Economic turnaround

The economic performance recorded in recent months is quite impressive. Many analysts are arguing that such a turnaround is nothing new but is part of many rebounds previously witnessed, especially in the backdrop of an IMF programmes.

In their view, this performance is not based on structural reforms and, therefore, as in the past, it would fizzle out as soon as the present dispensation passes on. In this article we would examine the performance and also reflect on how this may be a departure from the past.

In order to evaluate economic performance, it is important to spell out the challenges that confronted the economy at the baseline of FY23 when major disruptions were faced. The challenges included:

(i) Barring a couple of episodic bursts in-between, growth was absent for the previous five years;

(ii) Industrial output in FY23 was down by 10.30 percent, in sharp contrast to 11.75 percent growth in FY22;

(iii) Inflation was menacing at a historic level of 38 percent (average rates of inflation were 29 percent and 23 percent in FY23 and FY24, respectively);

(iv) Not surprisingly, interest rate was also historic at 22 percent;

(v) The Forex market witnessed an unprecedented disruption leading to a free-fall of exchange rate which hit as low as Rs335/$ at the beginning of September 2023;

(vi) External account faced a precarious position that required extraordinary measures that were adopted leading to a complete control by the central bank on opening of Letters of Credit for imports; The trumpet of imminent default that was blaring incessantly had cast a spectre of despondency on the economic outlook;

(vii) The Fund programme, predictably, was abandoned compounding the ills of the external outlook; several rating downgrades also affected investment sentiment;

(viii) Fiscal deficit was about 8 percent and primary deficit was 1.5 percent — way above the required level under the Fund programme;

(ix) Above all, a widespread economic disorder in the country ensued due to (a) rampant smuggling, (b) abuse of Afghan transit trade, (c) unrestrained speculative activity in the forex market, and (d) repressive regulatory practices undermining government’s stated policies and weakening of sanctity of contracts.

This was a very challenging scenario. Added to it were the political transitions; first, due to the passage of no-confidence motion in April 2022 and later due to fresh elections in February 2024. However, in the last two years, a significant and sustained improvement in the economic conditions is quite visible.

At the outset, let’s examine how the economy underwent changes during FY24 and FY25 compared to the tumultuous year of FY23.

The following Table presents the movements of key macroeconomic variables:

=============================================================================                        Table: Key Economic Indicators=============================================================================Indicator                             FY23           FY24                FY25=============================================================================GDP Growth                            -0.21          2.51            2.68 (R)Total Investment percent GDP          14.0           13.1                13.8LSM Growth                           -17.66          -0.17              -1.52Inflation (CPI)                       25.02          28.79               4.49Gross Revenues (national)           9,633,505     13,269,037       17,997,486As percent of GDP                     11.4           12.5                15.7FBR Revenues (Rs.b)                 7,169,140      9,311,007       11,744,288As percent of GDP                      8.5            8.8                10.2Fiscal Deficit (percent GDP)          -7.7           -6.8                -5.4Primary Deficit (percent GDP)         -1.0            0.9                 2.4Govt. Expenditure(national) (percent GDP)              19.1           19.3                21.1Trade Deficit ($m) - G&S             -25,861        -25,287           -29,186Exports - ($m) G&S                   35,472         38,671             40,450Imports - ($m) G&S                   61,333         63,958             69,635Current AccountDeficit (CAD) - $m                   -3,275         -2,072             +1,868Remittances ($m)                     27,333         30,251             38,062Foreign Reserves ($m) - SBP           4,445          9,390             12,728Foreign Reserves ($m) -SBP & Banks                           9,160         13,996             18,091Exchange Rate (Last day)- $ to PKR                             286            278                 283Policy Rate (mean)                     18%           19.2%              15.4%Credit to Private Sector(Flow) - Rs.m                        45,877         512,906          710,130*PSX 100 Index                        41,452         78,528          125,627**Public Debt (Rs.b) -FRDLA Def.                           57,779         65,105          72,840***percent GDP                           68.8           61.6                63.5Foreign Debt (Rs.b)                  24,071         24,086             25,493percent GDP                           22.57          16.95               22.2Domestic Debt (Rs.b)                 33,708         41,019             47,648percent GDP                           46.2           44.7                41.3* Jul to 20 June 2025;** 30 Jun 2025;*** Based on author's projections.=============================================================================

The following observations are evident from the Table:

i. Barring a 6 percent growth rate in two years, growth in this decade has remained muted. For two years it has been negative. For FY25, revised estimate is 2.7 percent. Growth is stalled because of deliberate contractionary policies followed in the wake of an overheated economy. This has been the primary factor behind the stability achieved since FY23.

ii. Owing to austerity measures and high interest rates, investment has been among the lowest levels in the last decade. Not surprisingly, the growth in output of large scale manufacturing has been negative.

iii. Inflation has been reduced dramatically from highs of 25 percent and 29 percent in FY23, FY24 to a low of 4.5 percent in FY25. This is a very hopeful sign for economic stability and protecting the low-income groups. What is disquieting, however, is that despite such a phenomenal drop in inflation a commensurate drop in the policy rate is missing. This is affecting revival of growth even though there is a significant jump in flow of credit to private sector, which increased from Rs 45.9 billion in June 23 to 512.9 billion in June 24 and to Rs 710 billion in June 25. This would have been much larger had the policy rate aligned at a level consistent with the rate of inflation. The SBP policy of keeping real interest rates positive is quite rational but to keep the real rate at more than 6 percent warrants an immediate review.

iv. The real turnaround in economic performance is in the area of fiscal management. On the revenue side gross national revenues have improved over time from Rs 9.6 trillion in FY23 to around 18 trillion in FY25, showing a nominal growth of around 190 percent in two years. On the other hand, revenue to GDP ratio rose from a meagre 11.4 percent to 15.7 percent, showing an improvement of 4.3 percent over two years. This is for the first time that a better overall revenue has been the basis for fiscal adjustment rather than cutting development expenditures. The development expenditure was not cut as the actual level was nearly at the budgeted level. The performance of FBR is also impressive as tax to GDP ratio increased from 8.5 percent in FY23 to 10.2 percent in FY25 or an increase of 1.7 percent. In nominal terms FBR revenues rose from Rs 7.2 trillion in FY23 to 11.7 trillion in FY25 showing a growth of 63 percent in two years.

v. It will be useful to point out that behind the impressive revenue performance is the share of non-tax revenues which has been substantial. This is due to record transfer of profits from SBP (Rs 2.6 trillion) and unprecedented receipts from petroleum levy (PL) (Rs 1.2 trillion). We would further reflect on this development later in the article.

vi. The level of expenditure rose from 19 percent of GDP in FY23 to 21 percent of GDP in 2025. However, thanks primarily to a good revenue collection performance a decline in both; overall deficit as well as the primary deficit was witnessed. The overall deficit declined from 7.7 percent in FY 23 to 5.4 percent in FY25, a decrease of 2.3 percent, which is a significant fall in deficit. On the other hand, primary deficit decreased from a deficit of 1 percent to a surplus of 2.4 percent, which was unprecedented in the country’s recent history. Fiscal adjustment of nearly 2.3 percent in overall deficit and 3.4 percent in primary deficit are the primary reasons behind the emerging economic stability.

vii. The accumulation of debt has remained moderate. From 68.8 percent of GDP in FY23 the debt ratio fell to 61.6 percent of GDP in FY24 but is now projected to rise to 63.5 percent of GDP in FY25. The rapid fall in inflation is behind the reversal of declining debt-to-GDP ratio, which was affected by nominal GDP growth. In FY25 the growth in nominal GDP was modest and thus the ratio rose again despite low fiscal deficit.

viii. Equally impressive is the economic performance on the external account’s side. At the outset, the most significant achievement is a healthy surplus in the current account balance. From a current account deficit (CAD) of USD 3.3 billion in FY23, CAD turned into surplus of USD 1.8 billion in FY25.

ix. This surplus has been made possible both by limiting imports and encouraging significant growth in both exports and remittances. Imports of goods and services rose from USD 61.3 billion in FY23 to USD 69.3 billion in FY25, or a growth of 13 percent. Exports of goods and services stood at USD 35.5 billion in FY23 and rose to USD 38.7 billion in FY25, showing a growth of 9 percent. But the most remarkable growth was witnessed in remittances which grew from USD 27.3 billion to USD 38.1 billion, or nearly 40 percent. In July 25, remittance performance has remained buoyant.

x. Ordinarily, it would not be desirable to carry external account surplus since a developing economy needs foreign savings to augment limited domestic resources for investment. In fact, the surplus is a reflection of a policy of austerity on the external side. A large surplus amounts to export of capital and strangulation of domestic absorption capacity. Clearly, we don’t want such a state to develop in our balance of payments. Although we support growth in imports to loosen the austerity, we must avoid a precipitous rise which would unravel the current account. The increase in July imports has shown a very high growth and doesn’t augur well for the CAD.

xi. Primarily thanks to improved current account position, there was a significant build-up of foreign exchange reserves, which increased from USD 4.5 billion in FY23 to USD 12.7 billion in FY25, a nearly 3-fold increase. This is a healthy coverage of 2.5 months of imports.

xii. Another corollary of improved external account is the notable stability in the exchange rate. In the early part of FY23 the exchange rate was unhinged and rapidly depreciated to Rs 335/US$. Rather than reflecting any malady in the country’s external account the situation was due to manipulation, speculation, financing of smuggling and other unauthorized dealings in the market. The authorities took serious notice of such disruptive activities and have brought them in order. Consequently, the exchange rate not only stabilised but its value was brought in line with real exchange rate and has largely remained orderly for two years when typical complacency again overtook caution and vigilance. Some pressures were building similar to the previous disorder. However, authorities have begun to take notice and requisite remedial measures have been adopted to restore order.

The stock market has shown enormous growth over the last two years. On 3rd July 2023, the KSE 100 Index was recorded at nearly 44,000.

Since then, over a two-year period the index has risen, virtually uninterrupted, to about 148,000 on 18 August 2025, representing an increase by more than 3 times. This is the most significant rise in the history of PSX. A Bloomberg report has termed it the best return globally of 58 percent in dollar terms. It may be tempting to dismiss this as a bubble that would burst anytime. This could well happen, but it may be noted the market has already sustained its present trajectory for two years, which is unprecedented. In fact, it may well be argued that behind the buoyancy of the market is a significant rise in confidence of market players.

According to a recent survey by Gallup, business confidence has been highest since April 2021: 61 percent of respondents judged the economic conditions strongest; 61 percent respondents feel that going forward the conditions would improve even more; bribery reports have been declined to 15 percent from 34 percent; overall approval of economic management has been doubled at 46 percent; and, energy situation was better than past years with lower load-shedding than in 2023 and 2024.

The improved credit ratings by all three rating agencies, Moody’s 12 August, S&P in July 2025 and Fitch in April 2025, constitute a testimony of economic turnaround.

Evidently, the economy has shown clear signs of stability and consolidation. A majority of challenges we noted at the outset are no longer on the horizon. Of these challenges one notable challenge was the risk of default, which is hardly mentioned in any discourse now. It is desirable to build on these strengths and protect the gains realized so far.

However, it should be borne in mind that all has not been well in this journey. We must evaluate how far the policies adopted have had an impact on social welfare and environmental sustainability.

In the backdrop of continued vagaries of Covid, punctuated by a further slow-down in global economy post-Ukraine war, prima facie, it appears that income distribution has been affected adversely during the period under review. For instance, the high cost of debt servicing (interest payments represent 56 percent of current expenditures) that has had a beneficial outcome for capitalist class. An analysis of the commercial banks deposits reveals only a handful of depositors earned much of the interest income.

The SBP data, for March 2025, on deposits of All Banks and financial institutions is quite revealing. In the category of personal accounts, there are 158 million account holders. The distribution by size of account shows that only 1.6 percent (2.5 million) account holders own Rs.10.3 trillion worth of deposits which constitutes 66 percent of total deposits in this category. Clearly, a lion’s share of interest income accrues this small group of depositors and, therefore, this has been contributing to worsening of income inequality.

On the other hand, increase in petroleum levy (PL) has had a negative impact on incomes of low and lower middle-income groups.

The income and expenditure survey of 2018 has estimated that household expenditure for the lowest quintile was 13 percent (which must have increased since then on the face of rising fuel costs) the highest among all quintiles. Of this expenditure 55 percent is spent on electricity, which is affected by (PL) which has been increased massively since 2022.

Coupled with high inflation in FY23 and FY24, adverse distributional effects on wage earner groups are quite evident. On the face of low growth, employment must have gone down also. So there is a double jeopardy of lost income as well as facing higher prices. As shown by Dr Hafiz Pasha (BR: 5-8-2025) there has been a decline in real incomes of low income groups, higher unemployment and rising poverty.

While austerity is well justified for an overheated economy but to throw the low income groups to face vagaries of market or to ignore the adverse distributional effects of adjustment policies would off-set economic gains by disenchantment of rising number of people being pushed into poverty. Corrective policies have to be put in place to mitigate worsening of income distribution and increased poverty.

Copyright Business Recorder, 2025