The economy of Pakistan has been facing structural problems for a long time, hindering the development of the country and preventing the development of existing potential.

The Republic is a net importer of goods and services, the growth of Pakistani exports is constrained by low labor productivity and the needs of the domestic market. The negative trade balance and the inefficiency of the taxation system limit the revenues of the state budget, lead to a shortage of liquid foreign currency and an extremely high level of external debt. Due to the lack of resources to solve infrastructural and social problems, Pakistan is extremely vulnerable to external and internal challenges, as well as facing the problem of low-quality labor and population outflow to more economically developed countries.

In 2021-2022, the Pakistani economy showed high rates of recovery after a decline in real GDP in 2020 due to the COVID-19 pandemic. However, by 2023, economic development slowed down, and real GDP decreased by 0.2%.

The recession is caused by a number of factors and conditions, including an increase in the state budget deficit and external debt, large-scale floods, an increase in inflation and depreciation of the Pakistani rupee, as well as domestic political uncertainty. In this regard, the Government of the country has restricted (through an outright ban or an increase in tariff barriers) the import of a number of goods, including luxury goods, in order to limit the outflow of liquid foreign currency.

Currently, the Government of Pakistan is awaiting a new loan from the IMF in the amount of $6 billion, which will allow the country to allocate funds for structural reforms. By the beginning of 2024, the macroeconomic situation in the country had improved markedly due to the simplification of customs and tariff regulation, stabilization of the national currency, a decrease in consumer price growth, as well as the effect of a low base in the conditions of economic recovery after the recession in 2023. However, the risks of recession remain significant, primarily in the case of delays in the receipt of external financing.

By the end of 2023, inflation in Pakistan in annual terms amounted to a record 29.2% since 1974, more than 2 times higher than in 2022. The main reasons for the sharp increase in consumer prices are the consequences of the flooding in the Indus River basin in the summer of 2022, which caused a reduction in the supply of goods, as well as a significant weakening of the national currency against the main currencies of international trade (by an average of 20% in 2023 compared to 2022).

Under these conditions, the State Bank of Pakistan has significantly tightened its monetary policy. From September 2021 to June 2023, the key rate was increased by a total of 1,500 bp to 22%. In January 2024, the State Bank of Pakistan maintained the key rate at this level, noting the stabilization of inflation in all sectors except energy.

At the same time, the consumer price growth index remains at an extremely high level, significantly exceeding the targets of the country's central bank. With this in mind, as well as taking into account other pro-inflation risks, it is expected that in the medium term the regulator will continue to pursue a tight monetary policy.