nitiating a series of administrative and macroeconomic adjustment measures, Pakistan’s GDP recorded a marginal growth of 0.3 percent in the financial year 2023. The swift fiscal adjustments and the so-called reforms pose potential challenges to economic recovery.

Today, the economy bears the marks of a significant surge in inflation, reduced industrial activity and external pressures, all of which have caused a general retardation. Consequently, an immediate full recovery is a far-fetched idea.

The World Bank’s latest release, Pakistan Development Update: Restoring Fiscal Sustainability predicts a gradual recovery in real GDP growth, with an estimated 1.7 percent in the FY 2024 and 2.4 percent in FY 2025. While this outlook marks an improvement over the disappointing results of FY 2023, it remains far below the country’s true economic potential.

At the start of the current fiscal year, a fresh wave of optimism and resilience swept over the nation, guided by a steadfast commitment to recovery and sustainability. The much-awaited turning point came in July 2023 with the long-anticipated approval of the International Monetary Fund stand-by arrangement.

This approval injected a much-needed dose of positivity into an economic landscape previously overshadowed by uncertainty. Before this approval, there were apprehensions about Pakistan’s capacity to meet its external obligations, having the potential to plunge the country into a grave financial predicament.

The IMF’s SBA emerged as a crucial lifeline, infusing requisite external financing that bolstered dwindling reserves. However, this was a short-term remedy rather than a sustainable, long-term solution. True salvation lies in tackling the root causes of fundamental issues, such as external imbalances and domestic fiscal management. The current execution of SBA can be viewed as a foundational step towards addressing these deeper concerns.

Achieving macroeconomic stability and sustainability depends on the steadfast and efficient implementation of the SBA, without any deviations or lapses. It also requires a consistent commitment to fiscal discipline and the timely influx of external financing. A failure to undertake necessary reforms or misalignment in the timing of these crucial components could place Pakistan’s economy in a precarious position.

The repercussions of this challenging situation are already evident in various aspects of the economy. Economic activity remains constrained due to exorbitant policy rates, high inflation, stringent import regulations and a lack of investors’ confidence, both domestically and internationally.

In FY 2023, the Quantum Index of Large-scale Manufacturing Industries registered a significant decline of 10.26 percent. This downturn can be attributed primarily to disruptions in the supply chain, surging inflation and contractionary policy measures implemented by the government to address existing imbalances.

This trend persisted in the first month of FY2024 as growth in large-scale manufacturing remained negative, experiencing a year-on-year decline of 1.09 percent. Additionally, a lack of fresh inflows in the form of foreign direct investment raises concerns and directly impacts the country’s medium-term growth potential, undermining the overall investment climate. The FDI plays a pivotal role in generating employment opportunities and introducing modern business technologies and practices to the economy. In FY 2023, the FDI inflows declined by 24.8 percent, dropping to $1,455.8 million from $1,935.9 million in FY 2022.

Over the past year and a half, inflation has surged to unprecedented levels, reaching the highest point in several decades. Rapid and continuous escalation of inflation is badly affecting the ability of ordinary citizens and businesses to survive. In FY 2023, headline inflation averaged an astounding 29.2 percent year-on-year, which is more than twice the average rate of 12.2 percent in FY 2022.

The historic rise in inflation can be attributed to several factors including floods that disrupted agricultural production and supply chains. Energy-related inflation, a consequence of stalled structural reforms in the sector, has had the most significant impact on the public and businesses. Persistent issues like line losses and ever growing circular debt are hindering the sector’s progress. Moreover, regular tariff adjustments due to rising petroleum prices and changing global market dynamics have not only increased energy costs but also led to higher prices for various goods and services.

The situation worsened due to continuous depreciation of the Pakistani rupee, leading to higher import costs and inflationary pressures on imported goods. The central bank responded with frequent policy rate hikes, reaching 22 percent (a 7 percent increase from FY 2023). However, real interest rates remained negative. The central bank’s actions seemed inadequate in curbing inflation, as the government, a major borrower from banks, faced high borrowing costs, significantly affecting revenue collection. Managing inflation in such a complex economic environment has remained an unsolved puzzle for policymakers.

The channeling of funds into loss-making state-owned entities has become increasingly painful. The Privatisation Commission Ordinance 2000, has proved a formidable barrier to the privatisation process.

At a recent press conference, newly appointed Caretaker Minister for Privatisation Fawad Hassan Fawad shed light on the situation, emphasising that the entities currently listed for privatisation were not exclusive to the present or past governments. The process was set in motion in 2001. Regrettably, despite the passage of two decades, we have yet to privatise these financially burdensome entities, including Pakistan International Airlines, in which we continue to inject funds to sustain operations.

Pakistan allocates a substantial portion of its budget, nearly as much as the development budget, to provide subsidies for operating state-owned enterprises. Instead of generating profits, these entities incur heavy losses. Another factor that is detrimental to the national treasury is currency and merchandise smuggling, including illegal import of Iranian oil. Needless to say, these illicit activities cannot be carried on without the involvement of customs and border control authorities.

The caretaker government has initiated some measures to curb these activities and target associated criminal networks. Questions persist about why such activities were not effectively addressed under the previous governments. There is a pressing need to overhaul the system for monitoring border control points to enforce stringent controls and impose penalties for those involved in smuggling.

As the government endeavours to dismantle criminal networks involved in smuggling and currency manipulation, it is essential to ensure that these efforts do not adversely affect small businesses. Expanding the tax base and enhancing the tax-to-GDP ratio are imperative for fiscal improvement.

Despite the challenges and risks ahead, policymakers must initiate comprehensive economic reform policies. It is imperative to focus on critical areas, such as expanding tax base and taxing sectors like retail, real estate and agriculture, notwithstanding political interests or external pressures. In order to ensure a congenial investment environment for both local and foreign entities, regulatory obstacles hindering private sector activities must be eliminated. Only through such coordinated and strategic efforts can Pakistan move towards stability, unlocking its full economic potential.

Dr Ikramul Haq, an advocate of Supreme Court, is adjunct faculty at Lahore University of Management Sciences

Abdul Rauf Shakoori is a corporate lawyer based in the USA