Daily Times

In the latter part of 2024, Pakistan’s economy is exhibiting signs of resilience, driven largely by robust policy actions and emerging sectoral improvements. Amidst global economic fluctuations, the nation’s fiscal landscape stands at a pivotal juncture, with recent indicators suggesting a cautious yet promising recovery trajectory.

The State Bank of Pakistan has played a central role in steering the economy towards stability. Since June 2024, the SBP has implemented a cumulative 700 basis points reduction in the policy rate, including a significant 250 basis points cut in November. This aggressive monetary easing aims to stimulate economic activity by lowering borrowing costs, thereby encouraging investment and consumption. Inflation, a critical economic barometer, has shown signs of moderation. As of October, headline inflation stood at 7.2 percent year-on-year, with urban core inflation at 8.6 percent, marking the lowest since April 2022. Rural inflation, while higher at 11.7 percent, reflects regional disparities but indicates a downward trend. The International Monetary Fund has revised Pakistan’s inflation forecast downward to 9.5 percent, aligning with local projections estimating fiscal year 2025 inflation between 11.5 percent and 13.5 percent. These developments suggest a more favorable environment for economic growth as stabilized prices enhance consumer purchasing power and business planning.

Pakistan’s external sector has witnessed notable improvements. The current account posted consecutive monthly surpluses, with September recording a surplus of $119 million, a 310 percent increase month-on-month. This positive shift is largely attributed to a 29 percent year-on-year rise in remittances and a moderate recovery in export earnings. The trade deficit contracted by 31 percent in October, settling at $1.5 billion compared to $2.17 billion in the same month last year. Over the first four months of the fiscal year, the trade deficit has cumulatively decreased by 5.6 percent year-on-year, signaling effective policy measures to curb external vulnerabilities. Remittances have been bolstered by a narrowing exchange rate spread between official and open markets, incentivizing formal channel inflows. The SBP’s foreign exchange interventions, including net purchases of $722 million in July, have strengthened reserves, now surpassing $16 billion. These actions enhance resilience against external shocks and stabilize the Pakistani rupee, reducing imported inflation pressures.

With continued emphasis on infrastructure, particularly through CPEC projects, Pakistan can expect sustained FDI inflows, further bolstering its economic resilience.

On the fiscal front, Pakistan achieved its first budget surplus in over two decades, equivalent to 1.4 percent of GDP. This was facilitated by robust revenue streams, including a Rs 2.50 trillion profit from the SBP and tax collections amounting to Rs 2.7 trillion. The reduction in policy rates has also decreased the government’s interest expense forecast to Rs 8.5 trillion, creating additional fiscal space compared to the initially budgeted Rs 9.8 trillion. The early retirement of Rs two trillion in domestic debt and treasury buybacks of Rs 351 billion demonstrate a strategic effort to reprofile public debt and stabilize the fiscal framework. Such debt management strategies are anticipated to relieve long-term fiscal pressures, allowing for a redirection of resources toward development and infrastructure projects essential for economic vitality.

The equity market has mirrored these positive trends. The KSE-100 index delivered remarkable returns in October, surging by 7,852 points, translating to a 9.7 percent increase-the highest monthly gain recorded this year. This growth was driven by heavyweights in the pharmaceutical (22 percent), oil marketing companies (20 percent), cement (16 percent), and fertilizer sectors (12 percent). These performances underscore investor confidence and reflect the market’s optimism toward anticipated lower financial costs and improving demand for cyclical industries. Domestic funds have shown a clear preference for stocks with dividend yield potential over secondary market yields, with sectors such as exploration and production, oil marketing companies, power, and cement capturing over 64 percent of fund inflows. This strategic allocation highlights market expectations of steady earnings growth, particularly within the energy value chain, as the economy rebounds.

Tax collection data presents a mixed picture. The Federal Board of Revenue missed its October collection target by Rs 101 billion, contributing to a cumulative shortfall of Rs 194 billion in the first four months of the fiscal year. This shortfall is primarily attributed to underperforming sales tax collections, though it has been somewhat mitigated by record income tax receipts. The correlation between economic activity and tax revenue is crucial, and with rising business confidence-recent surveys report a 4.3-point increase to 54.3-it is likely that tax collection may gain momentum as economic conditions stabilize. Improved business sentiment, particularly in sectors such as construction and manufacturing, augurs well for tax performance in the latter half of the fiscal year, as these sectors are expected to benefit from lowered borrowing costs and better liquidity.

Despite these promising signs, challenges remain, particularly regarding the structural vulnerabilities in Pakistan’s industrial sector. Large-scale manufacturing, a crucial barometer of economic health, registered a 2.65 percent year-on-year decline in August after a slight recovery in July. Sectors like textiles and non-metallic minerals, key components of Pakistan’s industrial output, posted contractions of 0.86 percent and 16.3 percent, respectively. These contractions indicate a need for targeted policy interventions to reinvigorate industrial activity, especially given that manufacturing is a significant employer and contributor to export revenues. On a positive note, however, segments such as garments showed impressive growth of 18.6 percent year-on-year, underscoring areas where Pakistan remains competitive. Going forward, stabilizing power supply, reducing input costs, and encouraging investment in modern manufacturing technologies will be essential to maintaining momentum in the industrial sector.

Foreign direct investment figures reveal positive trends, with a 123 percent year-on-year increase in September, predominantly driven by Chinese and Hong Kong investors. The power sector attracted the largest share, with inflows of $220 million concentrated in hydropower projects. Oil and gas exploration, a historically vital sector for Pakistan, witnessed a 167 percent monthly increase, reaching $49 million. These investments underscore the strategic role that the energy sector continues to play in Pakistan’s development agenda and reflect growing investor confidence in the country’s regulatory and investment landscape. With continued emphasis on infrastructure, particularly through China-Pakistan Economic Corridor (CPEC) projects, Pakistan can expect sustained FDI inflows, further bolstering its economic resilience.

On the consumer front, the outlook is also stabilizing. Consumer confidence indexes improved in October, driven by lower inflation expectations and an uptick in household income forecasts. Auto and durable goods purchases, indicators of consumer sentiment, showed notable improvements. Consumer loans, especially in the construction segment, recorded a 9 percent year-on-year increase as banks moved to meet the advance-deposit ratio threshold. Additionally, banking spreads expanded by 91 basis points in September, reflecting improved profitability within the banking sector. This environment not only supports the financial services sector but also bolsters consumer purchasing power, creating a ripple effect that sustains demand across various sectors.

The recent outcome of the US presidential election, which saw Donald Trump return to office, is likely to have nuanced impacts on Pakistan’s economy. Trump’s presidency brings uncertainty in areas critical to Pakistan, especially in trade and foreign policy. Historically, Trump’s foreign policy stance leaned towards trade protectionism and skepticism towards multilateral institutions, which could mean a shift in economic relations with the United States and, by extension, influence Pakistan’s trade dynamics. Under Trump, the likelihood of renegotiating trade terms could rise, potentially impacting Pakistan’s export sectors that rely on access to US markets. Furthermore, Trump’s stance on China, which is heavily interwoven with Pakistan’s economic framework, especially through CPEC, could lead to heightened scrutiny of Chinese investments in Pakistan. As the US-China economic rivalry intensifies, Pakistan may need to navigate this geopolitical landscape carefully to balance its ties with both superpowers.

The broader fiscal and economic reforms thus paint a cautiously optimistic outlook for Pakistan’s economy, with projections indicating that the country is on a viable path to sustained recovery. However, the need for fiscal discipline remains paramount. The government’s focus must remain on consolidating these gains by strengthening public institutions, increasing revenue mobilization, and ensuring a stable investment environment. The recently observed rate of remittance inflows, for instance, although bolstered by favorable exchange rate management, highlights a vulnerability that could quickly reverse under external shocks. As Pakistan’s foreign reserves accumulate, judicious management and strategic allocations will be essential to safeguarding these reserves for sustainable growth.

Looking ahead, Pakistan’s economic outlook is cautiously optimistic. The foundations for a steady recovery are in place, yet considerable work remains to convert these early gains into sustainable growth that benefits all citizens. While headline indicators like inflation, trade balance, and equity markets signal progress, the challenge lies in translating these into tangible benefits across the economy. Fiscal discipline, especially in terms of balancing debt obligations and prioritizing developmental spending, will be critical in fortifying Pakistan’s economic future. To that end, it is essential to maintain the current trajectory of policy reforms, ensuring that momentum is not lost to complacency or over-reliance on short-term fixes.

The writer is a financial expert and can be reached at jawadsaleem.1982@gmail.com. He tweets @JawadSaleem1982.