Inflation to Slow Down to 4% in December: Optimistic Economic Outlook

December 28, 2024 Mahi Bukhari

Inflation Expected to Decelerate to 4% in December: Economic Outlook for Pakistan

The Ministry of Finance has projected a significant slowdown in inflation, forecasting a drop to 4% in December 2024. This is a notable development that provides more room for the government to potentially reduce interest rates to single digits, offering an optimistic outlook for Pakistan’s economy. According to the finance ministry’s latest economic update, this inflation forecast is a result of stability on both fiscal and external fronts.

Key Factors Driving Inflation Deceleration

Several factors contribute to the anticipated deceleration in inflation. The government has made considerable progress in stabilizing key economic sectors, providing a solid foundation for this positive trend. These improvements are primarily driven by fiscal discipline, external stability, and favorable global commodity prices.

1. Stability in Fiscal and External Sectors

The finance ministry noted that the stability observed on the fiscal and external fronts would likely continue. This stability has been bolstered by increased remittances, consistent export inflows, and controlled imports. These elements have helped strengthen Pakistan’s economy, while the exchange rate has remained relatively stable. The reduced inflationary pressure has further contributed to a positive economic outlook.

2. Interest Rate Cuts and Economic Activity

The significant reduction in the interest rate by nine percentage points over the past six months is expected to stimulate economic activity. This rate reduction is seen as a key factor in reducing inflation, especially with the current rate of 13%. If inflation indeed reaches 4%, there will be more room for the government to reduce interest rates further, which would foster economic growth.

Inflationary Trends and Interest Rate Decisions

The latest update from the finance ministry indicates that inflation reached a 78-month low in November 2024, registering at 4.9%. This decline is attributed to stable food prices, improved fiscal consolidation, and the favorable global economic environment. These trends also align with the State Bank of Pakistan’s decision to cut the policy rate by two percentage points in December, bringing it down to 13%.

The reduced interest rate is expected to significantly lower government debt servicing costs. This, in turn, will create additional fiscal space, which can be utilized to offset any revenue shortfalls. As of December 27, the Federal Board of Revenue (FBR) had collected approximately Rs5.07 trillion, with another Rs940 billion required to meet the IMF’s target for the year.

Impact of Interest Rate Cuts on Debt Servicing

The reduction in interest rates will not only stimulate investment but also alleviate the government’s burden in terms of debt servicing. With inflation slowing down and the fiscal outlook improving, the government may have more flexibility in managing its debt obligations. The additional fiscal space can be used to invest in development programs and address key sectors in need of attention.

Positive Developments in External Accounts

Pakistan’s external account position has seen notable improvements, particularly in the areas of exports and remittances. Despite an increase in imports, the country’s current account posted a surplus of $944 million in the first five months of the fiscal year, a stark contrast to the deficit of $1.7 billion recorded during the same period last year. The positive external sector performance has further contributed to the overall stability and strengthened Pakistan’s foreign exchange reserves.

Current Account Surplus and Positive Export Performance

In November 2024, Pakistan’s current account recorded a surplus of $729 million, compared to a deficit of $148 million in November 2023. This marks the fourth consecutive month of surplus, which has helped improve the country’s balance of payments situation. This trend reflects a strong recovery in exports, particularly in sectors such as textiles and agriculture, which are key drivers of foreign exchange inflows.

Challenges in the Large-Scale Manufacturing Sector

Despite these positive developments, challenges persist in certain sectors of the economy. The Large-Scale Manufacturing (LSM) sector, in particular, has shown only marginal growth. In October 2024, LSM grew by a mere 0.02%, with a monthly decline of 2.2%. This downturn can be attributed to a combination of high interest rates, increased taxes, and the high cost of doing business, which have dampened industrial output.

Beverage Sector Struggles with High Taxes

The beverage sector, in particular, has faced challenges due to high taxation, which the government has yet to address. Despite warnings from industry experts, the government continues to impose high taxes on this sector, which has led to reduced production levels. However, the ministry noted that as winter approaches, demand for beverages typically declines, contributing to the reduced output.

Agricultural Sector’s Role in Economic Recovery

The performance of the agricultural sector remains a critical factor in Pakistan’s overall economic recovery. The finance ministry has set a wheat production target of 27.92 million tonnes for the Rabi season of 2024-25, which is expected to come from an area of 9.262 million hectares. To meet this target, the government is working on ensuring the timely availability of essential inputs such as agricultural credit, quality seeds, fertilizers, and mechanization support for farmers.

Sectoral Outlook for Agricultural Growth

The performance of the agricultural sector largely depends on the timely availability of water resources, which is critical for the sowing and harvesting of key crops. The government’s focus on providing essential support to farmers is expected to help mitigate any challenges faced by the sector, with a strong emphasis on ensuring adequate supplies for the upcoming Rabi season.

Overall Economic Outlook and Future Projections

In summary, the economic outlook for Pakistan in 2024 appears optimistic, with several key indicators pointing towards stability and growth. Inflation is expected to decelerate further, and there is room for further cuts in interest rates. The external sector remains strong, with a favorable balance of payments and consistent remittance inflows.

While challenges remain, particularly in the manufacturing sector, the government’s fiscal policies and the supportive role of agriculture provide a solid foundation for sustainable economic growth.

Frequently Asked Questions (FAQs)

1. What is the current inflation rate in Pakistan?

As of November 2024, inflation in Pakistan has slowed to a 78-month low of 4.9%. The government forecasts a further decrease to 4% in December.

2. How will inflation decrease affect interest rates?

If inflation decreases to 4%, the government may have more room to reduce interest rates, which currently stand at 13%. This reduction will encourage investment and economic growth.

3. What factors are contributing to Pakistan’s economic stability?

The government’s fiscal discipline, a stable external sector, increased remittances, and favorable global commodity prices are key contributors to Pakistan’s economic stability.

4. What is the expected growth in the agricultural sector?

The government has set a wheat production target of 27.92 million tonnes for the Rabi season of 2024-25, which will be supported by efforts to ensure the timely availability of agricultural inputs.

5. What challenges does the manufacturing sector face?

The Large-Scale Manufacturing (LSM) sector has faced challenges such as high interest rates, taxes, and the increased cost of doing business, leading to a marginal growth rate of 0.02% in October 2024.