Post-election, the incoming government is set to take charge amidst economic adversities. The hard decisions taken by the interim government supported by the armed forces’ have significantly contributed to economic steadiness by spearheading actions such as busting illegal financial networks, curtailing cross-border smuggling, deporting numerous illegal aliens, and addressing smuggling and trade malpractices that were bleeding the economy. Additionally, it also put its weight behind the government’s efforts to secure financial backing from allied countries, through sizable deposits and their subsequent rollovers which helped in maintaining a critical balance of payments. The coalition government, too, made tough choices, like hiking utility and fuel prices, which, albeit harsh, were pivotal in stabilizing the economy.
However, Pakistan is still knee deep in economic and financial difficulties posing the new government with an immediate challenge: economic stabilization. The contraction of the real GDP, from a positive 6.2 percent in 2022 to a concerning -0.2 percent in 2023, coupled with projected modest growth of only 2 percent in 2024, paints a picture of economic stagnation. This decline in economic activity translates to a reduced ability to generate employment opportunities, with the unemployment rate surging from 6.5 percent in 2022 to a worrisome 8.5 percent in 2023, with estimates suggesting little improvement in the foreseeable future. Further compounding this challenge is the significant escalation of the Consumer Price Index, which rose from 12.1 percent in 2022 to a staggering 29.2 percent in 2023, and is projected to remain around 24 percent in 2024. This rampant inflation erodes the purchasing power of individuals and households, disproportionately impacting their ability to afford essential goods and services, thereby negatively impacting overall living standards.
Furthermore, the nation grapples with the burden of substantial external and general debt, ranging from 80.7 percent to 76.8 percent of its GDP over the past three years. Additionally, the prevailing economic uncertainty discourages foreign investment which in 2022 was on $2.7 billion compared to FDI of India which was $80.2 Billion. This low level of FDIs, further restricting the availability of resources for modernization and expansion, threatens the prosperity for its people and stalls the nation’s development engine, squeezing household budgets and eroding savings.
Soon after assuming power, the new government would be faced with the daunting task of completing the last review of the IMF Stand-By Arrangement (SBA). The next daunting challenge would be to reach an early agreement with the IMF staff on a new medium-term facility, which is conditioned with carrying forward critical reforms on restructuring of the FBR, privatization of the loss-making SOEs including PIA, and the implementation of the SOE policy for improved governance and financial performance.
The new government, caught between lack of fiscal and budgetary space and ambitious plans outlined in its manifesto, will be in a deep fix. Pre-Election promises such as inflation reduction, targeted subsidies for vulnerable populations, job creation, and support for agriculture, revitalizing industries at all levels, encouraging youth entrepreneurship through accessible banking, and fostering agricultural advancement through initiatives like improved seeds and subsidized fertilizers, will need a lot of fiscal space.
It also promised to provide affordable utilities besides healing the wounds in Balochistan and KP, knowing very well that transforming promises is tough though not impossible. It would need the collaboration of stakeholders, political and non-political alike, to define the priority areas and set clear objectives with a time-bound deadline.
Though the clouds of economic and financial challenges are very thick, and many hard decisions have to be made, there are a few silver linings as well. The monthly economic update for February 2024, noted restoration of market confidence which led to a pick-up in economic activity. GDP growth accelerated to 2.1 percent in the first quarter of FY2024, after two consecutive quarters of negative growth. The agriculture sector, the backbone of the country, posted impressive 5 percent growth with manufacturing activity registering 2.5 percent growth. The rupee has stabilized and the PSX has shown sustained performance improvements. The inflation outlook for the upcoming month points towards an upward trajectory owing to better crops and a smooth supply of commodities. The industrial activity in December 2023 remained positive, exports are steadily increasing. encouraging business confidence coupled with exchange rate stability, contributing to a positive economic outlook for Pakistan amidst ongoing challenges.
In the long-term, human capital development through education and healthcare investments, combined with gender equality initiatives, will unlock Pakistan’s full economic potential. Embracing technology and transitioning to a green economy will further drive sustainable growth. Adaptability, public engagement, and strong governance will be critical throughout this multi-phase recovery program.Â
To start with, the new government should fully activate three vehicles for rapid economic and financial stabilization, the Special Investment Facilitation Council (SIFC), the China-Pakistan Economic Corridor (CPEC), and its agricultural sector.
First, the SIFC can streamline the investment process, particularly for CPEC projects. By minimizing bureaucracy and offering a one-stop shop for approvals, SIFC can attract both domestic and foreign capital. Furthermore, the SIFC can foster public-private partnerships within CPEC, encouraging innovation and job creation while ensuring the project’s long-term sustainability. Additionally, the SIFC can leverage Pakistan’s diplomatic ties to broaden CPEC’s scope, attracting international investment and maximizing its transformative impact.
Second, Pakistan’s agricultural sector presents a wealth of untapped potential. The SIFC can play a crucial role in attracting investment in modern farming techniques, storage infrastructure, and food processing. By focusing on value addition through processing and marketing, Pakistan can not only increase agricultural production but also create a more robust and profitable sector, fostering economic growth and prosperity.
Banking upon these gains, the new government should immediately develop short-, medium- and long-term strategies. In the short-term the government would need to curtail development spending, though vital for long-term growth, and must prioritize projects with immediate economic benefits and efficient implementation. Salary increases for government employees should be weighed carefully against fiscal constraints. Infrastructure projects must be chosen for their potential to generate revenue and jobs. Price controls and subsidies need effective management to curb inflation. Investment in education, health, agriculture, and research and development remains crucial, but efficient resource utilization is paramount. Fiscal management, external debt control, job creation, and a commitment to transparency and accountability will be essential components of the government’s strategy. Collaboration with international partners can provide crucial support.
Beyond immediate stabilization, medium-term reforms are needed. These include gradual deficit reduction, a comprehensive debt management strategy, improved tax administration, energy market reforms, and enhanced workforce competitiveness. Sustainable development efforts focusing on climate-resilient infrastructure and innovation will also be crucial.
In the long-term, human capital development through education and healthcare investments, combined with gender equality initiatives, will unlock Pakistan’s full economic potential. Embracing technology and transitioning to a green economy will further drive sustainable growth. Adaptability, public engagement, and strong governance will be critical throughout this multi-phase recovery program. By taking decisive action and prioritizing the well-being of its people, the new government can navigate the current economic storm and emerge stronger.
