In June 2024, Pakistan’s Consumer Price Index (CPI) inflation approached the single-digit range, signaling a positive shift in the country’s economic landscape, according to the latest Monthly Economic Update and Outlook released by the Ministry of Finance. The outlook indicates a stabilization of the economy in Fiscal Year 2024 (FY2024), with easing inflation and improved economic metrics.
The finance ministry’s report highlights that inflation, which had surged above 30% in 2023, has seen a significant reduction. For July, the Ministry of Finance projects inflation to hover between 12% and 13%, with expectations for a further decline in August, bringing it to a range of 11% to 12%. This trend suggests a continuing downward trajectory in inflation, providing some relief after a period of severe economic pressure.
The State Bank of Pakistan (SBP) has responded to these positive indicators by reducing interest rates for the second consecutive time. On Monday, the SBP cut the rate by 100 basis points, from 20.5% to 19.5%, reflecting a consensus in the market that inflation is beginning to temper. SBP Governor Jameel Ahmad acknowledged the declining trend in inflation, which has influenced the central bank’s monetary policy adjustments.
In addition to the easing inflation, the economic outlook is buoyed by improvements in several key sectors. The real sector has shown notable progress, with agriculture outperforming expectations. Large-scale manufacturing (LSM), a critical component of the economy, is also on an upward trajectory. From July to May FY2024, LSM grew by 1.0%, reversing a previous contraction of 9.6% from the previous year. The growth in May 2024 was particularly strong, with LSM expanding by 7.3% year-on-year and 7.5% month-on-month. This growth was driven by robust performances in sectors such as food, apparel, leather, coke and petroleum products, chemicals, pharmaceuticals, and machinery.
The external account position has also improved due to contained imports and increased exports and remittances. The fiscal deficit has been reduced to 4.9% of GDP from 5.5% in the previous year, reflecting effective fiscal management.
To further bolster economic stability, the Pakistani government has reached a staff-level agreement with the International Monetary Fund (IMF) on a 37-month Extended Fund Facility (EFF) arrangement worth $7 billion. This agreement is expected to help sustain economic reforms and stability but comes with its own set of challenges. The IMF program includes stringent measures such as higher taxes on farm incomes and increased electricity prices, which have sparked concerns among the poor and middle-class populations who fear further inflation and financial strain.
Despite the positive economic trends, there is still pressure on the government to address rising prices. Recent protests have emerged in major cities, with some parties threatening sit-ins if the government does not take more decisive action to manage inflation.
Pakistan’s economic outlook for mid-2024 shows promising signs of stabilization and improvement, significant challenges remain. The easing of inflation, growth in key economic sectors, and improved external accounts provide a foundation for optimism. However, the impact of the IMF agreement and ongoing public discontent highlight the complexities of managing economic reform in a challenging environment. The upcoming CPI inflation figures will be crucial in determining the continued trajectory of Pakistan’s economic recovery.
