The government is riding high on the much-lauded economic stability achieved over the past two years, but its new ambitions for growth appear precarious.
The government is riding high on the much-lauded economic stability achieved over the past two years, but its new ambitions for growth appear precarious.
Without the implementation of critical structural reforms, the path ahead raises serious concerns. Inflationary pressures loom large, signalling the risks of repeating past mistakes, where short-term policy fixes overshadowed the need for sustainable economic strategies.
Mounting political tensions and the fragility of the coalition government are increasingly shaping economic decisions, often at the expense of long-term planning.
One glaring example is the recent decision to lower energy prices. While aimed at providing relief to households and businesses, this measure reflects a focus on short-term political optics rather than fiscal prudence. In the absence of offsetting subsidy reductions or additional revenue measures, reduced energy prices are likely to widen the fiscal deficit. Such moves undermine efforts to stabilise public finances, posing risks to the broader macroeconomic landscape.
The government is reportedly exploring measures to stimulate the real-estate sector by relaxing taxes and duties. Proposed changes include halving the property sale tax from 4.0 per cent to 2.0 per cent, slashing the buyer’s tax from 4.0 per cent to 0.5 per cent, and eliminating federal excise duties on property transactions.
These fiscal concessions are already fueling speculative activity, with property prices surging as investors redirect their focus toward this non-tradable sector. While this may create an illusion of economic dynamism, it does little to address deeper structural challenges. A flood of undeclared wealth into the real-estate market, coupled with minimal regulatory oversight, risks reinforcing unproductive investment patterns. As land and property change hands rapidly, the broader economy suffers from the absence of growth in tradable, job-creating, and export-oriented sectors.
Meanwhile, the stock market has witnessed an unprecedented surge, with the KSE-100 index climbing from 41,541 points in June 2022 to an all-time high of 117,586 points by January 2025. This nearly threefold growth, however, appears disconnected from the real economy. The rally has been largely fueled by artificial stock repricing, driven by reforms tied to the IMF program, including exchange rate liberalisation and fiscal consolidation.
Without a decisive shift toward reforms that address fiscal imbalances, enhance institutional capacity and promote export-led growth, the hope for long-term economic stability and progress remains dim
While these measures attracted foreign portfolio inflows, they also inflated valuations, creating a bubble-like scenario. With stock prices increasingly divorced from economic fundamentals, the rally is beginning to stagnate. As investor interest shifts toward alternative asset classes like real estate, speculative trends are likely to intensify, amplifying economic vulnerabilities. On the agricultural front, the government’s decision to stop setting minimum support prices for wheat and discontinue procurement operations signals a departure from long-standing interventionist agricultural policies.
This shift is aligned with the principles of market liberalisation, aiming to reduce distortions in the wheat market and encourage more efficient resource allocation. However, while the policy is theoretically sound, its practical implications are likely to be more complex and challenging, especially in the short term.
The wheat procurement crisis during the last Rabi season serves as a cautionary tale of the potential fallout from abrupt policy shifts. Without a clear transition strategy, disruptions in supply chains, speculative hoarding and price volatility will threaten food security and intensify inflationary pressures.
While recent data indicates a decline in inflation, as measured by the Consumer Price Index (CPI), the State Bank of Pakistan cautions against any overly optimistic interpretations of this trend and clarifies that the decline in inflation appears to have reached its lowest point and moving forward, inflation is projected to rise. This suggests that the full disinflationary impact of the historically high interest rates has already been realised, with diminishing returns on further reductions in the price level.
Core inflation remains stubbornly high, reflecting structural challenges and cost-push factors within the economy. This signals that the broader inflationary environment has not yet normalised and that latent risks to price stability persist. Moreover, external vulnerabilities such as exchange rate volatility, global commodity price shocks and potential fiscal slippages continue to pose a threat to price stability.
This economic trajectory is reminiscent of previous stabilisation efforts under IMF arrangements, such as the Stand-By Arrangements in 2000 and 2008 and the Extended Fund Facility (EFF) programmes in 2013 and 2019. Each of these programmes delivered temporary stability, only to be followed by renewed turbulence due to a failure to implement lasting structural reforms.
The current policy approach appears to be repeating this cycle, prioritising short-term fixes over sustainable development. Without a decisive shift toward reforms that address fiscal imbalances, enhance institutional capacity and promote export-led growth, the hope for long-term economic stability and progress remains dim. For now, the spectre of inflation and economic fragility continues to overshadow the prospect of sustainable growth.
The writer is a development practitioner with an MPhil in Development Studies.
