Govt Revises Inflation Forecast for March as Economic Outlook Remains Uncertain

The government has revised its inflation forecast for March, now predicting a modest 1% rate, a sharp contrast to its earlier estimate of 3-4%. However, the outlook for the broader economy remains unclear, particularly in crucial sectors like agriculture and manufacturing, both of which are vital for job creation.

In its updated report, the Ministry of Finance has lowered the March inflation estimate to a range between 1% and 1.5%, aligning with expectations that inflation could dip below 1% for the month. The ministry also indicated that inflation may rise to around 3% in April.

Despite the drop in inflation, the central bank opted to keep its policy rate unchanged at 12%. Experts argue that this decision is unjustified, given the significant decrease in inflation. The central bank’s justification centers on persistent core inflation, alongside concerns that increases in food and energy costs could drive inflation higher in the coming months. Notably, the central bank shifted its benchmark for interest rate decisions from headline inflation to core inflation three years ago.

The finance ministry pointed out that price stability has been largely supported by lower food and energy prices. It also highlighted fiscal consolidation efforts, noting a primary surplus and a reduced fiscal deficit as signs of progress.

However, the report left several questions unanswered regarding the agriculture and manufacturing sectors, which have faced setbacks due to conditions that remain volatile.

Regarding agriculture, the government had initially projected wheat production for the 2024-2025 Rabi season to reach 27.9 million tonnes, supported by government initiatives such as subsidies, high-yielding seeds, and interest-free loans. However, it acknowledged that weather patterns remain unpredictable, with drought conditions becoming a significant risk. The Pakistan Meteorological Department has issued warnings about drought-like conditions, especially in Sindh and Balochistan, where rainfall has been notably lower than last year.

The earlier expectation of a boost in production through increased imports of agricultural machinery and fertilizers has not fully materialized. Wheat production last year reached 31.4 million metric tonnes, but early estimates suggest a drop to below 27 million metric tonnes this year. However, the finance ministry did not provide a precise updated figure in its report.

In terms of large-scale manufacturing (LSM), the sector showed a mixed recovery in January 2025. While there was some positive growth on a monthly basis, the year-on-year decline signals persistent challenges. The ministry remains hopeful that improved demand, reflected in rising cement sales, greater automobile production, and an uptick in imports, could lead to a recovery, provided the demand conditions hold.

On the fiscal side, government expenditures continued to rise sharply, even though inflation remained subdued. The report suggested that the fiscal consolidation observed in recent months may be partly temporary, with one-off payments such as the central bank’s Rs2.5 trillion profits adjustment contributing to the figures.

The fiscal deficit was reduced to 1.7% of GDP during the first seven months of the fiscal year, down from 2.6% in the same period the previous year. The primary surplus increased to Rs3.5 trillion, or 2.8% of GDP. Net federal revenues rose by 45%, totaling Rs6.3 trillion, largely due to higher collections from the petroleum levy and a significant one-time payment from the central bank. Non-tax revenues surged by 76%.

On the expenditure front, government spending increased by 24% year-on-year to Rs9.3 trillion, with current expenditures rising by 17%. A notable increase in markup payments was observed, while non-markup expenses grew at a slower rate, largely due to a reduction in subsidy payments. The finance ministry emphasized that fiscal discipline, aided by efficient resource mobilization and expenditure control, would help maintain the fiscal deficit within manageable limits for the remainder of the fiscal year.

In terms of external trade, the country’s external accounts showed positive trends, with exports continuing to rise and remittances seeing a substantial increase. The current account recorded a surplus of $691 million for the first eight months of the fiscal year, though it posted a minor deficit of $12 million in February, marking the second consecutive month of negative balance.

Remittances, particularly from Saudi Arabia and the UAE, surged by 33%, reaching $24 billion during the first eight months of the fiscal year.

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Frequently Asked Questions:

1. Why did the government lower its inflation forecast for March 2025?
   The government revised its inflation forecast due to significant drops in food and energy prices, leading to an overall decrease in inflationary pressures.
2. What does the unchanged interest rate by the central bank indicate?
   The central bank’s decision to keep the interest rate at 12% is based on concerns over persistently high core inflation, despite the overall reduction in inflation levels.
3. How has the agriculture sector been performing in 2024-2025?
   The agriculture sector has faced challenges, with reduced rainfall leading to drought-like conditions in some regions, which may impact wheat production, which is expected to fall short of last year’s figures.
4. What is the outlook for the manufacturing sector in Pakistan?
   The manufacturing sector showed mixed signals, with monthly growth in January 2025 but an overall yearly decline. There are hopes for a rebound if demand conditions improve.
5. What are the main drivers of fiscal improvement in Pakistan?
   The fiscal deficit has narrowed due to increased revenues, especially from non-tax sources and the petroleum levy, along with better control of government spending.

Focus Keyword: Inflation forecast revision