2024 was a year of economic stabilization for Pakistan. Inflation plummeted, the exchange rate showed marginal improvement, and interest rates were nearly halved.
However, employment creation and economic growth remained elusive. While much has already been written about this stabilization, the pressing question now is: What will 2025 bring for a country that teetered on the brink of economic default in 2023?
The volatility in key economic indicators is expected to be moderate in 2025. However, this year promises to be politically charged—especially in terms of geopolitics—and these shifts will inevitably impact Pakistan’s economy. Despite allegations of massive electoral rigging in the 2024 general elections, political stability emerged largely thanks to international backing, particularly from the US. The IMF’s relaxed approach toward Pakistan has been evident, but this leniency may not last longer.
The world is now watching closely as the US undergoes a leadership change, with Donald Trump and his team likely to take over. This shift could significantly influence both Pakistan’s IMF programme and its domestic political landscape. The pressure on Pakistan will not be confined to Imran Khan’s release; the stakes are in fact far higher. The ongoing Middle East conflict, especially if US-Iran relations worsen, will not leave Pakistan untouched, and the effects could be far from favourable.
US-China relations are another major area of concern. As a transactional leader, Trump’s approach to China could alter Pakistan’s relations with both Washington and Beijing. The geopolitical landscape will be one to watch closely, as Pakistan’s economic and diplomatic positioning could shift drastically depending on how this global dynamic evolves.
The role of the US in global affairs is also undergoing a transformation, which will reverberate in Pakistan’s relationship with international institutions. The Biden administration played a critical role in stabilizing Pakistan’s economy, helping it navigate through a potential crisis. However, this may change with the new US government, and a shift in IMF leadership could mean new, tougher terms for Pakistan. The unexpected approval of a Stand-by Agreement by the IMF in mid-2023, which caught many by surprise, may be a thing of the past as a new mission chief takes over.
By February 2025, the IMF staff’s visit for the first review will provide some clarity on future directions. With the government missing key tax revenue targets, the IMF has not yet pressed for immediate fiscal adjustments, but this leniency could change. The commitment to financing gaps for the entire duration of the programme is still uncertain, and Saudi Arabia and the UAE have yet to provide the necessary financial assurances. Pakistan’s oil facility with Saudi Arabia remains unconfirmed, further complicating the outlook.
On the global trade front, the US may impose tariffs on imports, potentially putting Pakistan’s textile sector under pressure. While additional sanctions are unlikely, Pakistan’s implicit support from the US may begin to wane, leading to tougher conditions from the IMF and the World Bank. This could slow the inflow of multilateral funding, putting further strain on Pakistan’s balance of payments.
The role of the Pakistani diaspora, especially in the US, cannot be underestimated. With around 40 percent of remittances coming from the West, any dip in these discretionary flows could exacerbate Pakistan’s fragile balance of payments.
In terms of macroeconomic indicators, 2025 is expected to see more of the same. Inflation may rise in the second half of the year, driven by base effects and potential demand triggers as monetary easing takes effect. Interest rates may drop slightly by 1-2 percent, hovering between 10-12 percent, but any significant reduction seems unlikely given the sticky nature of US interest rates. The exchange rate may see some moderate depreciation, but a sharp decline is not anticipated.
Economic growth may pick up in the latter half of 2025 as the effects of monetary easing begin to filter through. However, without structural reforms, this growth will likely be short-lived. For sustained growth, investment and foreign inflows are crucial—yet political uncertainties in 2025 may keep investors on the sidelines.
2025 presents a year of both opportunity and uncertainty for Pakistan. Political dynamics, particularly with the US, geopolitical tensions, and the country’s own domestic policies, will shape its economic future.
Without decisive action and structural reforms, Pakistan risks stagnation, and a fragile recovery may be nothing more than temporary.
Copyright Business Recorder, 2024
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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