Implementation of institutional reforms is critical for Pakistan

Pakistan’s economy is showing signs of recovery after years of struggling with inflation, fiscal imbalances, and mounting external debt. Key indicators, such as inflation, fiscal discipline, and banking sector performance, point toward positive economic trends. The key factors driving this recovery are as follows. Pakistan’s headline inflation has fallen to its lowest level in over five years, reaching 4.9% year-on-year in November 2024. This is a significant improvement from 38% in November 2023. The decrease is because of proactive monetary policies, improved fiscal discipline, and global commodity price trends. Inflationary pressures have slowed, providing space for further monetary policy adjustments. The State Bank of Pakistan (SBP) has already reduced the policy rate by 250 basis points to 15%, reflecting confidence in the economic stabilization. Additionally, urban and rural inflation have shown notable improvements, with urban inflation falling to 5.2%, and rural inflation remaining steady at 4.3%. IMF program and fiscal reforms are very important. Pakistan’s engagement with the International Monetary Fund (IMF) remains on track, with the government fulfilling its macroeconomic reforms. This ongoing partnership is critical for sustainable economic stability. The implementation of IMF-backed reforms has enhanced fiscal discipline, contributing to a more stable economy. However, Pakistan still faces challenges related to its external debt and interest payments, requiring more fiscal adjustments. The banking sector has shown positive trends, particularly in terms of lending. The Advance-to-Deposit Ratio (ADR) reached 47% in November 2024, up from 39% two months earlier. This suggests that banks are increasing lending to meet national economic targets, although regulatory reforms, particularly between conventional and Islamic banks, remain a priority. Despite improvements in inflation and fiscal discipline, Pakistan’s external debt remains a major challenge. As of late 2023, total external debt stood at USD 130.847 billion. It was up from USD 127.708 billion in 2022. The rise in debt underscores the urgency of fiscal reforms to manage debt servicing and reduce reliance on external borrowing. Pakistan must have transparency and governance reforms. To address these fiscal challenges and enhance stability, Pakistan must prioritize improving governance, particularly in asset disclosure laws. Strengthening these laws can build public trust and reduce corruption, with examples from countries like Ukraine, India, and Indonesia providing useful models for reform. Pakistan must pursue strategies for long-term economic growth. To foster sustainable economic growth and reduce dependency on external borrowing, Pakistan needs a multi-faceted approach. Pakistan can draw lessons from countries like Chile, Egypt, and Indonesia, which have successfully attracted Foreign Direct Investment (FDI) by focusing on sectors like renewable energy, infrastructure, and regulatory reforms. By creating an attractive investment environment, particularly in green energy and infrastructure, Pakistan can boost economic growth. Sectoral modernization is necessary. Modernizing key sectors such as agriculture and manufacturing is crucial for boosting productivity and exports. By improving agricultural techniques and investing in value-added industries, Pakistan can reduce dependency on imports and improve its trade balance, similar to the success stories of South Korea and Germany. Fiscal and tax reforms are compulsory. Addressing fiscal deficits requires bold policy reforms. Rationalizing subsidies, prioritizing developmental spending, and improving tax collection are key areas for reform. Formalizing the informal economy, as seen in India, can expand the tax base and generate revenue for public services. A combination of reduced inflation, improved fiscal discipline, and growing banking sector dynamism support Pakistan’s economic recovery. However, challenges like external debt, governance issues, and the need for structural reforms remain. By focusing on attracting FDI, modernizing key sectors, and improving fiscal management, Pakistan can create a foundation for sustainable growth and reduce reliance on external borrowing. The successful implementation of these reforms will be critical for Pakistan to navigate its economic challenges and secure long-term stability.