ISLAMABAD: The government of Pakistan has said that inflation may further come down to 4% in December providing more room to bring interest rate down to single digit.
The Ministry of Finance in its monthly economic outlook, said that there was stability on fiscal and external fronts, which promised an “optimistic outlook”. According to the economic advisory wing of the finance ministry inflation is expected to remain within 4-5% range for December.
It said that a nine-percentage-point reduction in interest rate in past six months was expected to stimulate economic activity.
If inflation declines to 4%, this will again provide room to cut interest rate, at present 13%, by nine percentage points. The finance ministry said last month, inflation slowed to a 78-month low of 4.9%.
The State Bank’s monetary policy committee decided to further reduce the policy rate by two percentage points to 13%, effective from December 17, 2024.
The decision is driven by inflation aligning with expectations, stability in the fiscal and external sectors, favourable global commodity prices, and improved growth prospects.
A reduction in the interest rate will substantially lower the government’s debt servicing costs, creating additional fiscal space that can be used to address revenue shortfalls. As of Friday, the Federal Board of Revenue (FBR) has collected approximately Rs5.07 trillion, with a remaining Rs940 billion to be collected in the next four days to meet IMF requirements.
The finance ministry said that on the external front, it was expected that the stability would continue on the back of remittances and export inflows with decent imports.
It added that improved fiscal performance from July to October, driven by higher revenues and better expenditure management, was expected to create fiscal room for development spending and sustainable economic growth.
According to the fiscal operations summary, net federal revenues surged by 72% to Rs4.8 trillion, primarily driven by a significant increase in non-tax collection following the decision to record the entire fiscal year’s central bank profit of Rs2.5 trillion in the first quarter.
Non-tax revenues doubled to Rs3.2 trillion in the first four months of the year. However, expenditures remained high despite a near halt in development spending. The report revealed that expenditures rose by 20.6%, reaching Rs4.5 trillion in the same period, compared to Rs3.7 trillion during the July-October period of the previous fiscal year.
The finance ministry said that Pakistan’s economy showed sustained positive developments from July to November, indicating an optimistic outlook for the ongoing year.
Macroeconomic fundamentals have improved, marked by a continued slowdown in CPI inflation, stable food prices, effective fiscal consolidation leading to a fiscal surplus, current account surplus supported by increased exports and remittances, and an accommodative monetary policy stance.
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However, the large-scale manufacturing (LSM) sector remains a concern. In October, LSM posted a marginal growth of just 0.02%. The industrial sector has struggled due to high interest rates, elevated taxes, and rising costs of doing business.
On a monthly basis, LSM reduced to 2.2% in October, primarily driven by a seasonal fall in beverages sector, said the finance ministry.
The beverage sector’s production has also been affected by higher taxation despite warnings in June that the sector will crumble under the higher taxes.
External account position has also improved significantly, driven by a notable increase in exports and remittances despite higher imports. In the first five months of the fiscal year, the current account recorded a surplus of $944 million, a significant improvement compared to a deficit of $1.7 billion in the same period last year.
In November alone, the current account posted a surplus of $729 million, in contrast to a deficit of $148 million in November of the previous year. “This marks the fourth consecutive monthly surplus,” the report noted.
