Pakistan's financial state

 Pakistan's financial condition is currently in a state of recovery, having emerged from a severe economic crisis in 2022. While the country has shown signs of progress, with inflation dropping and the economy growing, it still faces significant challenges, including high external debt, a shortage of foreign exchange reserves, and political instability. 

Poverty has increased slightly amid recent shocks, despite some economic stabilization. Pakistan made significant progress towards reducing poverty between 2001 and 2018 with the expansion of off-farm economic opportunities and increased external remittances. However, this has not fully translated into improved socio-economic conditions: over one-third of school-age children across Pakistan were found to be out of school; nearly two-thirds of those in school in FY24 were learning deprived; and high rates of stunting - 40 percent in FY23 - persist. Critical constraints, including recurrent fiscal and current account deficits, protectionist trade policies, unproductive agriculture, a difficult business environment, a heavy state presence in the economy, and a financially unsustainable energy sector, have remained largely unaddressed, leading to slow and volatile growth. Amid the COVID-19 pandemic, the catastrophic 2022 floods and macroeconomic volatility, poverty has increased. The estimated lower-middle income poverty rate stood at 42.3 percent (US$3.65/day 2017 PPP) for FY24 with an additional 2.6 million Pakistanis falling below the poverty line from the year before.

Pakistan has made progress towards macroeconomic stabilization. At the beginning of FY24, Pakistan's economy faced a potential economic crisis in the face of political uncertainty, global monetary policy tightening, and fiscal and external imbalances, that led to pressures on domestic prices and foreign reserves. To preserve reserves, measures to manage imports and capital outflows were introduced, which disrupted local supply chains, dampened economic activity and exacerbated inflationary pressures. With the approval of the IMF Stand-By Arrangement in July 2023, exchange rate flexibility was restored, import controls were relaxed, and steps were taken to contain the fiscal deficit. Political uncertainty also diminished with the successful conduct of the general elections. Coupled with favorable weather conditions and easing external conditions, the economy began recovering in FY24. Consequently, growth of real GDP at factor cost rose to 2.5 percent y-o-y in FY24, after contracting by 0.2 percent in FY23. (EK)

Agriculture And Textile Exports Key To Growth

Strategically positioned between China and India and serving as a gateway to the Indian Ocean, Pakistan boasts a large domestic market buoyed by remittance inflows, a cost-effective English-speaking labor force, and significant natural resources. While agricultural goods, textiles and apparel remain the primary sources of export revenue, economic diversification efforts toward minerals, consumer goods, digital and financial services, and tourism hold promise.

Yet, while the country is open to foreign direct investment (FDI), international investors are faced with opaque regulations, an underdeveloped financial sector, and inadequate infrastructure. Other weaknesses include the prevalence of a large informal sector and a low literacy rate, reliance on imports, geopolitical tensions and security concerns. ( EK)