As the echoes of electoral promises fade, the new government in Pakistan confronts a formidable array of challenges. From managing the debt burden and taming inflation to attracting foreign inflows, the path ahead is fraught with complexities.

Political leaders made numerous commitments before the elections, pledging to address challenges such as soaring inflation, unemployment, and the need for affordable housing. They also promised to focus on infrastructure development, including the establishment of new universities, hospitals, highways, and metros. However, the new government is now confronted with formidable challenges on both domestic and international fronts.

The challenges begin with negotiations with the IMF for a new multi-year agreement, as the existing $3 billion standby arrangement concludes in February. This process, alongside the presentation of a budget in early summer, will undoubtedly be demanding, testing the government’s institutional relationships in ways that may not be fully understood at this point. The upcoming budget season is poised to be the ultimate litmus test for what is initially presented as a unified front, essential for realizing the aspirations of the nearly 250 million citizens in the Islamic republic.

Considerable attention has been devoted to outlining the structural reforms necessary for Pakistan’s economy. Instead of revisiting the conventional wish list, it is crucial to highlight three key challenges that the incoming government will grapple with, testing its resolve post-election.

Pakistan’s debt situation remains a significant hurdle, constraining the government’s capacity to provide relief to the public. Without an IMF program, the external debt scenario is expected to worsen, leaving no choice but to implement austerity measures and explore avenues for new tax collection. Austerity measures maintain the thirst of patronage networks supporting the country, while collecting new taxes challenges the new government’s determination to disrupt the status quo inherent in Pakistan’s political economy. The government may also need to navigate the decision of debt restructuring, with timely cooperation with the IMF minimizing the likelihood of such a scenario.

Another major issue is inflation, which has eroded the purchasing power of households for nearly five years. While adjustments to prices, especially energy, may initially spike inflation, the underlying problem is the fiscal deficit. IMF-driven austerity may control inflation but at the expense of economic growth. Alternatively, reducing the government’s size and broadening the tax base challenges the existing order. Opting for the former limits the government’s ability to generate growth and jobs, while the latter may lead to confrontations with status quo elements, further destabilizing an already fragile system.

The final challenge revolves around foreign inflows, which play a crucial role in maintaining baseline economic stability in Pakistan. Despite discussions about significant funds from friendly nations, substantial inflows have yet to materialize. The new government must devise strategies to attract foreign currency inflows.

The government may anticipate that an IMF program, as seen in the past, will unlock additional multilateral flows. Some optimists may even envision Pakistan borrowing additional dollars from international capital markets to bolster the currency and spur economic growth reliant on imports. However, this potential growth spurt is likely to be short-lived due to the broader debt dynamics in Pakistan.

The more plausible scenario suggests that these inflows would be limited in scale. Unlocking additional flows necessitates significant reforms that would face resistance from the status quo, or it may require a geopolitical event that generates new avenues for extraction. Consequently, the government faces a trade-off: either upsetting status quo supporters to reorient the economy and attract new inflows or maintaining the status quo and hoping for the emergence of new rents, be they geopolitical or otherwise.

By the fall of 2024, the government’s honeymoon period is expected to be over. Even after making some of the challenging choices outlined earlier, any administration, even one with overwhelming public support, would likely find its political capital depleted. This implies that the best-case scenario points towards the ruling party in Islamabad encountering significant pressures in 2025.

The incoming government will already have limited legitimacy due to recent events, making it reluctant to antagonize the general public or key patrons of the status quo that underpin the country’s political economy. Therefore, rather than a year of major structural reform, 2024 may unfold as a period where Pakistan’s political economy either muddles along at best or faces unprecedented challenges at worst.

As the year progresses, 2024 unfolds as a testing ground for Pakistan’s political economy. The government’s honeymoon period wanes, and tough decisions beckon. Balancing between upsetting the status quo and seeking new avenues for growth, the ruling party faces a delicate dance. With limited political capital and the ever-present specter of geopolitical uncertainties, the year ahead may not witness sweeping structural reforms. Instead, it is poised to be a period where resilience and adaptability will be crucial, defining whether Pakistan’s political economy merely muddles along or faces unforeseen challenges in the pursuit of stability and growth.