Looking Ahead at 2025

Pakistan’s Economy: Navigating “Unstable Stability” Amid External and Internal Challenges

Date: January 3, 2025

Dr. Aqdas Afzal
Economic Advisor, Macro-Fiscal Policies
Ministry of Finance, Saudi Arabia

Pakistan’s economy seems to have finally stabilized after two years in the wilderness. We should give credit to Pakistan’s economic policymakers for their prudent policies and sound macroeconomic management. Reports indicate that macroeconomic fundamentals have strengthened during Jul-Nov FY2025, showing a deceleration in Consumer Price Index (CPI) inflation, fiscal surplus, current account surplus supported by increased exports and remittances, and an accommodative monetary policy stance.
This may not have benefited households just yet, still impacted by inflationary pressures on food and electricity, however, such positives may be restoring a degree of business and consumer confidence, as seen in private sector credit uptake and bull runs at the Pakistan Stock Exchange. This is an ‘unstable stability’ meaning that there are many external and internal challenges that can quickly take us back to the days when the economic future of this country appeared bleak.

On the external front, the recent election of Donald Trump has injected a lot of uncertainty into the global economy. Nobody fully knows the likely impact of his proposed tariffs, which could as high as 60% on Chinese imports. Still, Trump’s tariffs will be bad for the global economy, in general, and for Pakistan’s exports, in particular. US tariffs on Pakistan’s exports would negatively affect the current account deficit, thus bringing the exchange rate under severe pressure. This could prove disastrous by bringing in another cycle of stagflation, and force the State Bank of Pakistan to raise the policy rate.

On the internal front, Pakistan’s economy will need to remain focused on the fiscal side through more resource mobilization and privatization. Regarding resource mobilization, the government will need to collect a lot more revenue to ensure a primary fiscal surplus, but also bring un-taxed sectors like real estate and agriculture into the tax net. There are some efforts underway to increase revenue collection through more digitalization at the Federal Board of Revenue (FBR). Regarding privatization, focused effort will be required to transition state-owned enterprises. Success has eluded the government on privatization thus far, and it may decide to privatize lower hanging fruit, like the already-profitable power distribution companies.

The present political uncertainty and the weakness of the government’s mandate are significant constraints. It appears that overall economic activity and revenue collection will be negatively impacted due to political unrest, while a weak mandate will prevent the government from taking tough economic decisions necessary to put Pakistan’s economy on a sustainable trajectory.

This is particularly salient given the IMF’s conditions for its $7 billion bailout, that requires a slew of fundamental reforms on low productivity, economic openness, resource misallocation, and climate vulnerability. The bailout is necessary, but to realize “Pakistan’s last IMF program” as hoped for by PM Shehbaz Sharif, decisionmakers need to consider debt sustainability, which drags the whole country down and imposes a very high cost on citizens. 68 per cent of tax revenue went to debt servicing in FY2023.

In a sense, Pakistan’s unstable stability is akin to the ‘knife-edge equilibrium’ in Harrod-Domar’s classic development model, where slight deviations in the natural growth rate result in wide oscillations. All is not lost, however. Pakistan’s governance institutions have demonstrated agility and resilience in the past: the National Command and Operation Center’s (NCOC) Covid-19 response was one such instance, and while some may disagree, the Special Investment Facilitation Council (SIFC) is slated to play an instrumental role in stabilizing the economy.

The coming year is going to throw multiple external and internal challenges in front of Pakistan’s economy. The government may not be able to deal as effectively with these challenges, not for reasons of capability, but rather a weak political mandate.