Pakistan’s economy is in a multiple bind. First, there is the steadily mounting debt burden and its costly servicing. Secondly, the manufacturing sector is in a moribund state, while exports are stagnant.

FDI inflows are also much below expectation. The government talks of economic stability and falling inflation but the ground realities tell a different story. Economic growth remains below 2 percent, while all the employment-generating sectors — large-scale manufacturing, agriculture and construction — are showing a declining trend. The balance of payments position remains wobbly. Despite a satisfactory current account performance recently, the SBP’s reserves have decreased over the last two months.

The Asian Development Bank has downgraded Pakistan’s growth rate to 2.5 percent for the current year, against the 3.5 percent budgeted for the year by the government with 3.2 percent forecast by the International Monetary Fund (IMF) five months ago in October. The World Bank projected a growth rate of 2.8 percent, below potential due to tight macroeconomic monetary and fiscal policies and elevated inflation but it added that “with slower wage and employment increases and high population growth rate at nearly 2 percent, the poverty headcount for fiscal year 2025 is estimated to remain unchanged at 42.3 percent, close to Covid 19 peak levels, implying an additional 1.8 million poor people.”

Significantly, the growth rate was downgraded by the State Bank of Pakistan in its half yearly July-December 2024 report, which stated that “the economic recovery achieved in FY2024, with GDP growth rate of 2.5 percent against a contraction of 0.2 percent in FY2023, has sustained positive growth of 0.92 percent in the first quarter of FY2025. However, growth has slowed compared to the 2.3 percent recorded last year, reflecting moderation across key sectors, particularly in agriculture.”

In this context it is relevant to note that the services sector (with the largest component of wholesale and retail trade) and agriculture were expected to lead the way towards growth while large-scale manufacturing sector as per the latest figures for July-January 2025 registered negative 1.78 percent growth as opposed to negative 0.65 percent in the comparable period of the year before in spite of nearly halving of the discount rate from 22 percent in April 2024 to 12 percent at present.

No doubt, there is some progress in containing the deficit which has been reduced to 1.7 percent of GDP in July-January FY25, compared to 2.6 percent in the same period last year. Also, the primary surplus rose to Rs 3.6 trillion (2.8% of GDP) from Rs 1.9 trillion (1.8% of GDP) last year. This improvement is driven mainly by two factors: higher SBP profits from the previous year and a sharp rise in taxes on formal businesses and salaried individuals. But the authorities have signally failed in expanding the tax base. The Tajir Dost Scheme has not yielded much. The same goes for agriculture and real estate sectors.

On the negative side, current expenditure grew by 17 percent, with markup payments increasing by 20 percent, and non-markup expenditure growth slowing to 11 percent – largely due to reduced subsidy spending. At the same time, it is relevant to note here that the excessive burden placed on the formal industrial sector is retarding growth and deterring much-needed investment which has dampened demand. Global commodity price suppression also played a role in this situation. Food and energy prices remained low, but the resulting pressure on the farm economy has been on the increase.

On the other hand, major crops have underperformed and suppressed farmer incomes which has dragged down overall demand for other goods and services. Meanwhile, core inflation remains stubborn, with double-digit increases in health, clothing & footwear, and education. The Ministry of Finance report says that large scale manufacturing shows a mixed trend — 11 out of 22 sectors recorded positive growth, including textiles, wearing apparel and tobacco. However, apart from wearing apparel, nearly every sector remains below its 2022 peak figure.

Although there is some modest economic recovery, there is still the risk of renewed pressure on the current account, which could hinder reserve building and fuel inflation. The latest Moody’s report notes that Pakistan may see a worsening of the external position if the US tariffs are implemented on our exports to the US. In view of this, Pakistan must start seeking alternate markets for its exports, an objective which has remained neglected despite numerous rhetorical claims over the years.

All in all, it is highly unlikely that growth would be higher than 2.5 percent this year mainly because of the IMF programme conditions. The only way out of the situation is for the government to undertake structural reforms, including expansion of the tax net and curtailment of current expenditure.