As 2023 draws to a close, Pakistan stands at a crucial juncture, reflecting on a year marked by unprecedented economic challenges and heightened political anticipation. The year saw the Pakistan Democratic Movement government grappling with the highest inflation rates in living memory, peaking at alarming levels and significantly impacting the nation’s economic stability. This period of economic strain was further complicated by a sharp surge in terrorist activities, not only undermining national security but also exerting a significant drag on the country’s resources and public morale. Amidst these trials, the looming general elections scheduled for February 2024 have become a focal point of national discourse, stirring a mix of anticipation and apprehension. The imminent electoral exercise is set against a backdrop of economic turmoil and societal unrest, posing critical questions about Pakistan’s path forward and the potential for a transformative shift in its political and economic landscape.

The economic slowdown in Pakistan was noticeable as the country’s real gross domestic product was estimated to have shrunk by 0.6 percent in the fiscal year 2023. This slump followed two back-to-back years of remarkable growth, with GDP expanding by 6.1 percent in FY22 and 5.8 percent in FY21. The contraction in 2023 was blamed on numerous factors, including substantial damage to crops and livestock caused by floods, difficulties in securing essential inputs like fertilisers, supply chain disruptions due to import restrictions, high fuel and borrowing expenses, political uncertainty and weakened demand. These challenges impacted not just the agriculture sector, on which 44 percent of the workforce depends, but also industry and service sector activities. The decline in private consumption, motivated by weaker labour markets and soaring inflation, likely diminished the earnings of millions of workers, particularly those in low-productivity informal roles.

In September 2023, Pakistan’s external debt reached $128.1 billion. This constituted 36.5 percent of the country’s GDP for the year. The magnitude of this debt, along with the need for considerable repayments over the coming years, posed a major challenge for the economy. Repaying this massive external debt necessitated careful administration, as it influenced fiscal policies and international ties, particularly with major creditors like China, private entities and Saudi Arabia.

Inflation reached alarming heights in 2023. The consumer price index was documented at 27.6 percent in January, anticipated to rise to around 33 percent. Inflation peaked at 38 percent in May, the highest in four decades and remained around 30 percent later in the year. The sharp increase in inflation was credited to various factors, including flood-related interruptions in the supply of food and goods, elevated energy prices and challenging external circumstances like tighter global monetary conditions.

Food inflation was especially worrying, with CPI food inflation standing at 42.1 percent and the weekly sensitive price indicator reaching 41.54 percent. This circumstance marked the highest food inflation in 45 years in Pakistan. The surge in food prices disproportionately impacted low-income households, plunging them further into poverty and intensifying the divide between the haves and have-nots.

The global spillover effect, primarily from the ongoing conflict in Ukraine, notably affected Pakistan’s economic situation. This conflict transformed the post-Covid financial, energy and fertiliser markets, resulting in higher costs of living and contributing to the inflationary spiral in Pakistan.

Pakistan and the International Monetary Fund reached a preliminary agreement for the release of $700 million from a $3 billion bailout package after two weeks of discussions. This was part of the second installment of the bailout signed with Pakistan in June, with the first tranche of $1.2 billion received earlier. The IMF established new conditions for Pakistan, including revising its budget and terminating electricity and fuel subsidies.

The central bank’s foreign exchange reserves dropped to less than $4 billion, covering less than a month of imports. The country owes over $20 billion in external debt in the current fiscal year, leaving it vulnerable to significant external risks like geopolitical tensions, commodity price surges and tightening global financial conditions.

Pakistan encountered devastating floods and escalating global commodity prices following Russia’s invasion of Ukraine. The country’s inconsistent policy reaction, entailing monetary tightening, new subsidies and an informal exchange rate cap, culminated in the depletion of foreign exchange reserves and sabotaged progress with fiscal consolidation. These influences, coupled with tighter global liquidity circumstances, curtailed Pakistan’s access to international capital markets.

Pakistan’s economic downturn in FY23, with a real GDP contraction of 0.6 percent, necessitated a robust response from the government. This included fiscal adjustments and structural reforms to guarantee macroeconomic stability and growth. The World Bank emphasised the need for diligent economic administration and profound reforms, particularly in the face of record high inflation, rising electricity prices and severe climate shocks. To tackle these challenges, comprehensive fiscal reforms were proposed, encompassing tax policy reforms, streamlining of public expenditure, enhanced management of public debt and stronger inter-government coordination on fiscal matters.

The economic crisis in Pakistan has had profound social repercussions. Initiatives like distributing low-cost and free flour to alleviate the burden of escalating prices resulted in heartbreaking consequences, including stampedes and injuries. This situation highlighted the desperation induced by the rising cost of food and other essentials.

The country’s economic challenges were intensified by poor economic governance.

Last year’s floods, which damaged agricultural land, livestock and infrastructure, contributed significantly to the crisis, especially regarding food shortages and transportation challenges. These matters, along with the war in Ukraine disrupting grain supplies and Pakistan’s heavy reliance on imported oil, exacerbated the economic situation.

The GDP growth is likely to be a mere 0.3 percent in 2023. It is projected to increase to 1.9 percent in 2024. Inflation rate is expected to be 29.2 percent in 2023, with a minor decrease to 25.0 percent forecast for 2024. The recovery and future growth of the economy depend on successful execution of the proposed reforms and adjustments, alongside the capability to manage both domestic and external economic shocks.

Much hinges on the outcome of the upcoming general elections in February 2024. Political stability, often elusive in the nation’s turbulent history, is going to be a determinant of its economic and social future. The World Bank has voiced concerns that the new government may reverse the current stabilisation policies in favour of more populist measures. This could potentially derail the fragile economic progress. The resolution of global geopolitical issues, notably the longstanding Palestine conflict, holds significant implications for Pakistan’s economy as it will influence foreign policy, trade relations and investor confidence. The choices made in the upcoming elections and the subsequent policy direction will not only shape Pakistan’s internal dynamics but also its role and standing in the global community.

The writer is an associate professor in the Department of Economics at COMSATS University Islamabad, Lahore Campus