Restrictive monetary policy, limited fiscal space challenging Pakistan’s economy: Ministry of Finance

The Ministry of Finance has said a “restrictive stance of monetary policy and limited fiscal space are posing numerous challenges to stimulating Pakistan’s economy”.

The Ministry of Finance made these remarks in its latest monthly economic report released on Thursday.

Despite securing a last-minute deal with the International Monetary Fund (IMF) in July, Pakistan’s economy remains engulfed in a myriad of challenges.

The State Bank of Pakistan (SBP) has maintained its key policy rate at 22% since last year’s summer, while the government has struggled to contain rising debt, which ballooned to Rs65.188 trillion at the end of December 2023 compared to Rs 60.841 trillion at the end of June 2023.

The central bank is due to hold its next monetary policy committee meeting on March 18 with some analysts suggesting that easing may well be on its way.

Meanwhile, the Ministry of Finance said that despite the domestic challenges, “there is some optimism regarding Pakistan’s export markets”.

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“The weighted average cyclical conditions in Pakistan’s main export markets are improving which will be supportive in providing a boost to export-oriented industries and thus overall economic growth.

“Despite some important headwinds, the Monthly Economic Indicator (MEI) remains in positive territory, indicating a gradual recovery in economic activities,” it noted.

The Ministry of Finance also projected Consumer Price Index (CPI)-based inflation in Pakistan to hover around 24.5-25.5% in February 2024.

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The finance ministry anticipated inflation to further easing to 23.5-24.5% in March 2024.

It said the inflation outlook for the upcoming month points towards a downward trajectory owing to better crops and a smooth supply of commodities. “Similarly, favorable input situations are set to bolster Rabi crop production,” read the report.

The report said that the industrial activity in December remained positive despite a specific sectoral slowdown.

“Notwithstanding, restrictive monetary and fiscal policies, the optimism is fueled by improvements in cyclical conditions in Pakistan’s export markets facilitating steady economic recovery,” it said.

“The stabilization measures encouraging business confidence coupled with exchange rate stability, contribute to a positive economic outlook for Pakistan amidst ongoing challenges.”

Pakistan’s headline inflation clocked in at 28.3% on a year-on-year basis in January, revealed Pakistan Bureau of Statistics (PBS) data.

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The Ministry of Finance, in its latest report, also noted that in February, the administered prices of petrol and diesel increased in response to a notable surge in crude oil prices, highlighting the direct influence of global market dynamics on domestic fuel costs.

However, “despite the upward adjustment in transportation expenses and gas prices, the inflation outlook for the upcoming month may have a downward trend, primarily due to a decrease in the prices of perishable items on the back of better crops and ease in supplies.”

“Additionally, the high base effect would further contribute to keep the inflationary pressure on the lower side,” it added.