Dr. Ikramul Haq & Abdul Rauf Shakoori
The economic outlook of Pakistan remains an important focus for analysts and policymakers. The Federal Finance Minister, Muhammad Aurangzeb, has recently claimed that Pakistan is well positioned for the International Monetary Fund (IMF) programme. The first review of its US$7 billion 37-month bailout package is underway [March 4-14, 2025] highlighting macroeconomic stability as the key achievement. Muhammad Aurangzeb has expressed confidence in meeting IMF’s targets, which could unlock further funding to support economic recovery.
Prime Minister, Shehbaz Sharif, has also claimed significant progress in stabilizing the economy, crediting structural reforms and strategic alliances with international financial institutions. Furthermore, the Deputy Prime Minister-cum-Foreign Minister, Muhammad Ishaq Dar, has set ambitious goals, projecting Pakistan’s inclusion in the G20 by 2030, emphasizing resilience and economic reforms.
The gross domestic product (GDP) grew by 2.5% in fiscal year (FY) 2024, recovering from a decline of 0.2% in FY 2023. The stock exchange saw a remarkable 71% increase in returns, while the current account surplus reached its highest level in 20 years.
Pakistan’s inflationary pressures have eased significantly, with the consumer price index (CPI) dropping to 1.5% in February 2025, down from 2.4% in January and a substantial decline from 23.1% in the same month last year, according to official statistics. Despite this decline, energy costs remain a concern, driven by a 63.6% increase in electricity and gas tariffs, which continue to impact household and industrial expenses.
The World Bank’s latest Pakistan Development Update highlights pressing economic challenges, particularly in the power sector, where circular debt has surged. Inefficiencies in state-owned distribution companies have led to financial burden, with transmission and distribution losses remaining high.
Despite increased generation capacity, revenue collection remains inadequate. The government is implementing privatization strategies and policy measures to enhance operational efficiency and financial sustainability. Power sector reforms, including reduction in transmission losses and improved billing mechanisms, are essential for long-term stability.
The fiscal deficit narrowed to 6.8% of GDP, with tax revenues increasing by 26%. The government has focused on broadening the tax base and improving collection mechanisms. Petroleum levy and direct taxes have contributed significantly to revenue growth. However, the tax-to-GDP ratio remains lower than the regional average, necessitating further fiscal reforms. The goal is to increase tax revenue to 13.5% of GDP within the next four years. This should have been 18% in view of population growth and other peculiar fiscal challenges, especially monstrous debt burden, faced by Pakistan.
Foreign reserves increased to US$10.6 billion, equivalent to 1.9 months of imports. This improvement reflects the impact of fiscal consolidation efforts, reduced trade deficits, and inflows from international financial institutions. Despite these gains, external vulnerabilities persist, with high debt servicing costs and reliance on external financing. The government is seeking foreign direct investment to bolster economic resilience.
Monetary policy adjustments have played a key role in stabilizing inflation, which, despite easing from the previous year, remains elevated. The State Bank of Pakistan has maintained a cautious stance, implementing measures to control inflation while supporting economic growth. The exchange rate has stabilized, helping to curb imported inflation and improve investor confidence. However, inflationary pressures continue due to high energy prices and supply chain disruptions.
Pakistan’s external trade position has shown signs of improvement, with exports growing by 11.6% in FY 2024, primarily driven by the agriculture sector. Ban on Indian rice exports created an opportunity for Pakistani rice exporters, leading to record-high food export earnings of US$7.1 billion. However, import growth has remained modest at 0.9%, reflecting subdued domestic demand and tighter import regulations. The balance of payments has improved, contributing to overall economic stability.
The industrial sector faced challenges, contracting by 1.2% due to declining output in utilities and manufacturing. However, the agricultural sector experienced its highest growth in 19 years, expanding by 6.4%, driven by increased wheat, rice, and cotton production. The services sector also grew by 2.2%, supported by retail trade and improved consumer spending. The government aims to enhance industrial productivity by incentivizing investments and reducing regulatory bottlenecks.
Structural reforms in state-owned enterprises (SOEs) have been identified as a critical area for economic progress. Inefficiencies in SOEs have led to fiscal imbalances, prompting the government to pursue privatization and governance improvements. Efforts to restructure these entities focus on reducing operational losses and enhancing service delivery. The introduction of performance-based management and accountability mechanisms aims to improve financial sustainability.
The government has also emphasized social welfare programmes to mitigate the impact of economic challenges on vulnerable populations. The Benazir Income Support Programme (BISP) allocations have been increased, but inflation-adjusted benefits remain insufficient. The rising cost of living has strained household budgets, necessitating further policy interventions to support lower-income groups.
Investment in human capital is essential for sustainable economic growth. The education sector faces significant challenges, with one-third of children out of school. Increased public spending on education and skills development is necessary to enhance workforce productivity. Health sector improvements are also critical, as poor healthcare access continues to impact economic participation and productivity.
Pakistan’s digital economy presents a major opportunity for economic transformation. The information and communication technology (ICT) sector has shown resilience, with increased exports contributing to economic growth. The government is prioritizing digital infrastructure investments to support innovation and entrepreneurship. Strengthening cybersecurity and regulatory frameworks will be significant to fostering a competitive digital economy.
Energy sector reforms remain a priority, as rising costs and inefficiencies continue to burden consumers and businesses. The power sector’s circular debt has reached unsustainable levels, necessitating urgent reforms. The government is implementing measures to improve revenue collection, enhance grid efficiency, and promote renewable energy sources. Strengthening governance in energy distribution companies is essential to reducing financial losses and ensuring reliable power supply.
Agricultural productivity enhancements are key to ensuring food security and economic stability. Climate change and water scarcity pose significant risks to agricultural output. Investment in modern farming techniques, irrigation infrastructure, and climate-resilient crops is critical to sustaining agricultural growth. The government is also working on policies to support small-scale farmers and improve market access for agricultural products.
The financial sector has a crucial role in economic stabilization. The banking industry remains robust, with improved capital adequacy ratios and liquidity. However, credit to the private sector remains low, with banks heavily exposed to government borrowing. Strengthening financial inclusion, supporting small and medium enterprises (SMEs), and enhancing digital banking services are essential for a more dynamic financial system.
Pakistan’s economic outlook remains cautiously optimistic, with growth projected to reach 2.8% in FY 2025. Implementation of structural reforms, fiscal discipline, and policy continuity will be essential in achieving long-term economic stability. The government’s commitment to debt reduction, revenue generation, and investment-friendly policies will shape the economic trajectory in the coming years.
Looking ahead, government officials remain hopeful about achieving economic stability. The Prime Minister has emphasized the importance of ongoing structural reforms, strengthening partnerships with international financial institutions, and attracting foreign investments. The commitment to policy consistency, transparency, and regulatory efficiency will be key to ensuring sustainable growth.
The government aims to address macroeconomic challenges through targeted interventions, focusing on infrastructure development, energy reforms, and financial sector improvements. The path to economic resilience demands coordinated efforts across all sectors, with a firm focus on governance, efficiency, and strategic investments. The continued commitment to reforms positions Pakistan to become a stronger and more stable economy, ensuring a prosperous future for its citizens.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.