How has Pakistan's economy fared since last year's election?

Prime Minister Shehbaz Sharif's government, which came into power after the strongly disputed elections held on February 8 last year, faced several economic challenges at the very start.

While the country had secured a $3 billion Standby Arrangement with the International Monetary Fund (IMF) the previous year, its economy still wasn't out of the woods.

However, the second half of the government's first year was much better — inflation started cooling down, giving the central bank room to cut the interest rate by bigger margins, which in turn, provided much-needed support to the industrial sector.

In January 2024, all key indicators, whether short-term or long-term, were hovering near peak levels but from February, the situation started to improve.

However, this wasn't only because of the government. It was mostly due to technical factors on the economic side such as the high base effect on which the inflation rate is calculated, a steady dollar rate, completion of the IMF SBA and then a new $7 billion program from the international lender.

Inflation, bonds, and industrial output

Inflation, which had reached a record of 38% in May 2023, started to ease off from March 2024, when it was around 20.7%. However, it took another five months for inflation to land in the single-digit zone.

Inflation is mostly down because of the high base effect, some downward revision in food-related products, and some stringent measures of the government to check hoarding and profiteering by retailers and wholesalers.

The decline in wheat prices over 18 months also made heavy dents in inflation. Over a year ago, a 100kg bag of wheat was sold for PKR 12,000. Now, the same bag is sold for PKR 8,000.

Meanwhile, the State Bank of Pakistan started the monetary easing cycle from June. In the span of a year, the interest rate declined by 1,000 basis points from a record 22% to an almost three-year low of 12%.

Separately, the cut-off yield for three-month treasury bills (T-bills) was at 20.70% in January last year, while currently, it is around 11.76%.

Similarly, cut-off yield for six-month T-bills is down to 11.64% from 21% and that for one-year, around 11.46% from 20.84% in January 2024.

Moreover, the 10-year Pakistan Investment Bonds showed a similar pattern, declining to 12.16% from 14.17% a year ago and six-month KIBOR — which has been the benchmark for lending to the corporate sector — recording a substantial drop to 11.69% from 20.97%.

However, a worrisome situation is that despite a steep decline in the interest rate, industrial output has not picked up and is still in negative growth because of massive reduction in the purchasing power of the common man. Inflation in the past one year has made heavy dents and utility prices have soared up sharply — the gas price is up by almost 70% to 80% and electricity prices by 55% to 65%, respectively over the last eight months or so.

The main reason behind gas and electricity prices' appreciation is the reduction of subsidies, which was done to shrink the gap between the selling and purchasing price of commodities because the big difference resulted in a sharp rise in the circular debt.

Banking

The banking sector performance hovered around the higher interest rate, with profits remaining on the higher side, which resulted in an increase in investments in government bonds over the period.

Banks' investments in government securities in January 2024 were around PKR 25,603 billion which rose to PKR 29,129 billion by end-January this year. Though interest rates started to recede in June, banks continued to direct most of their investments toward long-term bonds and treasury bills as they felt there would later be further cuts in the interest rate.

Analysts are hopeful that by December this year, interest rate would be in the single-digit range, with most reductions happening before June. Three monetary policy announcements are expected before June, during which cuts of at least 150bps cannot be ruled out.

Bank deposits also rose sharply in the year under review by nearly PKR 2,742 billion to PKR 30,283 billion. The main reason behind the increase was that banks were offering better returns.

However, last month bank deposits recorded an outflow of PKR 1,000 billion mainly because of the ADR issue and government's move to clamp harsh conditions on non-filers.

The government introduced a bill which would prevent non-filers from banking transactions, property purchases, or investing in government securities. However, the bill is still awaiting approval by parliament.

Moreover, besides the bill, the government has been making efforts to improve tax collection as the tax collection bod faces a shortfall of more than PKR 500 billion in seven months of the current fiscal year.