Expectations for 2025 are changing: in mid-2024, there were concerns about the Extended Fund Facility’s (EFF) austerity, which has since been diluted with the balance of payment (BoP) comfort; now, some are questioning whether the government can deliver on politically-sensitive structural reforms.

The perceptible improvement in business sentiments — driven by the external sector and the cut in interest rates — has raised expectations of above-target growth in FY25. A pickup in economic activity will increase imports, requiring the State Bank to balance the higher growth while maintaining BoP comfort. Furthermore, the EFF also comes with challenging targets like FBR revenues, downsizing state-owned enterprises, and unveiling a credible reform agenda for the power sector.

These are sensitive issues, made more challenging by strained relations with the Khyber Pakhtunkhwa government and the low-grade war in Balochistan. Unless the PML-N government can do the hard stuff, the current optimism will fade in Q2FY25.

Since the ‘political will’ required for economic reforms appears beyond the government’s capacity, business sentiments could suffer as the EFF begins to bite. For a compromised government that could choose between short-term growth and hard reforms, the choice is clear. Hence, 2025 is likely to be another boom-bust year for Pakistan.

Published in Dawn, The Business and Finance Weekly, December 30th, 2024