensive and environmentally harmful production practices.

“The question is whether those with power and influence will take the opportunity arising from the current crisis to do what is needed?” the World Bank country director asked.