LSM Expected to Recover Gradually; Inflation Projected to Rise by May 2025

The Finance Division has indicated that despite ongoing contraction, the Large Scale Manufacturing (LSM) sector is anticipated to experience a gradual recovery. Inflation is projected to hover between 1.5-2 percent in April, potentially increasing to 3-4 percent by May 2025.

In its “monthly economic update and outlook April 2025,” the Division highlighted the continued challenges facing the LSM sector, with output decreasing by 1.9 percent during July-February fiscal year 2025, compared to a 0.4 percent contraction in the previous year. February saw a month-on-month (MoM) decline of 5.9 percent and a year-on-year (YoY) decrease of 3.5 percent in LSM.

The prospects for LSM might progressively improve in the coming months. The predicted recovery is likely to be slow, given the sustained YoY contraction and the recent MoM decline. High-frequency indicators, such as increased automobile production, raw material imports, and a more lenient monetary policy, suggest cautious optimism.

Jul-Feb FY25: LSM Sector Contracts

Favorable weather patterns and greater water availability are expected to boost crop yields and improve farming conditions, thereby contributing to overall economic growth.

The economic outlook made no mention of public sector development program (PSDP) releases. From July 1 to April 11, 2024-25, credit flow to the private sector amounted to Rs 692.5 billion, compared to Rs 106 billion in the corresponding period last year.

The report pointed out that improved revenue collection and controlled current expenditure have helped reduce the fiscal deficit and create a primary surplus. Driven by remittances and export growth, the current account recorded a larger surplus, reserves have grown, and the exchange rate has remained stable and market-aligned.

The Consumer Price Index (CPI) inflation fell to 0.7 percent YoY in March 2025, from 1.5 percent in February and 20.7 percent in March 2024. On a MoM basis, it increased by 0.9 percent, following a 0.8 percent decrease in February and a 1.7 percent increase in March 2024.

Inflation has declined to its lowest point, opening opportunities for a more encouraging monetary policy in the months ahead. Despite overall weak industrial activity, the automobile and export-oriented sub-sectors demonstrated notable performance. Social protection and climate finance initiatives are progressing, thus reinforcing the move towards sustainable and inclusive growth. Exports and remittances are expected to maintain their positive trajectory in the upcoming months, keeping the current account within manageable bounds.

According to the report, the availability of Urea and DAP for the Rabi season 2024-25 increased by 6.5 percent and 4.1 percent, respectively. However, their offtake decreased by 12 percent and 3.3 percent, respectively.

During July-February fiscal year 2025, net revenue receipts increased by 43.3 percent to Rs 6,780.2 billion, boosted by a 73 percent surge in non-tax revenues, which totaled Rs 3,921.6 billion, primarily from dividends, PTA/post office profits, SBP profits, gas surcharges, and petroleum levy.

Federal Board of Revenue (FBR) tax collection also rose by 25.9 percent to Rs 8,453.1 billion during July-March fiscal year 2025. Total expenditures increased by 23.2 percent to Rs 10,359.0 billion, with current spending up 17.2 percent to Rs 9,563.7 billion, comprising markup payments (18.2 percent) and non-markup expenditures (15.7 percent), while development spending surged by 50.3 percent. These patterns reduced the fiscal deficit to 2.2 percent of GDP (from 3.1 percent) and enhanced the primary surplus to Rs 3,452.1 billion (3 percent of GDP) from Rs 1,834.0 billion (1.7 percent). Generally, stronger revenue mobilization and sensible spending led to more robust fiscal results, with the deficit predicted to remain within acceptable levels, thus promoting long-term fiscal and debt sustainability.

The external account position improved substantially during July-March fiscal year 2025, bolstered by increasing remittances and export growth, despite growing imports. The current account registered a surplus of $1.9 billion, reversing a deficit of $1.7 billion from the previous year. Goods exports grew 7.7 percent to $24.7 billion, while imports increased 11.1 percent to $43.4 billion, widening the trade deficit to $18.7 billion from $16.2 billion last year.

Remittances totaled $28 billion, up 33.2 percent from $21 billion, driven by inflows from Saudi Arabia (24.6 percent share) and the UAE (20.4 percent). Net FDI increased by 14 percent to $1.6 billion, primarily from China ($684.5 million), the UK ($186.3 million), and Hong Kong ($175.9 million).

From July 1 to April 4, fiscal year 2025, the broad money (M2) supply grew by 3.7 percent, down from 6 percent last year. Net Foreign Assets increased to Rs 1,181.2 billion (up from Rs 742.1 billion), while Net Domestic Assets increased by only Rs 150.6 billion, compared to Rs 1,127.1 billion last year. Private sector credit expanded to Rs 550 billion from Rs 150.7 billion last year. In March 2025, the KSE-100 index continued its bullish trend, closing at 117,807 (gaining 4,555 points over the month), while market capitalization increased by Rs 393 billion to Rs 14,374 billion.

In March 2025, the Bureau of Emigration & Overseas Employment registered 58,555 workers, a 17 percent increase from 50,030 in February. The Pakistan Poverty Alleviation Fund, through its 24 partner organizations, disbursed 18,250 interest-free loans worth Rs 0.88 million. Since 2019, a total of 2.98 million loans amounting to Rs 115.72 billion have been provided.

During July-February fiscal year 2025, Rs 347.0 billion was disbursed under the BISP (82.6 percent higher than last year), against a full-year allocation of Rs 592.5 billion. The Ministry of Climate Change issued Host Country Approval and Letters of Intent for two carbon offset projects, advancing Pakistan’s carbon market under Article 6 of the Paris Agreement and building on the 2024 Carbon Market Policy.