Saul Loeb—AFP
Newly-appointed Finance Minister Muhammad Aurangzeb’s priority is to lay out Pakistan’s next budget in line with the implementation of much-needed reforms and securing a new deal with the International Monetary Fund (IMF) to pull the economy out of crisis. In a recent media interaction, he said Pakistan would seek a “large and longer program from the IMF under the Extended Fund Facility,” adding there was no more room for debate and decisive action was required. Ahead of this, however, he needs to ensure the release of the final tranche of the ongoing $3 billion bailout package.
A former bank chief, Aurangzeb is reputed to be an able economist who can steer Pakistan out of its current crisis, attributed to “pressures on domestic prices, external and fiscal balances, the exchange rate, and foreign exchange reserves mounting amid surging world commodity prices, global monetary tightening, recent catastrophic flooding, and domestic political uncertainty.” A major concern for the country is the real gross domestic product (GDP)’s estimated decline by 0.6% in 2023, partially due to devastating floods the year prior. With 44 percent of the country reliant on agriculture, any decline in its performance has significant impacts on poverty. Private investment, meanwhile, has declined due to supply-chain disruptions motivated by import restrictions; high fuel and borrowing costs; political uncertainty; and weak demand-affected industry and service-sector activity. The rampant inflation had dented private consumption, further reducing the labor incomes of millions of workers, especially those in lower-productivity informal jobs.
A recent report, backed by international agencies, noted the inking of the ongoing Standby Arrangement last year unlocked new external financing and averted a balance of payments crisis. However, even this was insufficient to significantly boost foreign exchange reserves, leading to sustained import controls that constrain economic recovery. According to experts, “marginal easing of import restrictions is expected to support some recovery in the industrial sector, particularly large-scale manufacturing. Flow-on impacts from the strengthening agriculture and industrial sectors will support a revival in associated services sectors including wholesale and retail trade, and transport and storage.” However, high inflation due to increasing domestic energy prices and continued depreciation is likely to keep economic activity subdued. Key to recovery is broader, and punishing, reforms. Whether the new government is able to enact them will determine how quickly, and effectively, Pakistan emerges from its perennial crisis.