Making 2024 count economically

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Syed Asad Ali Shah

Publishing date: 28 December 2024

Published in: The News

A pivotal year which may become a turning point for Pakistan’s economy, 2024 saw significant progress in achieving macroeconomic stabilisation. The country made strides in controlling inflation, reducing interest rates, and achieving a historic current account surplus.

These achievements were bolstered by a $7 billion International Monetary Fund (IMF) arrangement that averted a financial crisis and stabilised the balance of payments. However, systemic and structural flaws – excessive taxation, high energy costs, mismanagement in key sectors like agriculture, poor governance of social services, and government-imposed restrictions on the digital economy – continued to undermine sustainable growth and investment.

After years of economic turmoil, Pakistan’s stabilization efforts began yielding tangible results. Inflation, which had peaked at 29 per cent in FY 22-23 and 20 per cent in FY 23-24, dropped below 5.0 per cent by November 2024, surpassing the government’s target of 12 per cent. This decline provided significant relief for businesses and consumers. Complementing these improvements, the State Bank of Pakistan (SBP) implemented aggressive monetary easing, reducing the policy rate from 22 per cent to 13 per cent and lowering interest rates to 12 per cent. These measures are expected to save the government over Rs1.2 trillion in interest costs, easing fiscal pressures and creating space for development initiatives.

A noteworthy achievement in 2024 was the government’s decision to avoid budgetary borrowing in the first half of the fiscal year, instead retiring Rs2.03 trillion in debt. This unprecedented step, supported by the SBP’s record profit of Rs3.42 trillion, eased fiscal pressures and unleashed excess liquidity into the banking system. This liquidity, combined with lower interest rates, has created an opportunity to channel funds into productive sectors such as industry, agriculture, and infrastructure. However, realising the potential of this progress depends on decisive government policies and actions to drive job creation and sustainable economic momentum.

The current account surplus reached over $730 million in November, marking the fourth consecutive month of surpluses and the largest in nearly a decade. Projections for FY24-25 suggest the surplus could exceed $2 billion, fueled by rising remittances, improved exports, and a stable rupee. These developments spurred significant investment in the Pakistan Stock Exchange (PSX), with the KSE index surging by 80 per cent during the year and market capitalisation expanding substantially.

Despite these positive developments, several systemic challenges persist. Excessive taxation remains a significant obstacle. Instead of broadening the tax base or improving compliance, the FY25 budget further increased tax rates, disproportionately burdening businesses and households. This approach discourages investment in the formal sector, stifles economic activity, and fails to address underlying inefficiencies in the revenue system.

Similarly, Pakistan’s energy costs remain among the highest globally, making the cost of doing business prohibitively expensive. This undermines the competitiveness of Pakistani goods in international markets and deters foreign and domestic investment. Repeated coercive renegotiations of power purchase agreements have further eroded investor confidence, discouraging the long-term investments needed to address circular debt and energy insecurity.

Agriculture, a cornerstone of Pakistan’s economy, also faced significant challenges. Early in 2024, increased wheat production was initially a positive development. However, poor procurement policies (more specifically federal and Punjab governments reluctance to purchase at price they had guaranteed to the farmer) led to a collapse in wheat prices, falling below Rs3000 per maund against the committed minimum price of Rs3900.

This caused substantial losses for farmers, many of whom are now expected to shift to alternative crops. Such failures highlight the urgent need for better planning, fair procurement practices, and investments in agricultural technology to ensure food security and protect the livelihoods of rural communities.

The digital economy, a vital driver of innovation and growth, was hindered by government-imposed restrictions on internet access and social media platforms. These measures disrupted entrepreneurial activity, discouraged investment, and weakened Pakistan’s position in the global digital economy. In an era defined by technological transformation, such actions have significantly limited the country’s potential to harness digital tools for economic resilience and innovation.

Poor governance in social sectors like education, healthcare, and skill development further undermines Pakistan’s long-term growth potential. A lack of investment in these areas has left the country with a workforce ill-equipped to meet the demands of a globalised economy. Education, particularly in STEM (science, technology, engineering, and mathematics) fields, lags behind, restricting opportunities for innovation and entrepreneurship. In the same way, inadequate healthcare and insufficient vocational training programmes exacerbate inequality and limit productivity.

Political instability and security challenges compound these economic issues. Post-election disputes, allegations of rigging, and controversial constitutional amendments eroded public trust in democratic institutions, creating an environment of uncertainty unattractive to investors. Security concerns, including insurgent violence and militant activities, further disrupt economic activity, particularly in vulnerable regions, and deter foreign direct investment.

To transition from stabilisation to sustainable growth, Pakistan must implement bold and comprehensive reforms. Governance reform is crucial for improving efficiency, reducing bureaucracy, and fostering transparency. Streamlining government operations, cutting redundant departments, and ensuring accountability for outcomes will create a more business-friendly environment and restore investor confidence.

The tax system must be overhauled to broaden the base, improve compliance, and reduce reliance on high tax rates. Expanding the tax net to include under-taxed sectors and addressing exemptions for influential groups can create a fairer and more effective revenue system.

The energy sector requires immediate reform, including major privatisation of generation, transmission and distribution sub-sectors to reduce the role of the public sector, and enhance efficiency and productivity through competition. Transparent, long-term policies must replace ad-hoc measures, encouraging investments in renewable energy and domestic resources like coal. Modernising the power grid and privatising utilities to enhance competition will reduce costs and improve efficiency.

Investing in human capital is essential. Prioritising education, vocational training and healthcare will equip Pakistan’s population with the skills needed to compete in a global economy. Special emphasis on STEM education can foster innovation and entrepreneurship, preparing the workforce for the digital transformation of industries.

The digital economy offers immense potential for growth. Removing restrictions on internet access and social media platforms is a necessary first step. Beyond this, the government must invest in digital infrastructure and foster public-private partnerships to create a thriving ecosystem for tech-enabled entrepreneurship. Supporting startups with seed funding, incubators, and reduced regulatory hurdles will stimulate innovation and diversify the economy. A strategic focus on adopting artificial intelligence (AI) can further enhance productivity and competitiveness.

Agricultural modernisation is also critical. Policies ensuring fair prices to the farmer mainly through market mechanisms, investing in technology, and improving supply chain logistics can stabilise the sector and maximise its potential. Addressing inefficiencies in agriculture will enhance food security and contribute to rural development.

While the IMF programme has helped Pakistan in achieving much needed stabilisation, it is important to appreciate that such programmes address immediate crises but fail to tackle systemic issues in governance, taxation, energy policy, and human capital development. Without meaningful structural reforms, the progress achieved in 2024 risks being short-lived.

By fostering innovation, investing in its people, and embracing structural reforms, Pakistan can transition from stabilisation to enduring growth. The choices made today will determine whether 2024 becomes a fleeting moment of relief or a foundation for long-term resilience. The stakes have never been higher.

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