The government should focus on reforming the economy as only a deep-rooted structural reforms with strong political will can ensure sustained economic growth.
Dr. Abid Rashid Gill
Economic stability is a foundational aspect of a country’s overall security. It encompasses the ability of a nation to provide employment opportunities, and maintain a robust standard of living for its citizens.
When a country has strong economic stability, it can effectively address poverty, reduce inequality, and prevent social unrest, which are key factors in maintaining internal stability. Additionally, economic stability enables a nation to invest in defence and infrastructure, enhancing its ability to protect against external threats. Thus, economic stability is integral to the comprehensive security and resilience of a country.
Economic stability and growth fundamentally rely on macroeconomic stability, which provides a predictable environment for businesses and consumers. Stability in inflation, interest rates, and exchange rates reduces uncertainty, encouraging investment and long-term planning. It also ensures efficient allocation of resources, as stable economies can attract both domestic and foreign investments.
Furthermore, macroeconomic stability supports sustainable public finances, allowing governments to invest in infrastructure, education, and healthcare, which are critical for growth. Without stability, economies face volatile market conditions that can lead to crises, undermining confidence and hindering economic expansion. Thus, macroeconomic stability is essential for fostering consistent and robust economic growth.
The present government in Pakistan also focusing on macroeconomic stability to form the foundation of sustainable economic growth. As per monthly Economic Outlook (Ministry of Finance), Pakistan’s economy has moved towards macroeconomic stability in 2024. The decreasing inflation, primary fiscal surplus, manageable current account deficit and stable exchange rate over the year are the indicative of this macroeconomic stability in Pakistan.
The government anticipates inflation to be around 11 % in the fiscal year 2024-2025. It has been around 25% in the last two fiscal years and has halved the purchasing power of the households. As per Pakistan Bureau of Statistics, CPI inflation remained 12.6% in June 2024 compared to 29.4% in June 2023 providing a relief to the people. This inflation is at its lowest level in last 30 months and this decline can be attributed to tight monetary policy and stable exchange rate.
While the exchange rate remained stable around Rs. 280 per Dollar in last financial year providing stability to external sector. The improved external sector can be attributed to cautious fiscal and monetary policies. The imports remained in control while exports and remittances have increased.
The current account deficit has reduced to $0.7 billion compared to $3.3 billion last year. Pakistan now stands with 14 billion Dollar foreign reserve providing stability to foreign investors. The Monetary Policy Committee (MPC) also has reduced the interest rate to 20.5% in its June meeting.
Although it is still very high as compered to the region, yet it signals the SBP intentions to reduce it further in future as inflationary pressures get eased. This downward revision has enhanced the positive business sentiments. The fiscal accounts also have improved as overall fiscal deficit has reduced to 4.5% of the GDP and primary balance: the balance of expenditure and revenue exclusive of interest payments showing a surplus of 1.5% of the GDP.
This macroeconomic stability reduced fiscal and current account deficits, stable exchange rate, downward trend of inflation and interest rates have increased the confidence of International Financial Institutions in Pakistan. It has led Pakistan to a staff-level agreement for $7 billion 37-month Extended Fund Arrangement (EFF) with IMF. The program will further strengthen the hard-won macroeconomic stability by removing economic distortions and strengthening the public finance and external sector of the economy.
After dodging the default last year, the government is trying to afloat the economy and has set target a target of 3.6% economic growth for fiscal year 2024 from 2.4% of last year. Macroeconomic stability and large federal and provincial government’s public sector development programs announced in fiscal budget 20224 will be an impetus to achieve this economic growth targets.
Moreover, the green tractors initiative, interest-free loans for small farmers, solarisation of tube wells, model fish farms, and livestock and Kisan Cards announced in fiscal budget 20224 will be instrumental for agriculture growth and overall growth of the economy.
This hard-won macroeconomic stability should be a long-run phenomenon. Political uncertainty, unproductive bureaucracy, pervasive corruption in all government sectors, unnecessary and unproductive over-regulation, and high utility rates are significant constraints to industrialization and economic growth.
Unproductive large public sector is a big drain on the resource of poor tax payers. After achieving macroeconomic stability, the government should focus on reforming the economy to address these issues. Only a deep-rooted structural reforms program with strong political will ensure long run macro-economic stability and sustained economic growth.
The writer is a senior faculty member at the Economics
Department of The Islamia University of
Bahawalpur (IUB)
Pakistan Rupee Exchange Rate