EDITORIAL: The Ministry of Finance’s (MoF’s) monthly update and outlook report for March 2025 presents a mixed picture. The underlying narrative of the report praises economic recovery in a few sectors and highlights stability amid falling inflation.
However, the ground reality tells a different story. Economic growth remains below 2 percent, while all the high-employment-generating sectors — large-scale manufacturing, agriculture (excluding livestock), and construction — are in the red.
Balance of payments concerns persist; despite a decent current account performance, SBP’s (State Bank of Pakistan’s) reserves have declined by a billion dollars over the last two months.
The Finance Ministry’s primary responsibility is to manage the fiscal account, and through sound fiscal policies chart a path toward sustainable growth. Yet, the report focuses solely on the short-term gains of fiscal consolidation without addressing the consequences of suffocating the formal economy.
To be fair, there is some success on the deficit front — reduced to 1.7 percent of GDP in July-January FY25, compared to 2.6 percent in the same period last year. The primary surplus rose to Rs 3.6 trillion (2.8% of GDP) from Rs 1.9 trillion (1.8% of GDP) last year.
This improvement is driven mainly by two factors: higher SBP profits from the previous year and a sharp rise in taxes on formal businesses and salaried individuals. Meanwhile, there’s little progress in expanding the tax base. The Tajir Dost Scheme has yielded not much collections, and there’s been no significant advancement in agriculture or real estate taxation either.
On the expenditure side, current spending grew by 17 percent. Within that, markup payments increased by 20 percent, while non-markup expenditure growth slowed to 11 percent – largely due to reduced subsidy spending, thanks to declining commodity prices.
On one hand, improved fiscal performance is helping reduce debt and narrow the current account deficit. On the other hand, the excessive burden placed on the formal industrial sector is stifling growth and deterring much-needed investment.
That said, the decline in inflation is real, driven partly by the tight monetary policy adopted by the SBP last year and excessive taxation, which has dampened demand. Global commodity price suppression also played a role. Food and energy prices remained low, but the resulting pressure on the farm economy has been significant.
Major crops underperformed and suppressed farmer incomes have dragged down overall demand for other goods and services. Meanwhile, core inflation remains sticky, with double-digit increases in health, clothing & footwear, and education.
The report notes that LSM (Large Scale Manufacturing) shows a mixed trend — 11 out of 22 sectors recorded positive growth, including textiles, wearing apparel (mainly for exports), tobacco (due to better tax enforcement), among others. However, apart from wearing apparel, nearly every sector remains below its 2022 peak. LSM still declined by 1.8 percent during 7MFY25.
The struggle continues. Economic growth is expected to improve — from 1.7 percent in the first half to between 2 and 2.5 percent for the full fiscal year. However, this still lags behind population growth.
Even this modest recovery comes with the risk of renewed pressure on the current account, which could hinder reserve building and potentially reignite inflation. In summary, therefore, the report card is far from encouraging, and the outlook remains challenging.
Copyright Business Recorder, 2025
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