The April 2024 “Asian Development Outlook” by the Asian Development Bank (ADB) casts a shadow of uncertainty over Pakistan’s economic future. Highlighting significant risks, particularly stemming from political instability, the report underscores the challenges facing the sustainability of stabilization and reform efforts.

The report also highlighted potential disruptions to the supply chain stemming from escalating conflicts in the Middle East, which could further burden Pakistan’s economy. Given Pakistan’s substantial external financing needs and vulnerable external reserves, the ADB underscored the importance of continued support from multilateral and bilateral partners. However, it warned that such support might be hindered by deficiencies in policy execution.

The report stressed the significance of backing from the International Monetary Fund (IMF) to bolster market confidence and facilitate access to affordable external financing. It projected a modest economic growth of 2.8 percent for Pakistan in the fiscal year 2025, contingent upon increased confidence, reduced macroeconomic disparities, progress in structural reforms, enhanced political stability, and improved external circumstances. It anticipated subdued growth for fiscal year 2024, with a potential upturn in the following year if economic reforms take hold.

Furthermore, the report predicted a 1.9 percent growth in real gross domestic product (GDP) for 2024, primarily driven by a resurgence in private sector investment linked to reform progress and the transition to a more stable government. Inflation, forecasted to persist around 25 percent for the current year due to elevated energy prices, was anticipated to alleviate in 2025. However, the ADB warned that inflation could remain high due to expected increases in energy prices under the IMF Stand-By Agreement.

It observed that while improvements in food supplies might alleviate some inflationary pressures, energy and agricultural input costs continued to drive inflation. On the supply side, post-flood agricultural recovery was expected to stimulate growth, supported by favorable weather conditions and government initiatives such as subsidized credit and inputs. This increase in agricultural output would subsequently boost manufacturing, which had already shown signs of expansion in the first half of 2024.

The report highlighted the relaxation of import restrictions alongside economic recovery, which was anticipated to widen the current account deficit to 1.5 percent of GDP in 2024. Pakistan’s ongoing challenges included substantial new external financing needs and the rollover of existing debt, compounded by global financial constraints. Additionally, the ADB noted a significant increase in tax collection, primarily attributed to reforms in personal income tax, higher property transfer taxes, and the reintroduction of levies on bank withdrawals and bonus shares. It anticipated further revenue strengthening in the medium term through planned tax base expansions.

The report emphasizes the critical need for continued support from multilateral and bilateral partners, as well as backing from the International Monetary Fund (IMF), to bolster Pakistan’s economic resilience. While projecting modest growth in the coming fiscal year, the report also warns of persistent inflationary pressures and widening current account deficits, urging policymakers to navigate these challenges with careful consideration and robust reform measures.

The report provides a detailed assessment of Pakistan’s economic landscape, highlighting both strengths and vulnerabilities. It identifies political uncertainty as a significant risk to the sustainability of stabilization and reform efforts in Pakistan. This uncertainty undermines market confidence and hampers the effectiveness of policy implementation, thereby impacting economic stability.

Pakistan’s large external financing requirements and weak external buffers pose considerable challenges. The report emphasizes the crucial role of continued disbursements from multilateral and bilateral partners in sustaining the economy. Moreover, the rollover of old debt amidst tight global financial conditions adds further strain. The ADB underscores the importance of support from the International Monetary Fund (IMF) in boosting market sentiment and catalyzing affordable external financing from other sources. IMF backing for a medium-term reform agenda is seen as pivotal in enhancing Pakistan’s economic resilience.

Despite challenges, the report projects a modest economic growth of 2.8 percent for Pakistan in the fiscal year 2025. This growth is contingent upon several factors including increased confidence, reduced macroeconomic imbalances, progress on structural reforms, political stability, and improved external conditions. However, growth is expected to remain subdued in the current fiscal year, with the potential for a pickup in the following year if economic reforms take effect.

Inflation remains a concern, primarily driven by higher energy prices. While the report anticipates some easing in inflation in the coming years, persistent inflationary pressures are expected due to increases in energy prices under the IMF Stand-By Agreement. The report highlights the role of post-flood agricultural recovery in stimulating growth, supported by government initiatives such as subsidized credit and inputs. This increase in agricultural output is expected to bolster the manufacturing sector, which has already shown signs of expansion.

Import dynamics, including the relaxation of import restrictions and economic recovery, are expected to widen the current account deficit in 2024. This widening deficit reflects strengthening domestic demand and the stabilisation of the currency market, facilitating easier imports of inputs for firms.

The report notes a significant increase in tax collection, driven by reforms in personal income tax and other measures. Revenue mobilization is expected to strengthen further in the medium term through planned tax base expansions.

In conclusion, while Pakistan faces significant economic challenges, including political uncertainty and external financing needs, there are opportunities for growth and stability with continued reform efforts and support from international partners. However, careful handling of inflationary pressures and fiscal deficits remains critical for sustainable economic development.