Geopolitical and political uncertainties continue to pose significant risks to the sustainability of stabilization and reform efforts. These concerns have been consistently emphasized by international financial institutions in their successive reports. It is crucial for Pakistan to address internal loopholes within its system, which have persisted for decades. Doing so will not only strengthen its internal governance but also better equip it to tackle regional and international challenges.

The International Monetary Fund (IMF) asserted in its recent staff report that the economy faces significant downside risks, a sentiment echoed ahead of forthcoming discussions between the government and the IMF regarding an extended program. The IMF report underscores the persisting elevation of downside risks, despite the government’s expressed commitment to uphold the policies outlined in the standby arrangement (SBA). However, the report also highlights substantial political uncertainty as a lingering concern. The potential ramifications of political intricacies, coupled with the burdensome cost of living, could impede policy formulation. Furthermore, the IMF warns of the possibility of policy deviations, alongside reduced external financial support, which could imperil the precarious trajectory toward debt sustainability and exert pressure on the exchange rate.

Moreover, the IMF identifies additional external factors that could exacerbate the nation’s financial instability. These include heightened commodity prices, disruptions in shipping logistics, and potential tightening of global financial conditions, all of which could adversely impact the country’s external stability, given its strained financial situation. The World Bank has highlighted that Pakistan’s financing needs now exceed 10 percent of its Gross Domestic Product (GDP), emphasizing the significant fiscal challenges the country is confronting.

In its report titled “The Great Reversal: Prospects, Risks, and Policies in International Development Association (IDA) Countries,” the bank pointed out that several IDA countries, including Burundi, Fiji, The Gambia, Ghana, Kenya, Malawi, Mozambique, Pakistan, Togo, and Zambia, are facing financing needs exceeding 10 percent of their GDP. This underscores the considerable fiscal pressures experienced by these nations. The report also mentioned that Bangladesh and Pakistan are susceptible to seasonal river basin flooding, which, despite enriching soils, often results in extensive damage and displacement.

The threshold used by IDA for this assessment is $1,315 for the fiscal year ending June 30, 2024. Additionally, some IDA-eligible countries, such as Nigeria and Pakistan, have creditworthiness for certain IBRD borrowing, earning them the designation of “blend” countries. These countries are among the 75 nations currently eligible for IDA resources and are included in this study.

The imperative for timely disbursement of external financing post-programme is emphasized by the IMF, underscoring the significance of ongoing financial support to sustain economic stability. Despite recent stabilization efforts following the completion of the previous IMF program, Pakistan continues to grapple with a substantial fiscal deficit. Although import control measures have curbed the external account deficit, they have contributed to stagnant economic growth, forecasted to hover around 2% this year, following negative growth last year. In anticipation of future financial assistance, Pakistan is poised to seek a minimum of $6 billion from the IMF, alongside additional funding through the Resilience and Sustainability Trust, aiming to bolster the nation’s economic resilience.

Earlier, the Asian Development Bank (ADB) expressed uncertainty regarding Pakistan’s economic outlook, citing significant downside risks exacerbated by political instability, which threatens the sustainability of stabilization and reform efforts. The ADB’s April 2024 ‘Asian Development Outlook’ cautioned that potential disruptions in the supply chain resulting from escalated conflict in the Middle East could further burden the economy.

Given Pakistan’s substantial external financing needs and weak buffers, the ADB underscored the importance of disbursements from multilateral and bilateral partners, emphasizing that lapses in policy implementation could impede these crucial inflows.

The ADB emphasized that support from the International Monetary Fund (IMF) for a medium-term reform agenda would greatly enhance market confidence and facilitate affordable external financing from other sources.

The report projected Pakistan’s economic growth for FY2025 to reach 2.8%, driven by increased confidence, reduced macroeconomic imbalances, progress on structural reforms, improved political stability, and better external conditions. However, growth was anticipated to remain subdued in FY24, with a pickup expected next year contingent on the effectiveness of economic reforms.

Real gross domestic product (GDP) was forecast to grow by 1.9% in 2024, propelled by a resurgence in private sector investment associated with progress on reform initiatives and the transition to a more stable government. Inflation was anticipated to persist at around 25% this year due to higher energy prices but was expected to alleviate in 2025. However, the report cautioned that inflationary pressures might persist due to anticipated increases in energy prices under the IMF Stand-By Agreement.

Although food inflation eased slightly due to improved supplies, it remained elevated, largely driven by rising energy prices and agricultural input costs. Core inflation also remained high, reflecting domestic recovery and adjustments in energy prices.

On the supply side, growth was expected to be led by agricultural recovery post-floods, with output benefiting from improved weather conditions and government initiatives providing subsidized credit and inputs to farmers.

The relaxation of import restrictions, alongside economic recovery, was predicted to widen the current account deficit, expected to reach 1.5% of GDP in 2024 as imports expanded with strengthened domestic demand and a more stable currency market. The report highlighted a 29.5% increase in tax collection, attributing it to reforms in personal income tax, higher property transfer taxes, and the reinstatement of taxes on bank withdrawals and bonus shares issuance. Revenue mobilization was projected to strengthen in the medium term due to planned tax base broadening reforms.

In light of persistent geopolitical and political uncertainties, it is imperative for Pakistan to address internal systemic loopholes to ensure the sustainability of its stabilization and reform endeavors. By doing so, Pakistan can fortify its governance structures and better navigate both regional and international challenges.