Economy in 2024 | Overviews

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n 2024 Pakistan’s economy showed a complex combination of short-term stability and persistent long-term risk. Effective structural reforms, political stability, and a strong focus on human capital are critical to unlocking the country’s economic potential.

The national economy showed definite improvement during the year, at least in terms of macroeconomic indicators, and the country avoided defaulting on foreign debt. However, as a result of this improvement, the common citizens did not get any substantial relief.

Inflation fell from 30 percent to 4.9 percent, with prices still rising. Why prices did not come down after the interest rate came down from 22 percent to 13 percent, demands investigation. Although the private sector is not using project loans much, they regularly avail working capital loans for which the cost has come down significantly by 9%. This means that the financing cost has come down significantly but this reduction is not reflected in the consumer prices.

The rupee remained stable throughout the year. In fact, it rose slightly against the US dollar. This ensures that prices remain at least stable, especially as global commodity prices remain low through 2024. The effect of lower rates is reflected in the prices of petroleum products which are regulated by the state but not in other products. This is a sign of very poor governance.

Here is a historical summary of the national economy in 2024.

As of January 12, Pakistan’s total liquid foreign exchange reserves were $13.145 billion, of which the State Bank of Pakistan held $8.027 billion and commercial banks held $5.117 billion. As of mid-December 2024, reserves had declined to $13.013 billion, with the State Bank holding $7.942 billion and commercial banks $5.071 billion. The decline reflects ongoing pressure on foreign reserves due to external debt repayments and other fiscal challenges.

In recent years, a significant part of Pakistan’s foreign exchange reserves has been supported by short-term loans from friendly countries. These loans, often provided to avert an immediate balance of payments crisis, are used to stabilize reserves and meet external debt obligations.

Saudi Arabia, China and United Arab Emirates have provided deposits and credit facilities to Pakistan. By 2023, Pakistan had an estimated $5 billion in reserves backed by reserves from Saudi Arabia, China and the United Arab Emirates. Additionally, deferred payment arrangements for oil imports, such as from Saudi Arabia, facilitate foreign exchange outflows. However, such loans come with short-term repayment pressures, making reserves highly sensitive to the continuation of external financing.

This dependency highlights a structural problem in the economy, where external aid compensates for insufficient exports and remittances.

In January 2024, State Bank of Pakistan’s policy rate was 22 percent. Inflation was recorded at 27.6% year-on-year in January. Inflation had eased to 4.9 percent in November 2024. Exports rose 12.2 percent to $31.4 billion, up from $28 billion in the same period last year. Imports fell 6.5 percent to $51.5 billion in the first 11 months of 2024, down from $55.1 billion in the same period last year.

During January-March 2024, the caretaker government took some tough decisions to negotiate a new deal with the IMF. The IMF acknowledged the improvement in Pakistan’s fiscal performance in early 2024, highlighting the underlying surplus and stabilization of economic activity. Inflation showed signs of easing due to policy adjustments and the rebuilding of foreign reserves, which helped incomes.

The April-June quarter was a tough period for the economy. The general elections held in February increased political uncertainty in Pakistan, which had a significant impact on investor confidence. High inflation, currency devaluation and fiscal conditions made investors wary of long-term commitments. Delays in the implementation of key economic reforms and the influence of political considerations on fiscal decisions further fueled suspicions.

Import restrictions continued to negatively affect investment and industrial production, limiting growth. Despite setting ambitious tax targets for the fiscal year, the government struggled to generate revenue and deal with revolving debts.

In the July-September quarter, continued adherence to IMF conditions achieved a measure of economic stability. However, growth rates remained low (around 2-3 percent) and structural reforms were limited. Continued failures in power generation and distribution kept energy costs high, burdening businesses and households.

Political unrest in the October-December quarter, including protests and sit-ins, significantly eroded business and investor confidence. Inflation and unrest over stable wages compounded these challenges. Efforts to raise revenue, including through tax reforms, have fallen short of targets, increasing the government’s dependence on external debt.

Positive aspects of 2024 include the IMF program that helped stabilize the fiscal deficit, rebuild reserves and reduce external pressures in the first half of the year. It created a framework for fiscal discipline. Pakistan’s large youth population was identified as a potential driver for future growth.

Negative aspects included low job creation that undermined economic recovery, particularly for vulnerable populations. Minimal progress in addressing state-owned enterprise losses, energy inefficiencies and expansion of the tax base undermined long-term sustainability. Protests, long marches and sit-ins discouraged investment, increasing economic uncertainty.

Political unrest adversely affected investor confidence and disrupted economic activity. Prolonged sit-ins and marches deterred investment by creating a perception of instability, adding to an already weak economic environment. Businesses faced difficulties. Foreign investors remained hesitant due to concerns about governance and policy unpredictability.

The International Monetary Fund often imposes structural and fiscal conditions as part of its loan program to address macroeconomic imbalances in countries like Pakistan. Many of these situations are challenging because of their social, economic and political implications. IMF conditions that Pakistan may find particularly difficult to meet include ending energy subsidies, implementing cost-reflective pricing for electricity and gas, and reducing revolving credit.

A major challenge in this regard is that high energy prices lead to inflation, particularly affecting low-income households. Tariff hikes also trigger protests and political resistance. Energy-dependent industries may face higher costs and lose competitiveness.

Another requirement of the IMF is to increase the tax-to-GDP ratio by broadening the tax base, eliminating exemptions and improving tax compliance. But Pakistan’s large informal sector, particularly small traders and enterprises, has always opposed tax reforms. Taxing the politically influential agricultural sector has been equally difficult.

Another requirement of the IMF is a free-floating exchange rate and allowing market forces to determine the value of the Pakistani rupee. But the independent rupee often depreciates sharply due to weak economic fundamentals, further increases in inflation and rising prices of imported fuel and food. A devaluation also increases the cost of the rupee to service external debt.

Another requirement of the IMF is reduction of the fiscal deficit through expenditure cuts and revenue generation. It always comes down to development costs. Reducing allocations to public sector development programs stunts growth and increases unemployment. The pressure of reduced subsidies on food, fuel and social safety nets disproportionately affects the poor.

The IMF has called for the privatization of loss-making state-owned enterprises such as PIA, Pakistan Railways and DISCOs. However, trade unions and political groups oppose privatization due to fear of job losses. Privatization efforts in the past have been dogged by allegations of corruption and mismanagement. Some SOEs are considered strategically important.

Governments have been slow to improve governance, build institutional capacity and reduce corruption through structural reforms. Reforms face resistance from long-term commitments and vested interests.

IMF conditions are intended to achieve macroeconomic stability but are difficult to implement for political reasons. Some proposed reforms disproportionately affect the poor. Moot reforms trigger a response from businesses, trade unions and the general public. Weak institutions, governance problems and vested interests slow down the implementation of reforms.

Balancing these reforms with public welfare and political stability is the government’s most difficult challenge.

The author is a senior economic reporter at The News International.