The State Bank’s Monetary Policy Committee (MPC) has reduced the discount rate by 100 basis points — to 11 percent. The reduction is related to the decline in core inflation, non-food and non-energy, from 8.2 percent in March to 7.4 percent in April — a decline of 0.8 percent in a single month. However, in the opinion of some experts, a decline of 0.4 percent in core inflation in March 2025 did not warrant a reduction. February core inflation was 7.8 percent to 8.2 percent in March.

On the other hand, although the international petroleum prices have declined, the government decided not to pass it onto the public by raising the petroleum levy, adding to the inflationary pressure. At the same time, the MPS did not revise down the growth projection which remains at 2.5 to 3.5 percent irrespective of the fact that subsequent to the Trump tariffs, growth estimates have been downgraded globally. This is misplaced optimism.

Lower discount rate is a long-standing demand of the business community which borrows working capital. From 1 July 2023 to 12 April 2024 credit to the private sector was estimated at 106 billion rupees and rose to 692 billion rupees in the comparable period this year. But LSM growth declined from negative 0.45 percent (July-February last year) to negative 1.9 percent in the comparable period this year. This may be due private sector credit having been diverted to the stock market. This means that the decline from 22 percent discount rate effective end June 2024 to 12 percent did not help to put LSM growth on a positive trajectory.

The economy recently received a boost in the form of a surplus on the current account and a temporary cushion in foreign reserves, but merchandise exports have slipped into negative zone again. The trade deficit in April was 3388 million dollars as compared to 2183 million dollars in March, denoting a rise of 1205 million dollars. This should ring an alarm bell as it comes amid weakening global demand and new US tariffs on Pakistani textiles.

By all accounts, Pakistan’s external sector remains vulnerable in the face of a combination of internal and external factors. A major failure is to build a durable export base built on a growth-oriented industrial sector. The government has for long banked on erratic  currency depreciation and occasional export bursts but that is no solution to our underlying structural issues. Our industrial sector is underdeveloped, inefficient and heavily reliant on subsidies that saps the competitive spirit.

Despite many incentives given to exporters, we have failed to develop a high-value, knowledge-based export base. Successive administrations have repeatedly used fiscal and monetary gimmicks to delay reform. Secondly, the net financial inflows (the capital account component of the balance of payments position) have remained weak and are concerning as 16 billion dollars are planned as rollovers in the current fiscal year. The financial account is still showing net outflows despite the Fund’s umbrella and generous rollovers from friendly countries. Of the USD 10 billion in budgeted inflows, only about half have materialised. And the projected USD 14 billion in reserves by June is still USD 2 billion short of the expected rollovers, which are already booked. This involves substantial financial risks.

If exports fail to show any improvement due to higher energy tariffs, dipping global demand and  higher trade barriers, external stability will be in greater jeopardy. We need to have a clear understanding of where the economy stands in order to plan a comprehensive recovery plan. It is time we stopped depending on remittances or inflows from the Gulf. Instead, we must develop our own indigenous solutions.

Pakistan’s economy in 2025 faces significant challenges, including high inflation, fiscal deficits, energy sector inefficiencies, and geopolitical tensions. Addressing these issues requires comprehensive reforms and strategic policy interventions. Foreign direct investment has been a proactive strategy since June 2023; however, the actual annual foreign direct investment inflow has yet to exceed 1.6 billion dollars according to government data.

Fiscal deficits and debt burden have drained the economy. Pakistan’s public debt has escalated to Rs72.1 trillion, with debt servicing consuming over half of government revenue. This limits fiscal space for development and social spending. The energy sector suffers from outdated infrastructure, high transmission losses, and circular debt, leading to frequent power outages and high electricity tariffs. Without energy sector reforms, the economy cannot find its true balance. There is an urgent need to upgrade transmission and distribution networks to reduce losses, while promoting investment in renewable energy sources to diversify the energy mix

To strengthen fiscal discipline, we need to broaden the tax base by formalizing the informal economy, simplifying tax procedures and bringing agriculture within the tax net. Simultaneously, the government should reduce non-development expenditures and prioritize spending on health, education, and infrastructure.