ISLAMABAD:
The government on Tuesday significantly cut the inflation forecast to 1% for March but did not provide a clear picture of the macroeconomic outlook due to uncertain conditions in the agriculture and manufacturing sectorstwo key job-creating areas of the economy.
Contrary to its earlier forecast of a 3% to 4% inflation rate in March, the Ministry of Finance revised the estimate down to just 1% to 1.5% in its monthly outlook report. The revision aligns with market expectations that inflation could drop below 1% this month. The finance ministry added that inflation is expected to inch up to 3% in April.
In its latest monetary policy outlook, the central bank maintained the policy rate at 12%, a decision independent experts deemed unjustified given the exceptionally low inflation levels. The central bank based its decision on core inflation, which has remained persistently high, warning that potential increases in food and energy prices could drive inflation higher in the coming months. However, three years ago, the central bank shifted its benchmark for interest rate decisions from core to headline inflation.
The finance ministry noted that inflationary pressures have eased due to declining food and energy prices, fostering overall price stability. It stated that fiscal consolidation measures are yielding tangible results, leading to a primary surplus and a reduced fiscal deficit.
However, the report did not offer a clear assessment of the agriculture and manufacturing sectors after earlier projections failed to materialise.
For the Rabi season 2024-25, the finance ministry projected wheat production to reach 27.9 million tonnes, supported by government initiatives such as input subsidies, the distribution of high-yielding seeds, and interest-free loans under the Kissan Card initiative. However, it cautioned that “favourable weather remains a key factor in ensuring better harvests to meet production targets.”
The Pakistan Meteorological Department has issued warnings of drought-like conditions, as rainfall has been significantly lower than last year, particularly in Sindh and Balochistan.
Earlier, the finance ministry had anticipated that increased agricultural machinery imports and higher fertiliser use would boost production. DAP offtake rose by 3.8%, while urea offtake declined by 2% compared to last season.
Last year, wheat production reached 31.4 million metric tonnes, but early market estimates suggest it may fall below 27 million metric tonnes this year. However, the finance ministry did not provide a specific figure in its latest report.
The finance ministry stated that Large-Scale Manufacturing (LSM) showed a mixed recovery in January 2025. While recent monthly growth signals resilience, the yearly decline highlights underlying weaknesses that may continue to weigh on industrial performance. The ministry expressed optimism that high-frequency indicatorssuch as positive growth in cement sales, increased automobile production, and higher importsalong with an easier monetary policy, could lead to a production uptick if demand conditions remain supportive.
However, similar hopes were dashed last month when LSM contracted by 1.2% on a yearly basis. During JulyJanuary FY2025, LSM posted an overall decline of 1.8%.
Fiscal front
The report revealed that government expenditures continue to grow at a double-digit pace despite a low single-digit inflation rate. Any signs of fiscal consolidation appeared to be seasonal and potentially influenced by one-off payments, such as the upfront adjustment of the central bank’s Rs2.5 trillion profits.
The finance ministry reported that the fiscal deficit narrowed to 1.7% of GDP in the first seven months of the fiscal year, down from 2.6% in the same period last year. The primary surplus increased to Rs3.5 trillion, or 2.8% of GDP.
Net federal revenues grew by 45% to Rs6.3 trillion in seven months, mainly due to the central bank’s one-off payment and higher petroleum levy collections. Non-tax revenue receipts surged by 76% over the same period.
On the expenditure side, total spending rose by 24%, or Rs1.8 trillion, to Rs9.3 trillion in seven months. Current expenditures increased by 17%, or Rs1.2 trillion, to Rs8.6 trillion. Within current expenditures, markup payments rose by 20%, while non-markup expenses increased by 11.4%. The report attributed the restrained growth in non-markup spending largely to a significant reduction in subsidy expenditures. The finance ministry asserted that fiscal performance in the first seven months reflects the government’s commitment to fiscal discipline through efficient resource mobilisation and expenditure management. These efforts, it stated, would help contain the fiscal deficit within a manageable limit for the fiscal year.
External sector
The external account position has strengthened, driven by a continued increase in exports and a notable rise in remittances despite an upward trend in imports, according to the report.
During the first eight months of this fiscal year, the current account posted a surplus of $691 million. However, in February, the current account recorded a $12 million deficitthe second consecutive month of deficit.
Workers’ remittances grew by 33% to $24 billion in the first eight months, with the largest share coming from Saudi Arabia (25%), followed by the UAE (20%).
