Pakistan’s economic journey toward recovery is set to be a long and challenging one, despite some positive signals such as the recent drop in inflation. While inflation has seemingly bottomed out, the country’s economic landscape is marked by widening trade deficits, income inequality, and stagnation in key industrial sectors, all of which pose significant hurdles to a sustainable recovery.
In February 2025, the country witnessed a decade-low inflation rate, with the annual Consumer Price Index (CPI) inflation dropping to 1.5%, a sharp contrast to 23.1% in the same month of 2024. This decline is largely attributed to the effects of the economic stabilisation efforts, including the $7 billion reform package supported by the International Monetary Fund (IMF) and aggressive monetary easing measures implemented by the State Bank of Pakistan (SBP). The SBP reduced the policy rate by 10 percentage points from June 2024, bringing it to 12% by January 2025.
However, the IMF-backed stabilisation policies have been a double-edged sword for Pakistan. While they have helped contain inflation, they have also resulted in a squeeze on domestic demand. The country’s real income, adjusted for inflation, has either remained stagnant or decreased, and energy price hikes, coupled with new taxes, have made industrial production increasingly costly. These factors have contributed to a decline in industrial output and a contraction in commercial activities, setting back the economy’s growth prospects.
Despite the temporary relief brought about by falling inflation, experts predict that inflation is likely to rise slightly in the coming months. The onset of Ramazan will likely increase food demand, which could lead to higher prices. Additionally, the fading base effect will contribute to inflationary pressures. The finance ministry has projected that inflation in February would fall between 2-3%, with a further uptick to 3-4% expected in March. This means businesses and consumers should brace themselves for rising prices in the near future.
As inflation eases, Pakistan’s trade deficit continues to widen, exacerbating the country’s economic challenges. In January 2025, the trade deficit increased by 18% year-on-year to $2.3 billion, and in February, it surged by over 33% compared to the previous year. This trend is largely driven by falling exports, which declined by 5.6% year-on-year in February, and rising imports, fueled by economic recovery and increased industrial demand. While the IMF and the Asian Development Bank project Pakistan’s GDP growth at 3% for FY25, the World Bank’s forecast is slightly lower at 2.8%. Even with modest growth, the rising import bill could exacerbate the widening current account deficit (CAD), putting pressure on the rupee and increasing the cost of imports and debt servicing.
To tackle these challenges, experts argue that Pakistan must focus on boosting exports and curbing unnecessary imports. The government should look into strategies that promote import substitution, attract foreign investment, and strengthen domestic industries. Additionally, diversifying trade partners and maintaining fiscal discipline will be crucial in stabilising the country’s external account. However, the urgency of addressing these issues will become clearer later this month when the SBP is expected to revise its monetary policy.
One of the most pressing issues that remains largely unaddressed is income inequality. According to the United Nations Development Programme (UNDP), the richest 10% of Pakistan’s population hold 40% of the country’s wealth, while the bottom 40% control just 17%. This disparity has only worsened in recent years, with millions falling below the poverty line due to the economic strain of 2024. The latest UNDP report for 2023-24 highlights a 33% decline in Pakistan’s inequality-adjusted Human Development Index, pointing to worsening access to essential services such as education, healthcare, and jobs.
The rural-urban divide also remains a significant challenge. Farmers, who continue to struggle with outdated technology, poor infrastructure, and limited access to markets, face significant hardships. Gender inequality compounds this issue, as Pakistan ranks 135th out of 166 countries on the Gender Inequality Index. Without addressing these structural issues, Pakistan’s long-term economic growth will be unsustainable.
In conclusion, while the easing of inflation offers short-term relief, Pakistan’s economic recovery will require comprehensive structural reforms. These reforms must focus on inclusive growth, improving access to education and healthcare, supporting small businesses, and ensuring equal opportunities across regions and genders. Stabilisation alone will not be sufficient to reduce the widening economic divide. Pakistan’s policymakers must act decisively to create a more equitable and sustainable economic future.