Zafar Iqbal

Pakistan’s economy is showing tentative signs of recovery after years of battling inflationary pressures, fiscal imbalances, and an overwhelming external debt burden. The latest data from the Pakistan Bureau of Statistics (PBS) has offered a glimmer of hope, revealing that headline inflation for November 2024 has dropped to 4.9 percent year-on-year, the lowest level since May 2018. This marks a significant improvement compared to the astronomical inflation rate of 38 percent a year earlier. On a month-to-month basis, the Consumer Price Index (CPI) showed a modest 0.5% increase, indicating a slower pace of inflation growth. Furthermore, the average CPI inflation for the first five months of fiscal year (FY) 2024-25 stands at 7.88 percent, sharply down from 28.62 percent during the same period in FY 2023-24.

This promising trend is largely attributed to proactive monetary policies and a visible improvement in fiscal discipline. The latest inflation numbers highlight the efforts made by the government and the State Bank of Pakistan (SBP) in stabilizing the economy, with November’s inflation rate representing the lowest in 78 months. This improvement has allowed for the possibility of further policy adjustments. In a bid to stimulate growth, the SBP has already reduced the policy rate by 250 basis points to 15 percent. As inflationary pressures have subsided faster than expected, the central bank is now positioned to adopt more accommodative monetary policies aimed at encouraging economic growth.

The reduction in inflation is also reflected in the trends seen in both urban and rural inflation rates. In November 2024, urban CPI inflation decreased to 5.2% year-on-year, while rural inflation remained relatively stable at 4.3%. These figures indicate that the economic recovery is not confined to urban centers but is spreading to rural areas as well, contributing to broader national economic stability.

Moreover, Pakistan’s ongoing engagement with the International Monetary Fund (IMF) has played a crucial role in ensuring that the country adheres to its macroeconomic reforms. The government’s commitment to meeting the IMF’s conditions has helped in the smooth implementation of the IMF program, which is seen as a cornerstone for achieving sustainable economic stability. The government’s transparency and adherence to the IMF framework have provided a sense of assurance to international investors and financial institutions, even as the country faces persistent economic challenges.

Encouraging signs are also emerging from Pakistan’s banking sector. The gross Advance-to-Deposit Ratio (ADR) has improved significantly, reaching 47 percent in November 2024, up from 39 percent just two months earlier. Banks have been increasing their lending to meet the ADR threshold of 50 percent to avoid higher taxes, signaling a more dynamic banking sector aligned with national economic objectives. However, there are still challenges ahead, including the need to balance regulatory reforms between conventional and Islamic banking systems to create a more robust and inclusive financial environment.

Despite these positive developments, Pakistan continues to grapple with the challenge of external debt. As of the end of 2023, the country’s total external debt stock was estimated at USD 130.847 billion, a significant increase from USD 127.708 billion in 2022. This growing debt burden has led to a sharp rise in interest payments on public and publicly guaranteed debt, emphasizing the urgent need for comprehensive fiscal reforms. While remittances, which amounted to USD 26.6 billion in 2023, have provided some relief, they are insufficient to cover the escalating external obligations, leaving the country vulnerable to external economic shocks.

In this context, Pakistan must prioritize enhancing its transparency and accountability mechanisms, particularly in terms of asset disclosure laws for public officials, including those in the judiciary and military. Strengthening these laws is critical to aligning Pakistan with global standards and improving public trust in governance. The implementation of such laws could be inspired by practices in other countries where stringent asset declaration policies have proven effective in reducing corruption and fostering a more transparent political environment.

For example, Ukraine requires public officials to submit annual asset declarations, with severe penalties for non-compliance. Similarly, in India, judiciary members are mandated to disclose their assets under the All-India Services (Conduct) Rules, with violations leading to criminal prosecution or disciplinary action. In Indonesia, the Corruption Eradication Commission enforces asset disclosures for high-ranking public officials, with violations subject to legal investigation. These international examples provide a framework that Pakistan can adopt to strengthen its anti-corruption efforts and improve its governance systems, thus improving overall economic stability.

While addressing corruption and improving governance is crucial, the path to sustainable economic growth requires Pakistan to implement a multi-faceted strategy. Attracting foreign direct investment (FDI) is one of the key components of this strategy. Other countries have successfully implemented measures to boost FDI, and Pakistan could benefit by adopting similar approaches. For instance, Chile’s focus on renewable energy, particularly solar and wind sectors, attracted over USD 21.7 billion in FDI in 2023. By offering substantial incentives for green energy projects and simplifying regulatory processes, Chile positioned itself as an attractive destination for sustainable investments.

Similarly, Egypt attracted USD 9 billion in FDI in 2023 by focusing on its energy and infrastructure sectors, particularly renewable energy and hydrogen projects, through regulatory reforms and improved transparency. Indonesia’s FDI surged to USD 47 billion in 2023, driven by government-led initiatives in green energy and infrastructure improvements. By prioritizing renewable energy, infrastructure development, and regulatory reforms, Pakistan can position itself as an attractive investment destination, stimulating long-term growth and contributing to its economic recovery.

In addition to attracting foreign investment, Pakistan must prioritize modernizing key sectors such as agriculture and manufacturing to boost productivity and exports. Countries like South Korea and Germany have successfully modernized their agricultural practices and diversified their manufacturing sectors, respectively, leading to more resilient and competitive economies. By improving farming techniques, enhancing supply chains, and investing in value-added industries, Pakistan can reduce its dependence on imports and strengthen its trade balance.

Addressing fiscal deficits is another critical aspect of Pakistan’s economic strategy. Bold public expenditure and tax policy reforms are necessary to ensure that fiscal imbalances are corrected. Rationalizing subsidies, prioritizing development spending, and improving tax collection efficiency will be crucial steps toward achieving fiscal stability. Additionally, by formalizing informal sectors and integrating undertaxed areas into the formal economy, Pakistan can significantly expand its tax base, as demonstrated by India’s successful digitization and tax reforms, which have generated additional revenue for public services.

To achieve sustainable economic growth, Pakistan must also adopt a robust institutional framework for economic governance. The implementation of transparent asset disclosure laws, the establishment of independent oversight bodies, and the adoption of a corporate governance model will be key in fostering accountability and reducing corruption. Countries like Singapore and New Zealand have effectively tackled corruption through strict anti-corruption policies and independent oversight, resulting in reduced illicit financial flows and improved investor confidence. By implementing similar measures, Pakistan can enhance governance and ensure that its economic recovery is not undermined by corruption or inefficiency.

In conclusion, while Pakistan’s economy is showing signs of recovery, the country still faces significant challenges, including external debt, inflationary pressures, and governance issues. To achieve long-term economic stability and growth, Pakistan must implement a comprehensive strategy that includes improving governance, attracting foreign investment, modernizing key sectors, and addressing fiscal deficits. By adopting best practices from other countries and implementing reforms in key areas, Pakistan can pave the way for a more resilient and sustainable economy.