Staying stable

The SBP’s Annual Report on the State of Pakistan’s Economy for FY2023-24 paints a picture of an economy that has stabilised over the past year or so but faces a tough road ahead. The highlights included a double-digit drop in the inflation rate from a peak of 38 per cent in May 2023 to 12.6 per cent in June 2024, a rise in agricultural output on the back of a record harvest of rice and wheat and a rebound in cotton production and a narrowing current account deficit despite an increase in real economic activity. The latter highlights the strong growth in remittances and exports, offsetting a slight increase in imports. IMF engagement was also important in this context, with the Stand-By Agreement helping catalyse inflows and build up forex reserves. Staying on the IMF path also appears to be the key stabilising factor for the economy, along with prudent policies at home and a favourable global economic environment. While economic stability is undoubtedly important and one should not dismiss the efforts of the current government in helping get the country to this stage, it is important to point out that this nascent stability is unlikely to have changed the financial picture much for most ordinary Pakistanis.

If one looks beyond the period covered in the report, the inflation picture only gets more positive. The headline inflation rate fell to a 34-month low of 9.6 per cent in August, paving the way for a substantial 200 basis points (bps) rate cut by the SBP, bringing the policy rate down to 17.5 per cent. While this is expected to help the economic recovery, most people are still struggling to pay their bills and find jobs that pay enough for them to meet their living expenses. Prices might no longer be rising as fast but they are still much higher than what they were three or four years ago. The same cannot be said for incomes or job prospects. Compounding these woes is the fact that tariffs and taxes have also risen for most people, an unavoidable consequence of tightening fiscal discipline to stay on the IMF path. Staying on the path of stability will likely require more such tough changes. The SBP report highlights a host of structural impediments that it says continue to pose a challenge to sustaining macroeconomic stability, including falling investment and low savings, an unfavourable business environment, lack of research and development, low productivity, and climate change risks. The familiar energy sector problems of inefficiency and resulting circular debt also remain.

Addressing these issues will be crucial to lifting the country’s growth potential going forward, even though the SBP expects the improvement in the country’s macroeconomic conditions to continue into the ongoing fiscal. Among the steps recommended by the SBP are expanding the scope of reforms in the energy sector by introducing sectoral policy and regulatory reforms and the need to reform state-owned enterprises. Such reforms will require a broad-based political consensus and the will needed to initiate unpopular but necessary moves that Pakistani governments have usually lacked. While the current government has thus far managed to overcome the negative public reaction to many of its economic measures and even to form a consensus around them with political allies, it is unclear how long this streak can continue, particularly as the nation gets closer to the next round of elections. In this context, lifting the economic prospects of the majority will be crucial to sustaining the momentum for economic reforms.