akistan’s economy is facing several complex challenges, marked by high inflation, high lending rates and rising tariffs for gas and electricity. The problems are exacerbated by poor governance. Inflation stood at 12.60 percent as of mid-2024, eroding purchasing power and affecting the cost of living.

The central bank’s policy rate, which has been persistently high to curb inflation, ranging from 22 percent to existing 19.5 percent, has stifled economic growth by making borrowing costly for businesses and consumers alike. Concurrently, high electricity tariffs have significantly raised operational costs for industries, contributing to their financial strain and reduced competitiveness.

Mismanagement and inefficiencies within state-owned enterprises (SOEs) are a significant drain on government’s resources. SOEs, including entities in sectors such as energy and transportation, are plagued by corruption, operational inefficiencies and financial losses, diverting critical revenue away from more productive uses. These enterprises require substantial subsidies, which further strain the national budget and undermine fiscal stability.

The root causes of Pakistan’s economic instability include chronic governance issues including persistent corruption, weak institutional frameworks and a lack of effective policy implementation. The government’s failure to undertake essential reforms has exacerbated these problems. Crucial reforms include restructuring and privatising SOEs to improve efficiency, rehashing the tax system to enhance revenue collection and implementing structural changes to enhance transparency and accountability in governance. Additionally, addressing energy sector inefficiencies, reducing subsidy dependence and promoting industrial growth through supportive policies are critical for stabilising the economy.

Media reports have highlighted a recent study by Asian Development Bank revealing that up to 70 percent of Pakistan’s population fails to pay bills due to a combination of financial difficulties and inefficiencies in billing. This issue, worsened by an inadequate tariff regime and legal delays, undermines the financial stability of distribution companies. The privatised K-Electric has shown some improvement in managing operations and reducing losses. Meanwhile, other distribution companies are hampered by political resistance and union opposition.

The media have further reported that the Privatisation Commission convened a meeting presided over by Federal Ministers Abdul Aleem Khan and Sardar Awais Leghari to advance the privatisation of DISCOs and made key decisions that include issuing international advertisements, finalising procedures and ensuring transparency through technical assessments. The privatisation will proceed in several phases.

The intricate nature of privatisation process presents a significant challenge for authorities attempting to initiate these reforms. The involvement of politicians and influential individuals in this process leads to further complications and delays. Such obstruction not only impedes the progress of privatisation but also negatively affects governance and efficiency within these entities.

In its country reports and staff-level agreements, the International Monetary Fund has consistently emphasised the need for SOEs’ privatisation. Global lenders are persistently advocating for the privatisation of financial institutions, power plants and other SOEs to alleviate the financial burden on the government. This global pressure underscores the urgent need for comprehensive reforms to improve economic management and operational efficiency.

International Monetary Fund, the lender of last resort, reached a staff-level agreement (SLA) on July 12 for a 37-month Extended Fund Facility programme, amounting to approximately $7 billion pending approval from the IMF’s executive board. It urged Pakistan to take necessary steps to enhance its economic environment. It has also emphasised the need to promote private sector growth and export dynamism by improving the business climate, creating a level playing field for all businesses, and removing state-imposed distortions. Specifically, it has requested that Pakistan advance efforts to enhance the management and operations of SOEs, with a focus on privatising the most profitable ones.

The IMF has also called for increased transparency and better governance surrounding the Pakistan Sovereign Wealth Fund. Additionally, Pakistan has been advised to phase out incentives for Special Economic Zones and agricultural support prices, eliminate subsidies and avoid new regulatory or tax incentives that could distort the investment environment, particularly in projects overseen by the Special Investment Facilitation Council. The IMF has further recommended that Pakistan implement strong anti-corruption measures, advance governance reforms and gradually liberalise trade policies to foster a more competitive and transparent economic environment.

The IMF has been advising Pakistani authorities to pursue sustainable public finances through gradual fiscal consolidation, aiming to broaden the tax base and remove exemptions. Specific measures in this direction include increasing tax revenues by 1½ percent of GDP in fiscal year 2025 and 3 percent over the programme period and using these funds to expand social protection and critical development spending.

The federal budget for the current year targets a primary surplus of one percent of GDP and seeks to simplify taxation, including incorporating net income from various sectors into the tax system. Additionally, a National Fiscal Pact aims at rebalancing fiscal responsibilities between federal and provincial governments, improving public services and tax collection efforts. Therefore, it is important to combat inflation and enhance financial stability by focusing on maintaining a flexible exchange rate, improving foreign exchange market and strengthening financial institutions.

The IMF recommends restoring energy sector viability through timely tariff adjustments, cost-reducing reforms and targeted subsidy replacements with direct support to households. The pace of implementing the recommended economic reforms appears to be slow, however, as reported in the media, the government is claiming that efforts are under way to address Pakistan’s economic needs and that it has outlined a strategy to enhance trade with Middle Eastern countries like Saudi Arabia, despite ongoing disagreements over the Bilateral Investment Treaty.

Major Middle Eastern economies include Saudi Arabia ($1.108 trillion GDP), the UAE ($507 billion), Kuwait ($184 billion), Iraq ($264 billion) and Qatar ($237 billion). In the year 2023-24, Pakistan’s top exports to the region were rice ($564 million) and meat ($351.92 million). The imports consist mainly of petroleum products and polymers. Bilateral trade with the Middle East reached $15.97 billion, with Pakistan’s exports totaling $3.08 billion.

Upcoming initiatives include a single-country exhibition and a Lifestyle Show in Saudi Arabia, scheduled for early 2025 and a visit by a trade delegation from the UAE. Additionally, Pakistan plans to strengthen ties through new missions in Iraq, Kuwait and Oman and is working on creating Joint Working Groups with several countries in the region. The Ministry of Commerce is focused on aligning with business associations to maximise trade benefits and expedite agreements, including the Comprehensive Economic Partnership Agreement and investments in logistics.

While these efforts to strengthen Pakistan’s economy through trade and fiscal reforms are commendable, addressing political instability and revamping the judicial system are crucial for sustainable progress. To enhance economic stability, Pakistan should focus on reforms, including simplifying regulatory frameworks, boosting public sector efficiency and tackling corruption in SOEs. Expanding access to financing, fostering innovation and technology and investing in infrastructure will also be important. By implementing these measures, Pakistan can pave the way for a more resilient and prosperous economic future.

Dr Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct teacher at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA