Pakistan must address underlying structural issues to achieve substantial growth

Both positive and negative trends observed in 2024 will shape the economic outlook for Pakistan in 2025. While notable improvements have been in some areas, significant challenges remain, which could affect growth and stability in the year ahead. Following were the positive developments in 2024. One of the most important achievements in 2024 has been the drastic reduction in inflation. From a high of 28.4% in January, inflation fell to 9.6% by August and reached an exceptionally low rate of 4.9% by November. This marks a welcome improvement in the cost of living, easing pressure on consumers. The balance of payments also showed improvement, with the current account deficit for the first nine months of 2024 at just USD 429 million, a positive development compared to previous years. Additionally, foreign exchange reserves surged, reaching over $12 billion, largely due to inflows from the IMF and other sources, up from $6.159 billion at the end of 2023. The federal and provincial governments have made progress in reducing the budget deficit, bringing it down to 3% of GDP by September 2024, compared to 4.3% during the same period in 2023. Negative trends and concerns for 2025 are as follows. Despite the reduction in inflation, economic growth has been lackluster. The GDP growth rate has been consistently low, and employment has expanded only marginally. The unemployment rate is likely near 11%, one of the highest levels in recent history. Furthermore, investment, both public and private, has remained subdued, primarily due to high interest rates, which have discouraged borrowing and investment. A worrying trend for 2025 is the agricultural sector’s underperformance, especially in cotton production, which dropped by 25-30% in 2024. The outlook for the wheat crop is also bleak. Additionally, the large-scale manufacturing sector has been struggling, with industries like cement, iron, steel, and chemicals facing negative growth. Only the textile industry has shown a modest growth of 2.6%. Projections by the IMF for 2024-25 suggest moderate optimism, with expected GDP growth of 3.2% in 2024-25, rising to 4% in 2025-26. However, concerns over Pakistan’s ability to meet IMF targets cloud these projections. Several structural reforms, such as improvements in tax collection (particularly in the FBR) and the implementation of agricultural income taxes, are unlikely to be achieved, potentially delaying or suspending the IMF program review scheduled for March 2025. As the low base effect from 2024 fades, there is a high risk of inflation rising again, especially in the second half of 2025. The government may be forced to increase indirect taxes and raise energy tariffs to cope with a shortfall in FBR revenues, which would further fuel inflation. The IMF’s optimistic inflation projection of 7.8% for 2025-26 seems unlikely, given these pressures. While the IMF has projected a manageable current account deficit of USD 0.9 billion in 2024-25, this may worsen in 2025-26 if GDP growth accelerates, as higher growth typically leads to increased import demand. This could put pressure on foreign exchange reserves, especially if external financing inflows fall short. Pakistan’s economic outlook for 2025 appears cautiously uncertain. While inflation control and reserve accumulation are positive signs, the country faces significant risks in terms of GDP growth, unemployment, agricultural output, and fiscal consolidation. The IMF’s projections, though somewhat optimistic, may be hard to achieve due to the challenges in structural reforms and revenue generation. The risk of a delay in completing the IMF review or suspension of the program could lead to a deterioration in the economic situation, including a decline in foreign exchange reserves. Given these mixed factors, Pakistan’s economy in 2025 may struggle to achieve substantial growth without addressing underlying structural issues.