- The Finance Ministry presented a “positive picture” of the economy.
- The ministry is seeking concessional financing from multilateral sources.
- The report highlights the challenge of rising loan servicing costs.
ISLAMABAD: The Finance Ministry has projected a “positive picture” of the economy ahead of the review of the International Monetary Fund (IMF) loan programme, projecting an improvement in overall economic activity throughout the fiscal year.
The Finance Minister projected that overall economic activity would remain upbeat due to pick-up in domestic economic activity and improvement in inflationary pressures. news Reported on Wednesday.
Projections indicate that Consumer Price Index (CPI) based monthly inflation is projected to decline from 31.4% in September to around 27%-29% in October 2023.
To address external financing needs, the ministry is actively seeking concessional funding 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. The IMF is also expected to approve $3 billion, as well as bilateral assistance of about US$10 billion.
The government expects a recovery in remittances in October 2023, after the spread between interbank and open market narrowed to less than 1%.
However, remittances have declined as a result of the impact of global inflation on the disposable income of foreign workers. Ministry officials highlighted the slowdown in remittances to several countries, especially Bangladesh, India and the Philippines.
In the monthly economic report released on Tuesday, the Finance Ministry said: “In the coming months, overall economic activity is expected to remain positive throughout the fiscal year due to improvement in domestic economic activity and improvement in inflationary pressures. Recent coordinated efforts by government organizations to address macroeconomic imbalances are aimed at achieving stabilization and promoting sustainable, inclusive economic growth in the medium to long term.
“Significant progress on the fiscal and external accounts is beginning to translate into a rebound in economic activity. Positive economic data and signs of an improving economy have led to the PSX rising 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 gained 8% in October, boosted by expectations of easing inflation pressures and a favorable outlook for the IMF staff review in November. The Pakistani rupee (PKR) appreciated by 9% in October due to reforms initiated by exchange companies and a crackdown on illegal transactions.
“The Monthly Economic Indicators (MEI) for September 2023 recorded positive gains in the index for the third consecutive month, reflecting growth momentum in high-frequency economic variables.
“The GDP growth outlook has improved, with positive momentum in manufacturing activity and a promising outlook for agricultural production. Recent large-scale manufacturing (LSM) data showed a positive growth of 2.5% in August, reversing a 14-month decline in the manufacturing sector.
“Several factors have contributed to this, including improvement in dollar liquidity in the markets due to removal of import restrictions, clearance of letters of credit (L/C), and increase in foreign exchange (FX) reserves of the State Bank of Pakistan. Increase in economic activities. The improvement in the manufacturing sector included the export sector, construction activity and consumer goods, which posted gains in August.
“Growth in various industries such as ready-made garments, cement, food, beverages, pharmaceuticals and power generation reflects a resilient economic revival. In the agriculture sector, increased production of cotton and rice promises a favorable outlook for exports and overall economic growth in FY2024.
“Additionally, positive trends in farm tractor production and sales, strong revenue performance in Q1 FY2024, and notable revenue collections in various sectors such as Federal Board of Revenue (FBR) and non-tax revenue have contributed to the economic momentum.”
The report also highlights challenges, such as rising cost of servicing public debt due to rising policy rates by the State Bank of Pakistan (SBP) and weak PKR.
Despite these challenges, the government has managed to control expenditure growth through prudential measures, including reduction in untargeted subsidies and spending on new projects. While headline inflation rose to 31.4% year-on-year in September 2023 from 27.4% in August, this was mainly due to the one-time electricity tariff adjustment in September 2022.
However, food inflation eased to 33% in September year-on-year from 39% in August, with a notable decline in prices of commodities like tomatoes, chicken and cooking oil.
The Monetary Policy Statement (MPS) of October 30 indicated an expected significant decline in inflation in October due to cut in fuel prices, easing of key food commodity prices and favorable base effect.
The Monetary Policy Committee (MPC) said that barring any major adverse developments, inflation will moderate significantly in H2FY24.
Externally, global markets remain volatile, although the global growth outlook has improved. Despite this, some economies have still not fully recovered to pre-pandemic levels due to factors such as geopolitical tensions, monetary policy adjustment, reduced fiscal support and extreme weather events.
The current account deficit (CAD) narrowed by 58% to $0.95 billion in the first three months of the current fiscal year. Full-year CAD is expected to stabilize at around $6.5 billion (1.5% of GDP) in FY2024 as trade and investment flows normalize. State Bank of Pakistan’s foreign exchange (FX) reserves have stabilized at around $7.5 billion, providing around 1.5 months of import cover.