Pak economy shows resilience amid mixed signals

ISLAMABAD: Pakistan’s economy is exhibiting signs of resilience, with improvements in the current account balance and a stabilizing currency, according to the latest figures from August 2024. However, the broader economic landscape remains mixed, with challenges in trade, government debt and sector-specific performance.

The country’s current account deficit, which had been a major concern, showed signs of narrowing. The Pakistani rupee, which faced volatility earlier in the year, has also begun to stabilise against major currencies.

Despite these positive indicators, other economic metrics present a more complex picture. Trade figures for August reveal sluggish export growth, while the government’s debt continues to rise, putting pressure on fiscal management. Performance across key sectors such as manufacturing and agriculture also displayed inconsistency.

The current account, a significant indicator of an economy’s health, has seen a noticeable contraction in deficits year-over-year. In August 2024, it turned to surplus $75 million compared to a deficit of $152 million in August 2023, marking a substantial improvement. Notably, on a month-to-month basis, August 2014 reading was significantly improved from July 2024’s deficit of $246 million.

Pakistan’s trade deficit fell to its lowest level in 11 months in August 2024, marking a positive shift for the country’s economy. The deficit dropped by more than 20 percent year-on-year, narrowing to $1.68 billion from $2.11 billion in August 2023. The reduction is attributed to a significant rise in exports and a modest decrease in imports. Exports surged 18.9 percent in August, reaching $2.74 billion, up from $2.31 billion in July 2024. Imports also saw a 4.9 percent increase, climbing to $4.42 billion from $4.21 billion the previous month.

Compared to August 2023, exports grew by 15.93 percent, while imports fell by 1.25 percent. Last year, exports stood at $2.37 billion, with imports at $4.47 billion. The trade deficit, which was $1.9 billion in July 2024, shrank by 12 percent in August, hitting $1.68 billion. Analysts say the narrowing trade gap offers hope for easing Pakistan’s economic challenges, though sustaining these trends remains crucial for long-term stability.

The headline inflation rate fell to a 34-month low of 9.6 percent in August 2024, marking the first-time inflation has dropped to single digit since October 2021. The currency exchange rate between the USD and PKR shows a slight appreciation of the rupee, with a 2.8 percent increase year-over-year, stabilizing at 278.7 in August 2024. In August 2023, it was at Rs286.6.

The cooling of inflationary pressures is attributed to a combination of factors, including stabilizing commodity prices, improved supply chain management and a relatively stabilized rupee against major currencies. However, the structural weaknesses of the economy and global economic conditions still pose substantial risks.

While seeing the sharp decline in inflation over the last several months, on September 12, the State Bank of Pakistan cut its policy rate by 200 basis points (bps) to 17.5per cent, following earlier reductions of 150bps in June and 100bps in July. The rate had been at an all-time high of 22 per cent since June 2023. Economists expect more rate cut in coming months, this will help boost the industrial, business and commercial activities in the country and will spur aggregate demand and ultimately the GDP growth and jobs.

The LSM sector, which accounts for 69.3 per cent of the country’s manufacturing and contributes 8.2 per cent to GDP, performed better than the previous year. In FY2023-24, the sector’s output increased by a modest 0.92 per cent.

Now, July 2024, which marks the start of FY25, signaled a modest recovery in manufacturing activity and grew by 2.38 per cent compared to the same month last year. The growth was driven by gains in key industries including textiles, automobiles, food, beverages, garments and cotton yarn. Industry analysts expect the LSM sector to improve in the coming months as borrowing costs ease due to declining inflation.

Pakistan’s total government debt saw a moderate increase, rising 13 percent from the previous year to Rs69.6 trillion as of July 2024. This figure includes both domestic and foreign debts. In July 2023, the total public debt stood at Rs61.8 trillion. While the central government’s debt rose incrementally, a key positive development emerged: the debt-to-GDP ratio saw a significant reduction. By the end of 2023-24, public debt accounted for 65 percent of GDP, down from 73 percent at the close of 2022-23. This marked a substantial improvement in the country’s fiscal health, despite inflationary pressures in 2023-24.

The debt level at the end of Fiscal year 2023-24 stood at Rs68.9 trillion, up from Rs60.84 trillion at the end of FY2022-23. Experts view the drop in the debt-to-GDP ratio as a promising sign of improved fiscal management, providing a more sustainable path for Pakistan’s economy going forward.

Foreign Direct Investment (FDI) in Pakistan surged in August 2024, with net FDI reaching $214 million, marking a 51 percent increase from $142 million the same month the previous year. Inflows rose to $296 million, up 46 percent from August 2023, while outflows increased to $82 million from $62 million.

Pakistani workers’ remittances surged to $2.9 billion in August 2024, marking a 40.5 percent increase from the same month last year. After exports, remittances are the major sector supporting Pakistan to manage its external deficits (current account balance). The cumulative remittances for the first two months of fiscal year 2025 reached $5.9 billion, marking a 44 percent rise from $4.1 billion during the same period in FY24.

The Federal Board of Revenue (FBR) reported a 17.33% increase in tax collection for August 2024, totaling Rs785 billion, compared to Rs669 billion in the same month last year. However, this amount fell Rs113 billion short of the monthly target of Rs898 billion.

Cars sales have seen a significant increase of 15 percent year-over-year to 8,699 units against 7,579 units a year ago. However, petroleum products, especially petrol and diesel sales declined. Petrol sales down by seven percent to 625,000 tons in August 2024 from 672,000 tons in same month last year. High speed diesel sales also fell by 17 percent to 456,000 tons, last year in August, its sale was 548,000 tons. Similarly, fertilizer sales, particularly urea and DAP, have shown decline, with urea sales fell by 14 percent and DAP by 70 percent year-over-year.

With the improving macroeconomic indicators, the Pakistan Stock Exchange (PSX) benchmark KSE-100 Index has surged by 77.29 percent year-over-year, climbing from 45,947.30 on September 20, 2023. Since the start of the calendar year, the index has risen by 29.93 percent, up from 62,696.99 on January 1, 2024.

Interestingly, on Thursday, the benchmark Index soared to a record high of 82,000 during intra-day trading. A strong buying spree was seen for most of the session. At the close, the KSE-100 settled at 81,459.29, marking an increase of 997.95 points or 1.24 percent.