The year 2024 ended more or less the same way it began, with Pakistan struggling to stay on course to stabilise its economy from the debilitating instability of the previous three years. The spectre of default retreated, inflation subsided after a ferocious three-year run starting from May 2021, the exchange rate found its moorings and the country went from one IMF programme to another with barely a four-month interval in between.

The groundwork for all this began in July 2023 as the curtain dropped on what was arguably the single most troubled parliament ever in Pakistan’s history. The interim government that took the country’s reins in July 2023 began implementing a tough but manageable Standby Arrangement (SBA) negotiated hastily by the outgoing PDM government in its final days.

At the start of 2024 the interim government was holding the course in the stabilisation programme it was assigned to implement. One of the key targets was to achieve a primary surplus equal to 0.4 per cent of GDP by the end of FY24 from a deficit of 1pc of GDP. But in the first six months of the fiscal year, running from July to December 2023, the interim government managed to post a surplus equal to 1.7pc of GDP, surpassing its annual target in six months.

All talk of an impending default had ebbed away once the SBA was announced and foreign exchange reserves doubled in July 2023 on the back of IMF inflows coupled with a $1 billion support line from the United Arab Emirates. Reserves continued to improve in the months ahead, helped in large measure by a collapsing current account deficit as the economy ground to a halt. Reserves had fallen to dangerously low territory in the days when talk of default swirled thick. But by the end of 2024, the finance minister was able to assure the business community that import cover had risen to 2.5 months, and by end of FY25 it would have crossed three months, which is regarded as the safe level as per international conventions.

The economy was stabilised on the back of predatory policies.

Problems persist

But problems brewed beneath the surface. The fiscal position had improved and reserves had risen, undoubtedly. But a closer look at the numbers showed the government had missed key revenue collection targets, and the reserves position seemed to be contingent on the economy remaining stagnant. As 2024 wore on these problems became more and more visible until November when they prompted an extraordinary visit to Pakistan from the IMF’s mission chief and his team.

At the end of FY24, for example, the government posted a surplus in its primary account that was more than twice its target in the SBA. But its tax collection fell short of target by more than Rs1 trillion, or almost 10pc of total tax revenue. So how did they still manage to post a primary surplus larger than target? “The … government achieved a primary surplus of 1.8 percent of GDP” wrote the IMF staff in its final review, “exceeding projections of 0.4 percent of GDP, driven by strong PDL, excise and direct tax revenues”. This, coupled with large reductions in development spending allowed them to squeak past the goalpost without triggering an alarm.

Likewise on the foreign exchange reserves side. The year opened with $12.5bn in total reserves and closed with $16.6bn. The entire increase was accounted for by an almost 50pc increase in State Bank reserves (as compared to reserves held by banks). On the surface this sounds like a good story, and to some extent it was. This was the reason why talk of default faded into memory, why the exchange rate found its mooring and a sense of stability restored permeated the business community.

But a closer look revealed a less favourable picture. First of all the reserves were built up by throttling the economy. The current account — which measures the sum of all non-liability creating foreign currency flows into and out of an economy — swung into surplus in the middle of 2024 and stayed there till the end. This helped build up the reserves and as exports rose, the money markets were flush with foreign exchange liquidity for which there were few buyers because imports had fallen sharply. The State Bank used the opportunity to buy up dollars in large quantity, building up its reserve cover.

This is why the exchange rate remained more or less range bound throughout the year. There were fewer takers for the foreign currency liquidity in the system, and if rumours were to be believed, the State Bank was quietly warning the banks to not allow the price of the dollar to rise beyond certain limits. With ample supply and possibly a controlled price, the dollar stabilised after three years of intense volatility and devaluation.

The volatility that the state was grappling with through all this was undoubtedly formidable. Pakistan had just lived through the most ferocious inflationary fire of its history, a fire that burned harder and longer than any other in the past. The bout of devaluation the rupee saw since 2021 was also stronger than any other period in the past. Pakistan came closer to defaulting on crucial private debt service obligations than it had come since any period since 1999, the days of sanctions. In every metric the economy was overheating catastrophically and a near emergency situation existed. So extreme measures were required and the interim government that entered office in July 2023 began undertaking them.

Throughout 2024 those measures remained in place. But it could be said that the economy was stabilised on the back of predatory policies. Import restrictions, directions to money markets, forced and gunpoint renegotiation of power purchase agreements, a rain of taxes on salaried people and industry, the list went on and on. Facing unprecedented volatility and armed with rudimentary and blunt policy tools, the state struggled to put out the fire and in 2024 its efforts finally bore fruit.

But having turned fully predatory and milked its revenue machinery as much as it possibly could, and throttling its economy to a near standstill, the state now faces the question of how to transition out of this stability towards growth without giving rise to volatility once again. Pakistan’s allies are now weary of the country’s chronic requirement for bailouts and foreign currency support. With American soldiers gone from Afghanistan the country’s relevance to the geopolitics it was accustomed to has now disappeared.

Growth can be restored under two scenarios. One is a revival of geopolitics should another superpower war find its way into our neighbourhood and once again Pakistan is offered dollars in return for playing its part. Given developments in the Middle East such a scenario cannot be ruled out. The second scenario is an organic one. The year 2024 is when the state discovered the limitations of its own economic system, whether the lack of buoyancy in its revenue system, the lack of competitiveness in its industrial base or the lack of efficiency in its power system. All the deficiencies that were growing in Pakistan in the absence of meaningful reform over the decades meant the country faced its most intense storm of volatility when it tried to pump growth in the post-Covid years, and the state had to turn extreme in its predatory actions in the stabilisation phase. By 2024 this story was complete.

The year 2024 now asks us whether we can embark on building a better Pakistan in 2025, one that can grow without overheating. Otherwise, the year 2024 warns us, this is as far as you can go with this growth model.