Hope, caution and Pakistan’s unstable economic stability

Like a battered ship that stops heaving after emerging from a perfect storm, Pakistan’s economy has finally stabilized after two years. The numbers speak for themselves. Pakistan registered the highest six-month current account surplus in 15 years, while successive current account surpluses and higher remittances have led to a sharp recovery in foreign exchange reserves that now stand at almost at $12 billion. 

At the same time, inflation clocked in at 4.1 percent at the end of December 2024, a far cry from almost 40 percent in May 2023, while interest rates are down from historic peaks leading to a massively booming stock market. 

Pakistan’s economic policymakers deserve credit for this economic stability. Nevertheless, the present economic situation can best be described as an “unstable stability,” meaning that looming external and internal challenges can quickly take us back to the days when the economic future of the country appeared bleak. 

In a sense, this present economic situation is reminiscent of the Harrod-Domar model, a classic Keynesian model, independently developed by Roy Harrod and Evsey Domar in the 1940s to describe economic growth. The Harrod-Domar model pointed out the “warranted” growth rate as the desired state since it prevented wild expansion or recession. However, the warranted growth rate was inherently unstable as even slight deviations led to the economy falling off its “knife edge” growth path.

Pakistan’s economic policymakers still have much to worry about as Pakistan’s economic growth is going to be a perilous voyage on Harrod-Domar’s knife edge. On the external front, the recent election of Donald Trump has injected a lot of uncertainty into the global economy. Nobody knows what is going to be the likely impact of his proposed tariffs that could be as high as 60 percent on Chinese imports. At least initially, this uncertainty is being expressed globally through higher long-term interest rates according to the latest World Economic Outlook published by the International Monetary Fund. 

The Special Investment Facilitation Council was instrumental in stabilizing a faltering economy by building on Pakistan’s special relationship with important Gulf countries, in no small measure. 

Dr. Aqdas Afzal

Where President Trump’s tariffs will be bad news for the global economy, they may end up hurting Pakistan’s exports, in particular. US tariffs on Pakistan’s exports would negatively affect the current account and this along with a strengthening US dollar will bring the USD-PKR exchange rate under severe pressure. This then would lead to another cycle of “stagflation” and force the State Bank of Pakistan to raise the policy rate, thereby bringing economic activity to a standstill.

On the internal front, Pakistan’s economy will need a needle-sharp focus on the fiscal side through more resource mobilization and privatization. The government would not only need to collect a lot more revenue to ensure a primary fiscal surplus but also bring un-taxed sectors into the tax net. Not surprisingly, there are serious efforts underway to increase revenue collection through more “digitalization” by the Federal Board of Revenue. 

A lot more work would be required in order to privatize some of the state-owned enterprises. Since success has eluded the government on the privatization front, the government may want to provide a fillip to privatization efforts by privatizing low-hanging fruit like the already-profitable power distribution companies. 

Is the ship of the economy about to hit another storm? It’s difficult to say, but the present political environment and the weakness of this government’s mandate will result in significant drag. In a way, economic activity and revenue collection will be negatively impacted due to political unrest, while a weak mandate will prevent the government from taking tough economic decisions that are required to successfully steer Pakistan’s economy. For instance, the government will likely remain leery of bringing yet untaxed sectors like agriculture into the tax net lest it leads to political unrest or dissension among the treasury ranks. 

Still, Pakistan’s governance institutions have tremendous agility and resilience as they can combine expertise in order to address specific threats. The National Command and Operation Center (NCOC) enabled the country in dealing effectively with the Covid-19 pandemic, while the Special Investment Facilitation Council (SIFC) was instrumental in stabilizing a faltering economy by building on Pakistan’s special relationship with important Gulf countries, in no small measure. 

Dark ominous clouds are visible on the economic horizon. The coming year is going to throw multiple external and internal challenges in front of Pakistan’s economy. Due to its weak mandate, the government may not be able to deal effectively with these challenges. Nevertheless, Pakistan has a solid governance command-and-control (C2) mechanism that has ample capability of dealing with any or all economic challenges down the road. 

– The writer completed his doctorate in economics on a Fulbright scholarship.

X: @AqdasAfzal