Islamabad : Feb 29 2024: The monthly economic update for January 2024 released here by the Finance Division on Thursday pins high hopes on Sharifs government for economic recovery Its summary noted as the new government takes office after February 8, general elections, expectations are that a vibrant strategy and vision would help revive the economy and build on the hard-earned gains made over the last six months. Last few months measures have restored market confidence and led to a pick-up in economic activity. GDP growth accelerated to 2.1% in Q1 FY2024, after two consecutive quarters of negative growth. The growth was broadbased with the agriculture sector posting 5%
growth and manufacturing activity
registering 2.5% growth. In particular, the removal of the import ban and other import restrictions have eased supply constraints, leading to pick-up in economic activity.
Data from Q2 FY2024 is showing stronger
performance of the manufacturing sector,
with large scale manufacturing posting 8.2% increase over Q1. We expect Q2 FY2024 GDP growth to rise to around 3% on
stronger manufacturing output and higher
production of crops including cotton, which has increased by 75% to 8.35 million bales.
To tackle these challenges, the caretaker
government has taken steps to reduce
unproductive expenditures and boost tax
and non-tax income. During Jul-Dec
FY2024, the government has run a primary
surplus of Rs 1.5 trillion (1.4% of GDP)
against IMF SBA target of 0.5% of GDP.
Difficult and unpopular measures including a reduction in the subsidy bill on power and gas through timely implementation of quarterly tariffs helped improve primary
account. No supplementary grants have
been issued during this period and PSDP
projects that fall under the provincial domain have been transferred to provincial ADPs.
At the same time, we have increased the
release of funds for 9.3 million most
vulnerable households.
On the revenue side, the FBR Tax collection grew by 30% to Rs 5.15 trillion during JulJan FY2024 despite a slowdown in imports and 0% GST on petroleum products.
Overall growth in the domestic taxes has
increased by 40%, with the rebound in
economic activity and rise in profitability of
companies including Banks, Oil & Gas, and
the manufacturing industry. Import taxes
posted a growth of 16% due to
improvements in the valuation of imports
that yielded Rs 151 billion in collections as well as the anti-smuggling drive that witnessed almost 69 % growth in FY2024.
The improvement in the fiscal position has helped the government to reduce the
accumulation of public debt. Net domestic
borrowing has decreased by 67% to Rs 1.9
trillion, from Rs 5.8 trillion in the preceding period. The lower domestic borrowing, lower cost of borrowing on margin (below the SBPpolicy rate) and extended maturity profile
helped lower net domestic borrowing. Most of all the domestic debt profile has improved to 3.1 years in Jan 2024, from 2.7 months in Jun 2023. The government also successfully launched a 1 year Sukuk on the PSX, the first auction was held in
November 2023, raising lower-cost debt
from non-bank and retail investors.
Similarly, external net borrowing during fell to $ 0.3 billion, compared to $ 3bn in the preceding period.
At the heart of the economic challenges
facing Pakistan today is the unsustainable public debt position, with Pakistan in breach of the Fiscal Responsibility & Debt Limitation Act (FRDL) since 2013.
The government’s ability to service the public debt liabilities are hampered by weak tax collection, rising losses of SOEs, and highest interest rates since 1972.
The improvement in the fiscal position and other quantitative and structural
benchmarks led to the successful first
review of the IMF SBA in November 2023,
and subsequent disbursement of $ 700
million in January 2024. The measures
taken to conclude the IMF staff review
included the annual rebasing of power
tariffs, the semi-annual gas tariff
adjustment, and the SOE Policy to enhance
governance and improve financial
performance. A comprehensive Circular
Debt Management Plan (CDMP) was
enforced that focused on reforms to reduce high costs, improve DISCO performance, and increase competition and green energy.
Headline Inflation has remained persistently high, but we anticipate a significant fall in inflation in 2024 due to the economic measures taken by the caretaker government including improvement in the supply of imports of raw materials, higher food production, and stability in the exchange rate market. Assuming no exogenous shocks, including a rise in international oil prices, the SBP projects inflation to fall to 5% to 7% range by FY2025. During the month of Feb 2024 the weekly SPI inflation has declined to 30.7%
compared to 44% in Jan 2024.
Turning to the markets, the premium
between interbank and open market was
brought down to less than 0.5%, against the agreed 1.25% range. SBP FX reserves
were raised to $ 8.1 billion, compared to $ 4.4bn in June 2023, while reducing the
swaps from commercial banks to $ 3.5
billion, from $ 4.5 bn in June 2023.
The markets have rallied due to
improvements in the economic conditions
and the PSX has rallied 40% from Sep with
the KSE 100 index rising to 63,300 points
th by 26 Feb. Foreign buyers have invested $ 51.7 million in the PSX during FY2024, after 4 years of outflow. During the period, the Rupee has strengthened 8% to 280 levels.
The risk premium (Credit Default Swaps) on the Eurobonds has come down sharply to
1,534bps in Feb 2024, compared to
4,825bps in June 2023.
To sustain these gains, it is imperative that the new government completes the last review of the IMF SBA. Perhaps more
important is that the new government reach an early agreement with the IMF staff on a new medium-term facility,providing an anchor to carry out the difficult reforms. To achieve this the new government must take
forward critical reforms on restructuring of the FBR, privatization of the loss-making SOEs including PIA, and the
implementation of the SOE policy for
improved governance and financial
performance.Economic instability is fading, with revival efforts aimed at boosting the activity across
sectors. The real sector is experiencing
notable growth, leading to a positive market response and signs of recovery. The PKR has stabilized and the PSX has shown sustained performance improvements,
reflecting a conducive environment for the economic activity. Though the pace of
overall expansion is slow, but improvements in major economic indicators signifying an optimistic GDP outlook in FY2024.Agriculture sector is experiencing stronger growth as compared to last year. The robust performance in this sector reflects better situation of food security and employment during the ongoing fiscal year. For the Rabi
season 2023-24, the timely sowing of wheat aligns with the goal of reaching a production target of 32.12 million tonnes, with expectations for further increase in other crops production due to favorable climatic conditions. The farm tractor production and sales registered significant increase of 76.7 percent and 82.5 percent during JulyJanuary FY2024, respectively, compared to the same period last year. A mixed trend witnessed in fertilizer usage, urea off-take dropped by 6.7 percent during OctoberJanuary whereas DAP off-take rose by 14.5 %percent during the same period.
The LSM sector showcased an increase of
3.4 percent on YoY basis in December
2023, compared to 1.1 percent decline. On
MoM basis it increased by 15.7 percent in
December, against an increase of 3.6
percent in November. Overall, a minor
decline of 0.4 percent was recorded during Jul-Dec FY2024, compared to a contraction of 2.1 percent in the same period last year.
During Jul-Dec FY2024, 12 out of 22
sectors witnessed positive growth. The
positive sectors include Food, Beverages,
Wearing Apparel, Leather Products, Coke &
Petroleum Products, Chemicals,
Pharmaceuticals, Non-Metallic Mineral
Products, Rubber Products, Wood
Products, Machinery and Equipment and
others (including Football), while negative growth observed in Tobacco, Textile, Paper & Board, Iron & Steel Products, Fabricated Metal, Computer, Electronics & Optical Products, Automobiles, Electrical Equipment, Furniture and Other Transport
Equipment.The inflationary pressure remained sustained in January, though anticipated to fall in coming months. In January 2024, the CPI inflation was recorded at 28.3 percent on a year-on-year basis, up from 27.6 percent in January 2023. During Jul-Jan
FY2024, it has increased to 28.7 percent,
compared to 25.4 percent in the
corresponding period last year. The spike in CPI is mainly driven by an increase in the costs of Alcoholic Beverages & Tobacco, Housing, Water, Electricity, Gas & Fuel, Furnishing & Household Equipment
Maintenance, Perishable Food Items, NonPerishable Food Items, Transport, Health, and Clothing & Footwear. The government is providing relief measures including the Ramzan Relief package, aimed at supporting poor segment of the society during the holy month of Ramzan in 2024.On the fiscal front, during first half of the current fiscal year, a substantial rise in tax and non-tax collection contributed to improved revenue growth, leading to a surplus in the primary balance. However,
the expenditure side remained under
significant pressure due to higher markup
payments. Consequently, the fiscal deficit reached 2.3 percent of GDP compared to 2.0 percent of GDP last year. While the primary surplus improved to 1.7 percent of GDP during Jul-Dec FY2024, up from the 1.1 percent of GDP in the previous year.
On the external front, a sustained
improvement in trade balance is continued, leading to improvement in the Current Account Balance. During Jul-Jan FY2024, the Current Account posted adeficit of $1.1 billion against a deficit of $ 3.8 billion last
year. The YoY exports increased by 21.2
percent to $ 2.7 billion in January 2024 as compared to $ 2.2 billion in January 2023, owing to ease in imports restriction and exchange rate stability resulted in smooth supply of raw material for export-oriented industries. YoY imports increased by 16.0
percent to $4.5 billion in January 2024 as compared to $ 3.9 billion same month last year. Trade balance narrowed down by 9.1 percent to $ 1.8 billion in January 2024 as against $ 1.7 billion last year. The total foreign investment during Jul-Jan FY2024 recorded an inflow of $ 785.9 million as against an outflow of $ 148.8 million last year. During Jul-Jan FY2024, workers’ remittances recorded at $ 15.8 billion ($ 16.3 billion last year), decreased by 3.0 percent. However, YoY remittances increased by 26.2 percent in January 2024 ($ 2.39 billion) as compared to January 2023 ($ 1.90 billion)
In monetary sector, the MPC has
maintained the policy rate at 22.0 percent in
th its decision held on 29 January, 2024. The
decision based on the expectation of
decline in inflation in upcoming months.
st nd During 1 July – 2 February, FY2024
money supply (M2) showed growth of 2.5
percent (Rs 792.3 billion) compared 1.5
percent growth (Rs 426.1 billion) in last
year.
The first seven months indicates uptick in the key economic indicators. It is expected that the economic activities will gain further momentum in the last quarter of FY2024.
The positive outlook is contingent on the
sustained implementation of sound and
prudent economic policies to achieve the
set growth targets for the current fiscal year According to World Economic Outlook
(WEO) January 2024, global growth
estimated at 3.1 percent in 2024 before
rising modestly to 3.2 percent in 2025. The forecast for 2024 is 0.2 percentage point higher, compared with October 2023 WEO, indicating upgrades for China, the United States, and large emerging market and developing economies. Nevertheless, the projection for global growth in 2024 and 2025 is below the historical (2000–19) annual average of 3.8 percent, reflecting restrictive monetary policies and withdrawal of fiscal support, as well as low underlying
productivity growth. Advanced economies
are expected to observe growth decline
slightly in 2024 before rising in 2025, with a
recovery in the euro area from low growth in
2023 and a moderation of growth in the
United States. Emerging market and
developing economies are expected to
experience stable growth through 2024 and
2025.
Global headline inflation is expected to fall
from an estimated 6.8 percent in 2023 to 5.8
percent in 2024 and 4.4 percent in 2025.
The drivers of declining inflation differ by
country but generally reflect lower core
inflation as a result of still-tight monetary
policies, a related softening in labor
markets, and pass-through effects from
earlier and ongoing declines in relative
energy prices.
World trade growth is projected at 3.3
percent in 2024 and 3.6 percent in 2025,
below its historical average growth rate of
4.9 percent. Rising trade distortions and
geo-economic fragmentation are expected
to continue to weigh on the level of global
trade. These forecasts are based on
assumptions that fuel and non-fuel
commodity prices will decline in 2024 and
2025, and interest rates will also be
declining in major economies. Annual
average oil prices are projected to fall by about 2.3 percent in 2024, whereas non-fuel commodity prices are expected to fall by 0.9 percent.The Federal Reserve held its benchmark overnight interest rate steady in the 5.25-5.50 percent range at the end of its January
30-31 policy meeting. However, committee
has considered to reducing it once
policymakers are more confident, inflation will continue falling to the U.S. central bank’s 2 percent target. Upcoming data on inflation, jobs and consumer spending will shape the timing of that decision. CPI index rose 3.1 percent on YoY basis in January,
down from 3.4 percent in the prior month,
but the latest inflation numbers was higher than expected projections.
U.S. firms added 353,000 jobs in January
up from 333,000 jobs in December. The
unemployment rate remained steady at 3.7
percent. The US Commerce Department’s
Bureau of Economic Analysis (BEA)
reported fourth quarter real GDP increased at an annual rate of 3.3 percent in the fourth quarter of 2023 exceeding expectations. In addition, the economy added 2.7 million jobs in 2023.Consumer confidence
continues to remain strong. This also
evident through growth in WEI which is
hovering around 2-2.5 percent in recent
months (Fig-1).
The J. P. Morgan Global Composite Output
Index increased to 51.8 in January 2024 as against 51.0 in December 2023 and its
highest reading since June 2023. Services
business activity rose at the quickest pace since July 2023, as increases in the
business and financial services categories offset a minor decrease at consumer service providers.
Data by nation signaled expansions of
economic output in 09 out of the 14 nations for which January data were available. The BRIC nations of Brazil, Russia, India and China made up four of the top-five performers, along with the UK in fourth
position overall. The US, Japan, Italy and Spain were the other nations to signal expansions. France, Canada and Germany were the worst performers overall.
