n 2024 Pakistan’s economy showed a complex mix of short-term stabilisation and persistent long-term vulnerability. Effective structural reforms, political stability, and a sharp focus on human capital are critical to unlocking the country’s economic potential.

The national economy showed definite improvement during the year, at least in terms of macroeconomic indicators and the country avoided the apprehended default on foreign loan repayment. However, the improvement has not resulted in tangible relief for the ordinary citizens.

While inflation declined from over 30 percent to 4.9 percent, the prices were still rising. Why prices have not declined after the interest rates came down from 22 percent to 13 percent, merits an investigation. While the private sector is not using a lot of project loans, they regularly avail of working capital loans for which the cost has declined by a significant 9 percent. This means the financial cost has declined appreciably but this decline is not reflected in the consumer prices.

The rupee remained stable throughout the year. In fact, it gained slightly against the US dollar. This warrants that the prices should at least remain stable particularly since global commodity prices remained low throughout 2024. The impact of lower rates was reflected in the prices of petroleum products that are managed by the state but not on other products. This is a sign of extremely poor governance.

Here is a chronological summary of the national economy in 2024.

On January 12, Pakistan’s total liquid foreign exchange reserves stood at $13.145 billion, with $8.027 billion held by the State Bank of Pakistan and $5.117 billion by commercial banks. In mid-December 2024, the reserves had declined to $13.013 billion, with the SBP holding $7.942 billion and $5.071 billion held by commercial banks. This decrease reflects the ongoing pressure on foreign reserves, driven by external debt repayments and other fiscal challenges.

A significant portion of Pakistan’s foreign exchange reserves has been supported by short-term loans from friendly countries in recent years. These loans, often provided to avert immediate balance-of-payment crises, are used to stabilise reserves and fulfill external debt obligations.

Saudi Arabia, China and the UAE have extended deposits and credit facilities to Pakistan. As of 2023, an estimated $5 billion of Pakistan’s reserves were backed by deposits from Saudi Arabia, China and the UAE. Additionally, deferred payment arrangements for oil imports, like those from Saudi Arabia, ease the outflow of foreign exchange. However, such loans come with the pressure of short repayment periods, making reserves highly sensitive to continuity of external financing.

This reliance highlights a structural issue in the economy, where external assistance compensates for insufficient exports and remittances.

In January 2024 the State Bank of Pakistan’s policy rate was 22 percent. Inflation was reported at 27.6 percent year-on-year in January. The inflation was down to 4.9 percent in November 2024. Exports grew by 12.2 percent, reaching $31.4 billion, compared to $28 billion in the same period last year. In the first 11 months of 2024 the imports declined by 6.5 percent, amounting to $51.5 billion, down from $55.1 billion in the corresponding period last year.

During January-March 2024 the caretaker government took some difficult decisions to conclude a new deal with the IMF. The IMF acknowledged improvements in Pakistan’s fiscal performance in the early 2024, highlighting a primary surplus and stabilisation of economic activity. Inflation showed signs of easing due to policy adjustments and rebuilding of foreign reserves, supported by inflows.

The April-June quarter was a difficult period for the economy. The general elections in February heightened political uncertainty in Pakistan, significantly impacting investor confidence. High inflation, currency depreciation and a precarious fiscal situation, made investors wary of long-term commitments. Delays in implementing critical economic reforms and the influence of political considerations on fiscal decisions further fuelled scepticism.

Import restrictions continued to affect investment and industrial production negatively, limiting growth. The government struggled with revenue generation and addressing circular debt despite setting ambitious tax targets for the fiscal year.

In the July-September quarter, a measure of economic stability was achieved with continued adherence to IMF conditions. However, growth rates remained low (around 2-3 percent) and structural reforms were limited. Persistent inefficiencies in power generation and distribution kept energy costs high, burdening businesses and households.

In the October-December quarter political unrest, including protests and sit-ins, significantly eroded business and investor confidence. Unrest over inflation and stagnant wages compounded these challenges. Efforts to increase revenue, including through tax reforms, fell short of targets, increasing the government’s reliance on external borrowing.

The positives from 2024 include the IMF programme which helped stabilise fiscal deficits, rebuild reserves and ease external pressures in the first half of the year. It created a framework for financial discipline. Pakistan’s large youth population was identified as a potential driver for future growth.

The negatives included low job creation that undermined economic recovery, especially for vulnerable populations. Minimal progress on addressing state-owned enterprise losses, energy inefficiencies and tax base expansion hampered long-term stability. Protests, long marches and sit-ins discouraged investment, exacerbating economic uncertainty.

Political unrest negatively influenced investor confidence and disrupted economic activities. Prolonged sit-ins and marches deterred investment by creating a perception of instability, adding to the already fragile economic environment. Businesses faced disruptions. Foreign investors remained hesitant due to concerns about governance and policy unpredictability.

The International Monetary Fund often imposes structural and fiscal conditions as part of its loan programmes to address macroeconomic imbalances in countries like Pakistan. Many of these conditions are challenging due to their social, economic and political repercussions. The IMF conditions Pakistan may find particularly difficult to fulfill include elimination of energy subsidies, implementation of cost-reflective pricing for electricity and gas and reduction in circular debt.

A major challenge in this regard is that high energy prices lead to higher inflation, particularly impacting lower-income households. Rising tariffs also trigger protests and political resistance. Industries reliant on energy may face higher costs and lose competitiveness.

Another IMF condition is an increase in the tax-to-GDP ratio by broadening the tax base, eliminating exemptions and improving tax compliance. But Pakistan’s large informal sector, particularly small traders and businesses, has always opposed tax reforms. Taxing the politically influential agricultural sector has been equally hard.

Another IMF condition is a free-floating exchange rate and allowing market forces to determine the value of the Pakistani rupee. But a free-floating rupee often depreciates rapidly due to weak economic fundamentals, further increasing inflation and raising prices of imported fuel and food. Depreciation also raises the rupee cost of external debt repayments.

Another IMF condition is a reduction in the fiscal deficit through expenditure cuts and revenue generation. It always falls on development spending. Reducing allocations for public sector development programmes hampers growth and spurs unemployment. Pressure to cut subsidies on food, fuel and social safety nets disproportionately affects the poor.

The IMF has asked for privatisation of loss-making state-owned enterprises such as PIA, Pakistan Railways and DISCOs. However, privatisation is opposed by trade unions and political groups for fears of job losses. Privatisation efforts in the past have faced allegations of corruption and mismanagement. Some SOEs are considered strategically important.

Governments have been very slow in improving governance, enhancing institutional capacity and reducing corruption through structural reforms. Reforms require long-term commitments and face resistance from vested interests.

The IMF conditions are aimed at achieving macroeconomic stability, but they are difficult to implement for political reasons. Some of the proposed reforms disproportionately affect the poor. Mot reforms trigger backlash from businesses, trade unions and the general public. Weak institutions, governance issues, and vested interests slow down reform implementation.

Balancing these reforms with public welfare and political stability remains the government’s toughest challenge.

The writer is a senior economic reporter at The News International