The limits of an economic fix | Political Economy

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As Pakistan enters 2025, the economy is showing signs of improvement. Inflation eased to 4.1 percent in December, the lowest in six years, on the back of a stable currency and global commodity prices. The State Bank of Pakistan cut its key policy rate by 900 basis points until 2024, to 13 percent in December, to boost economic growth.

In the first quarter of FY 2024-25, the economy grew by 0.92 percent, led by the agriculture and services sectors, despite a contraction in the industrial sector. A $7 billion loan approved by the International Monetary Fund in 2024 is helping the economic recovery. Thus Pakistan 2025 is starting on a positive economic path.

The biggest surprise on the last day of last year was Prime Minister Shehbaz Sharif’s unveiling of Uran Pakistan Plan, a bold initiative aimed at revitalizing the country’s economy. This ambitious five-year national economic transformation plan 2024-29 focuses on a “Five Es” framework: boosting exports to drive growth and boost foreign exchange; Accelerating Pakistan’s digital transformation through e-Pakistan; implementing sustainable practices to combat climate change and ensure food and water security; developing affordable and green energy solutions; and promoting social equality and empowerment. The plan aims to position Pakistan as a trillion dollar economy by 2035, creating a National Economic Transformation Unit to oversee its implementation, ensuring transparency and accountability.

This initiative is commendable as it identifies key development priorities and provides a structured roadmap for short- to medium-term interventions. By targeting concrete areas, such as improving literacy rates, increasing employment opportunities, addressing energy inefficiencies and promoting business growth, the 5Es framework is aligned with the global economic model, giving it international support. Makes it attractive to borrowers and lending institutions.

The Uran Pakistan project aims to transform Pakistan into a $1 trillion economy by 2035. This requires maintaining an annual growth rate of about 8.41 percent over the next 12 years, starting from the current GDP of $379.31 billion. Historically, Pakistan’s highest recorded GDP growth rate was 11.35% in 1970. The most recent peak was 6.51% in 2021. Achieving an ambitious goal is a daunting task. This significantly outpaces the growth rate achieved in recent decades.

While the target is quite ambitious by any standards, let’s not forget the miracles that have happened in different countries at different times. This shows that the government is optimistic and is starting 2025 on a positive note. The important question is whether this momentum will be sustained. More importantly, can Pakistan build on last year’s success?

The answer is obviously conditional. Uran’s success depends on the challenges he faces and the strategies he uses to overcome them. The authors of the project have correctly diagnosed several long-standing problems. The project objective is reproduced below, with explanations added in brackets:

“Pakistan has faced numerous challenges since 1947, including lack of political stability, [a lack of] Continuity in policies, [a lack of] Repeated obstacles to peace and political process [challenges] Weakened institutions and created obstacles in the way of development. The Uraan initiative aims to address these challenges through the 5Es framework, providing short- to medium-term solutions for Pakistan’s economic stability and growth.

The question of causation deserves attention. While it is clear that political instability and policy continuity lead to negative economic outcomes, can we assume that positive economic outcomes will ensure political stability and policy continuity? Is economic growth capable of breaking the vicious cycle that has gripped Pakistan for so long? Furthermore, are the current conditions conducive to such a change?

Despite the government’s apparent ability to carry out most of its administrative functions, political uncertainty persists. The court cases of the former prime minister and the former ISI chief have the potential to create a stir on the political scene. Then there are the PPP Chairman Bilawal Bhutto’s open criticisms of various government policies and occasional indications of rethinking the alliance partnership.

The 5Es framework faces its most pressing challenges in addressing Pakistan’s deep structural problems. One of the most pressing problems is the country’s recurring boom-bust cycle, characterized by periods of high growth resulting from short-term policy initiatives followed by stagnation or decline due to weak fundamental reforms. . This cycle undermines Pakistan’s long-term economic viability, increases public debt and weakens the economy with each iteration. The standard economic or social “fixes” provided by the 5Es are insufficient to break this cycle because they do not address the underlying structural vulnerabilities.

Overreliance on state interventions, such as subsidies and protectionist policies, distorts market mechanisms and hinders innovation and competition. Domestic firms often rely on government subsidies, which stifle the growth of the private sector and limit its ability to compete in regional and global markets. Additionally, Pakistan’s narrow tax base, in which large segments of the economy are taxed, limits public spending on essential services such as health, education and infrastructure. This inefficiency in revenue generation undermines the effectiveness of the economic reforms proposed under the 5Es framework.

Another key problem is the inefficiency of state-owned enterprises (SOEs), which continue to drain financial resources and deter private sector investment. Without meaningful reforms, these loss-making enterprises remain a significant burden on the economy. The energy sector also faces significant challenges, with high costs, inefficiencies and circular debt limiting the supply of affordable energy to consumers and businesses. These structural constraints require comprehensive institutional reforms that are beyond the scope of the 5Es framework.

Underinvestment in human capital exacerbates Pakistan’s economic struggles. Underinvestment in education and health care results in low literacy rates, high infant mortality rates and widespread stunting, preventing the population from participating effectively in the modern labor market. Capacity becomes limited. Addressing these issues requires sustained and coordinated efforts at multiple levels of government, which the 5Es framework alone cannot guarantee.

Corruption and weak institutions present additional obstacles. Corruption, bureaucratic inertia and lack of accountability undermine public trust and impede the implementation of effective reforms. Without strong governance structures and political stability, initiatives under the 5Es framework will be abandoned or inadequately implemented when political alignments change. This instability perpetuates the boom-bust cycle and prevents long-term economic stability.

Furthermore, Pakistan’s export sector remains limited to low-value-added products, resulting in export stagnation and reduced competitiveness vis-à-vis regional peers. The lack of export diversification and innovation highlights the inadequacy of the 5Es framework to address complex economic challenges that require more than sector-specific interventions.

Achieving the Uranian goals will require addressing structural barriers through comprehensive reforms and sustained political consensus. First, efforts should be made to break the persistent boom-bust cycle by prioritizing long-term policy measures that strengthen institutions and encourage private sector growth. Streamlining subsidies, rationalizing tariffs and reducing protectionist barriers can promote competition and innovation. Second, bold restructuring – privatization where appropriate – combined with transparent governance is essential to address inefficiencies in state-owned enterprises.

These reforms can free up resources for important social investments in health and education, thereby increasing human capital. Broadening the tax base — through digitization and better compliance — will generate revenue to support infrastructure development and social safety nets. Meanwhile, a strong anti-corruption framework and institutional strengthening can help ensure continuity in reforms, preventing frequent changes in policies that often undermine Pakistan’s growth momentum.

The author is the Head of the Department of Economics, Comsetes University Islamabad, Lahore Campus.