Welcome to 2025

With the arrival of the new year comes renewed hope and opportunities to make choices that can improve upon the previous year. The year ahead presents a chance to reflect on past challenges and take decisive steps towards addressing them effectively.

While the future remains uncertain, our choices shaped by different internal and external factors lead to different scenarios defining our achievements or lack of them in any given time frame.

Take, for instance, Pakistan’s economic trajectory in 2025. It will hinge on a complex interplay of factors, including its relationship with the IMF, efforts to build climate resilience, fluctuations in energy prices, political stability, and investment in human development. The country’s ability to effectively leverage these elements will determine whether it embarks on a path of recovery, remains stagnant, or slides further into decline.

The IMF will continue to be a key player in Pakistan’s economic landscape in 2025. The ongoing transition to macroeconomic stability will be affected if Pakistan chooses to deviate from its commitments with the IMF. The Fund’s first review of the current programme, to be held in February 2025, will likely focus on unmet conditions, including addressing the tax revenue shortfall, implementation of taxation on agricultural income, privatisation of loss-making public sector enterprises, and power sector reforms, etc.

Pakistan’s success in meeting key targets – or securing additional time to do so – will be crucial in determining whether the IMF releases the next tranche of funding or delays it until concrete measures, particularly those outlined in the Finance Bill 2025, are implemented. Any delay in funding could exacerbate macroeconomic challenges, leaving the country more exposed to external shocks. Pakistan’s relationship with the incoming US administration (potentially led by Trump) could also play a significant role in shaping the IMF Board’s decision. Strained ties may reduce Pakistan’s room for negotiation and limit flexibility in IMF decisions.

Climate change remains a critical threat to Pakistan’s economic stability. The floods of 2022 are a reminder of the devastating impact of extreme weather on the country’s agricultural sector, infrastructure, and fiscal health. In 2025, the monsoon season and occurrence or lack of extreme events – such as floods or droughts – will define the country’s economic performance.

Agriculture, which employs a large portion of the population and contributes substantially to GDP, is particularly vulnerable to climatic disruptions. Investments in climate resilience, disaster preparedness, and implementing climate-smart agricultural practices can reduce the economic and human toll of climate shocks. Without such measures, climate shocks could deepen rural poverty, inflate food import bills, and strain government finances. The consequences of climate inaction could be dire, making this a critical area of focus for economic stability.

As a country relying mainly on imported fuel, Pakistan’s economy is heavily influenced by fluctuations in global energy prices. High energy costs could widen the trade deficit, intensify inflation, and constrain fiscal space for development spending. Conversely, a decline in prices may provide temporary relief. The answer lies in a strategic shift towards renewable energy and efficiency improvements. However, switching to renewable energy, while good for consumers, will give headaches to the government as it will exacerbate the burden of capacity payment charges.

Another defining factor for Pakistan’s economic performance in 2025 is the future trade regime. The European Union’s Carbon Border Adjustment Mechanism (CBAM to be fully implemented in 2026) and similar carbon tax measures proposed by other countries pose a significant challenge to Pakistan’s export competitiveness. CBAM functions by imposing tariffs on imports based on the carbon emissions generated during their production, effectively penalising carbon-intensive industries.

For Pakistan, whose manufacturing and processing industries are carbon-intensive, this presents a significant hurdle in maintaining cost competitiveness in international markets. To mitigate this impact, Pakistan must invest in cleaner technologies, energy-efficient production, and renewable energy adoption.

China’s leadership in green technology offers Pakistan a valuable opportunity in 2025 to modernise its economy and tackle pressing energy and climate challenges. As the global frontrunner in affordable solar panels, batteries, and electric vehicles, China can support Pakistan’s transition to cleaner energy solutions.

China’s advancements in carbon capture and storage (CCS) and green hydrogen – key technologies for reducing emissions in hard-to-decarbonise sectors – could provide Pakistan with access to cutting-edge innovations at competitive costs. By collaborating with China, Pakistan can decarbonise its industrial processes, enhance energy security, reduce dependence on expensive fossil fuel imports, and better prepare for the emerging carbon-tariff trade regime.

The choice of transitioning to digital transformation or delaying it is another factor that will affect Pakistan’s economic outlook in 2025. Digitalisation offers immense potential to drive Pakistan’s economic growth by fostering innovation, expanding e-commerce, and improving public service delivery. However, recent disruptions in internet services have exposed vulnerabilities in Pakistan’s digital ecosystem. Whimsical internet outages or restrictions could have severe economic consequences, including reduced business activity, hindered access to global markets, and diminished investor confidence.

Such disruptions may stall progress in other sectors widening existing inequalities and hampering overall growth. To unlock the potential of digital transformation, Pakistan will have to learn from countries such as the UAE, Saudi Arabia and China where selected apps are restricted rather than slowing down the whole internet services.

Political stability is a cornerstone of economic progress. A stable government enables the implementation of long-term reforms, fosters investor confidence, and ensures policy continuity. Prolonged political instability in 2025 has the potential to reverse the gains of all other measures that the government will take for economic revival.

Human capital development is essential for Pakistan’s economic recovery and sustainable growth. According to World Bank estimates, improving human capital could increase Pakistan’s GDP by up to 18 per cent in the long term. Strategic investments in education, food security and healthcare can significantly boost workforce productivity while harnessing the demographic dividend offered by the country’s young population. Addressing gender disparities and expanding access to quality public services will be crucial for promoting social mobility and fostering economic inclusion.

Equally critical are governance and institutional reforms, particularly those that empower a dynamic private sector. Strengthening regulatory and competition frameworks, combating corruption, and enhancing bureaucratic efficiency can bolster investor confidence and ensure the effective implementation of policies. Without these reforms, Pakistan risks perpetuating inefficiencies, delaying progress, and further eroding public trust in its institutions.

The interplay of these factors will determine Pakistan’s economic trajectory in 2025, shaping three possible scenarios: a business-as-usual approach, a worst-case scenario, and a best-case scenario. If Pakistan continues its one-step forward, two-step back approach, 2025 is likely to reflect the stagnation of prior years. A worst-case scenario could emerge if the country fails to make the right choices in a timely manner, resulting in deeper economic and social decline.

On the other hand, a best-case scenario requires seizing opportunities and addressing challenges proactively. This involves fulfilling IMF commitments or negotiating flexibility through diplomatic relations with the IMF Board members, implementing climate-resilient policies, transitioning to a green economy with Chinese support, stabilising political dynamics, and investing in human development. These actions could position Pakistan to achieve greater economic resilience and surpass 2024's performance.

As this new year begins, Pakistan’s future rests on the recognition that, as J K Rowling aptly put it, "It is our choices that show what we truly are, far more than our abilities." Wishing you a very happy new year.

The writer heads the Sustainable Development Policy Institute (SDPI) and is a member of the COP29 International Advisory Committee. He tweets/posts @abidsuleri