Positive developments mark strong start for Pakistan’s economy in FY2025

ISLAMABAD: Pakistan’s economy commenced financial year (FY-2025) on a firm positive trajectory, setting an optimistic tone for the months ahead. July 2024 saw a significant drop in CPI inflation, suggesting that the economy is on track to achieve single-digit inflation in the coming months. Both fiscal and external sectors demonstrated resilience, attributed to improved management. The current account has improved, and the Federal Board of Revenue (FBR) tax collection exceeded the target. The agriculture sector is also expected to achieve its targets.

The agriculture sector is expected to achieve its targets

According to the Economic Monthly Update & Outlook for August 2024 issued by the Finance Division Economic Adviser’s Wing, agricultural credit disbursement increased by 24.8 per cent during FY2024 to Rs 2,216 billion compared to the previous year.

A significant rise in the import of agricultural machinery and implements by 122.8 per cent to $91.3 million in FY2024 indicates a continued boost in investment in farming technology, enhancing productivity and efficiency in the agriculture sector. Urea offtake during Kharif 2024 (April-July) remained at 1,822 thousand tonnes, 13.5 per cent less than Kharif 2023, while DAP offtake increased by 8.2 per cent to 419 thousand tonnes compared to Kharif 2023.

However, the Pakistan Cotton Ginners Association reported a decline in cotton arrivals, with total bales dropping from 0.858 million in 2023-24 to 0.442 million in 2024-25.

In Punjab, cotton arrivals decreased to 0.114 million bales from 0.199 million bales last year, while Sindh saw a reduction from 0.659 million bales to 0.328 million bales. Despite this, the timely availability of inputs such as agricultural credit, improved seeds, and fertilizers has been ensured to achieve production targets.

Large-scale manufacturing (LSM) sector maintained the positive outlook

The large-scale manufacturing (LSM) sector maintained a positive outlook, registering growth of 0.9 per cent in FY2024 against a contraction of 10.3 per cent last year. However, LSM slightly decreased by 0.03 per cent on a year-on-year basis in June 2024, mainly due to declines in the production of textiles, non-metallic minerals, beverages, iron and steel, automobiles, and tobacco.

Conversely, the performance of food, wearing apparel, coke and petroleum products, chemicals, and pharmaceuticals remained encouraging, contributing to overall growth in LSM during FY2024. The auto industry showed signs of recovery in July FY2025, with production and sales of all vehicles increasing by 15.3 per cent and 16.9 per cent, respectively. Notably, car production grew by 89.6 per cent and trucks and buses by 212.6 per cent.

Total cement dispatches were recorded at 3.0 million tonnes in July FY2025, reflecting a year-on-year decline of 6.8 per cent. Domestic dispatches stood at 2.5 million tonnes, down by 11.4 per cent from 2.8 million tonnes last year, while exports grew by 21.6 per cent, from 0.45 million tonnes in July 2023 to 0.55 million tonnes in July 2024.

CPI inflation is steadily declining, recorded at the lowest level after 32 months

CPI inflation is steadily declining, recorded at its lowest level in 32 months in July 2024. CPI inflation was 11.1 per cent year-on-year in July 2024, compared to 12.6 per cent in the previous month and 28.3 per cent in July 2023. On a month-on-month basis, it increased by 2.1 per cent in July 2024 compared to an increase of 0.5 per cent in the previous month. Major drivers contributing to the year-on-year increase in CPI include perishable food items (29.2 per cent), housing, water, electricity, gas and fuels (25.3 per cent), health, clothing, and transport.

The Sensitive Price Indicator (SPI) for the week ending on August 22, 2024, recorded a decrease of 0.10 per cent compared to the previous week, with prices of 9 items declining, 21 items remaining stable, and 21 items increasing.

Fiscal sector’s performance remained resilient due to the consolidation efforts

The fiscal sector’s performance remained resilient due to consolidation efforts. The government managed to reduce the fiscal deficit to 6.8% of GDP in FY2024, down from 7.8% last year. The primary balance showed a surplus of 0.9% of GDP, contrasting with a deficit of 1.0% of GDP in FY2023.

The fiscal performance remained robust due to prudent measures, with total revenues growing by 38.0 per cent due to notable increases in both tax and non-tax collection. Non-tax collection grew by 75.4 per cent to Rs 3183.3 billion in FY2024 against Rs.1814.8 billion last year. FBR revenue growth continued its upward trajectory and surpassed the target by Rs.3.8 billion set for July 2024, with net tax collection growing by 23 per cent to Rs.659.8 billion from Rs.538.4 billion last year.

The external account improved due to increased inflows

The external account improved due to increased inflows. The current account deficit shrank to $0.2 billion in July FY2025 compared to $0.7 billion last year. Goods exports increased by 12.9 per cent, reaching $2.4 billion, while imports recorded $4.8 billion, compared to $4.1 billion last year (16.3% growth). This led to a goods trade deficit of $2.4 billion, up from $2.0 billion last year. The export commodities that registered significant positive growth include rice (75.7%), fruits (13.1%), readymade garments (7.6%), and plastic materials (95.5%).

Major imported items include petroleum products and crude ($0.9 billion), LNG ($0.3 billion), and palm oil, plastic materials, and iron and steel ($0.6 billion). Exports of services grew by 5.8% to $0.6 billion, whereas imports declined by 8.0% to $0.8 billion, resulting in a reduced deficit of $0.2 billion compared to $0.3 billion last year. Workers’ remittances reached $3.0 billion in July FY2025 (47.6% increase), with the largest share from Saudi Arabia.

Pakistan’s total liquid foreign exchange reserves were recorded at $14.8 billion as of August 23, 2024, with the SBP maintaining $9.4 billion reserves. Foreign Direct Investment (FDI) stood at $136 million, 63.7 per cent up from the previous year.

The main contributors to FDI were China ($45.1 million), Hong Kong ($42.4 million), and the UK ($22.3 million). The power sector received $62.2 million, accounting for a 45.6% share, followed by oil and gas exploration with $29.9 million (21.9% share). Moreover, Private Foreign Portfolio Investment (FPI) had a net inflow of $23.6 million, while Public FPI recorded a net inflow of $145 million.

Monetary policy is easing owing to low inflationary pressures, while the Pakistan Stock Market remained well-performing in the global market. Witnessing diminishing inflationary pressures, the Monetary Policy Committee (MPC) cut the policy rate by a further 100 basis points to 19.5 per cent, effective from July 30, 2024.

During July 1 – August 2, FY2024, money supply (M2) shrank by 3.2 per cent (Rs. -1173.1 billion) compared to a 2.0 per cent decline (Rs. -627.6 billion) last year. The policy rate adjustment will keep inflationary expectations well-anchored and will support the sustainable economic recovery in FY2025. Nonetheless, the performance of the Pakistan Stock Exchange (PSX) remained dynamic during July 2024. The KSE-100 closed at 77,887 points at the end of July 2024. Similarly, the market capitalization of PSX was recorded at Rs 10,368 billion as of July 31, 2024.

The scope of social safety nets expanded while labor continued to seek overseas employment. The scope of BISP is being expanded to 9.3 million deserving families with the aim to empower beneficiaries and their families by equipping them with internationally recognized certifications and enhancing their employment prospects both locally and abroad.

The Ministry of National Health Services, Regulations & Coordination organized a health week in the capital’s slum areas from August 12th to 17th, providing medical services, malaria medication, and clean water facilities, reflecting the government’s commitment to reducing disparities.

In July 2024, the PPAF provided 24,905 interest-free loans amounting to Rs.1.2 billion against 31,636 loans last year. During July 2024, the Bureau of Emigration & Overseas Employment registered 64,897 persons for overseas employment, an increase compared to the previous year. The Ministry of Federal Education and Professional Training launched 20 pink buses under the initiative “No Fear, No Barrier” to facilitate girl students and other females for rural-to-urban commutation.

Economic Outlook

The LSM sector is projected to sustain a positive growth trajectory in FY2025, supported by improved external demand, a stable exchange rate, receding inflation, and easing monetary policy. For agriculture, the outlook for Kharif 2024 production is dependent on crop-specific weather patterns, which will play a critical role in crop yield.

The recent and ongoing rainfall spells can have positive and negative impacts on rice, sugarcane, cotton, fodder, and vegetables if the rains do not sweep away farmlands. On the account of stability in economic indicators, inflation is expected to remain within the range of 9.