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Money Matters

Stability meets growth

By Adnan Alam Khan
20 January, 2025

In 2024, the State Bank of Pakistan (SBP) made a bold move to reform the country's monetary system, emphasising its dedication to fostering economic stability and growth. On December 16, the MPC decided to lower the policy rate by 200 basis points up to 13 per cent in an effort to balance growth with inflation.

Stability meets growth

In 2024, the State Bank of Pakistan (SBP) made a bold move to reform the country's monetary system, emphasising its dedication to fostering economic stability and growth. On December 16, the MPC decided to lower the policy rate by 200 basis points up to 13 per cent in an effort to balance growth with inflation.

The impact of these measures was already noticeable. In November, the headline inflation rate fell to 4.9 per cent year-on-year, thanks to a mix of declining food prices and the gradual reduction of gas tariff increases.

The most encouraging sign of recovery is the anticipated GDP growth for FY25, which is expected to be in the range of 2.5-3.5 per cent. This optimistic outlook is supported by improving economic indicators, indicating that Pakistan’s monetary adjustments are paving the way for recovery. However, challenges such as core inflation, fiscal pressures, and external vulnerabilities remain, necessitating ongoing vigilance. Although the SBP's initiatives have established a foundation for progress, sustained growth will depend on strong reforms, consistent policies, and inclusive development. While 2024 has laid the groundwork for improvement, the real challenge will be turning these gains into enduring resilience and prosperity.

Pakistan's external sector is displaying positive trends, as the current account recorded a surplus of $0.2 billion from July to October FY25. This progress, bolstered by robust remittance inflows and an 8.7 per cent increase in exports, highlights the strength of essential economic drivers even in tough times. Moreover, favourable global commodity prices and a reduction in exchange rate discrepancies have enhanced confidence in the economic outlook. Together with proactive steps taken by the SBP, these elements position Pakistan to surpass $13 billion in foreign exchange reserves by June 2025.

While these developments are encouraging, maintaining this progress will necessitate a commitment to diversifying exports, enhancing competitiveness, and implementing policies that draw in foreign investment. The favourable trend in the external sector offers a valuable chance to reinforce economic achievements and establish a more robust foundation for the future.

The $7 billion loan agreement with the IMF in 2024 has been crucial in achieving fiscal stability and facilitating essential reforms. This programme seeks to broaden the tax base, cut subsidies, and promote fiscal discipline -- key measures for tackling the country’s fiscal challenges. Nevertheless, these reforms face considerable political and social hurdles. The dependence on indirect taxes, which often place a heavier burden on vulnerable populations, may provoke public discontent and political resistance.

The IMF’s conditions set a framework for fiscal responsibility, Pakistan needs to strike a balance between implementing structural reforms and adopting policies that safeguard the most vulnerable populations. Achieving inclusive growth while upholding fiscal discipline will be crucial for the long-term success of the programme. The fiscal outcomes for 2024 reflect a narrative of progress mixed with ongoing challenges.

The FBR reported provisional tax collections of Rs5.623 trillion from July to December, which represents a 26 per cent increase compared to Rs4.466 trillion from the previous year. Although this marks a significant achievement in revenue mobilisation, the shortfall against the Rs6.009 trillion target underscores existing structural inefficiencies and vulnerabilities. The drop in tax revenues from imports, influenced by sluggish trade activity, weak manufacturing growth, and unexpectedly low inflation, indicates a pressing need for a broader and more resilient tax base.

Reforms within the FBR are needed to streamline the tax system, digitise processes, and ensure that salaried individuals are not faced with additional tax burdens

To address these gaps, policymakers must prioritise reforms that reduce reliance on indirect taxes, enhance tax compliance, and incentivize economic activity. While progress is evident, the mixed fiscal performance calls for immediate action to ensure the resilience of public finances.

The surge in private sector credit during 2024 reflects a positive shift in Pakistan’s financial landscape. Eased financial conditions and banks’ efforts to meet advances-to-deposit ratio thresholds have driven this growth, indicating improved business and consumer confidence. Consumer financing, in particular, has gained traction, signalling optimism about economic recovery.

However, caution is warranted. Inflation stability remains vulnerable to both external and domestic risks. Potential revenue measures, volatile global commodity prices, and the threat of food inflation could undermine the economic gains. While the private sector’s dynamism is encouraging, sustained growth requires prudent monetary and fiscal policies to control inflation and create an environment conducive to long-term investment.

The Pakistan Stock Exchange (PSX) had a transformative year in 2024, with the PSX 100 Index rising by 80 per cent, reaching an all-time high of 115,258 points. This growth reflects not only market resilience but also increasing confidence in Pakistan's economic stability. Despite foreign investors selling shares worth $120 million, the PSX remained strong, driven by favourable macroeconomic conditions. The market’s performance suggests that, even amid external challenges, Pakistan’s financial markets are maturing, offering a promising outlook for 2025. This resilience underscores the importance of maintaining macroeconomic stability and investor confidence in navigating future uncertainties.

The ‘Uraan Pakistan’ economic plan outlines a strategy for sustainable growth over the next two to three years. It emphasises export-led growth, cutting government spending, enhancing the agriculture and IT sectors, and streamlining the tax system. Although its focus on private sector participation and less government intervention is practical, achieving success will depend on political commitment and widespread agreement among stakeholders. The plan targets 6.0 per cent GDP growth and aims to increase exports to $60 billion annually within the next five years, up from approximately $30 billion today.

A unified approach is crucial for addressing significant economic challenges, with stakeholders encouraged to find common ground on important issues for lasting stability. Pakistan should prioritise self-reliance and reduce its reliance on external aid, highlighting the advancements the country has achieved through its own initiatives.

The creation of a ‘charter of economy’ is essential to bridge political gaps and promote national prosperity. While lower interest rates can help boost economic activity, achieving sustainable stability will take time and patience. To enhance economic growth, it is vital to revitalise key sectors, especially agriculture and IT, which are essential for long-term success. State-owned enterprises (SOEs) that are operating at a loss should either be privatised or closed, allowing the private sector to take over the management of underperforming institutions.

Reforms within the FBR are needed to streamline the tax system, digitise processes, and ensure that salaried individuals are not faced with additional tax burdens.


The writer is a banker.