The most striking aspect of Pakistan’s economy in 2023 was that it was bifurcated into two very distinct halves. As the 2022–23 financial year was coming to a close in June 2023, Pakistan’s economy was on the verge of a default. Pakistan was desperate for the International Monetary Fund (IMF) to step in and avoid a serious financial crisis. 

Before the new financial year began, the IMF had granted Pakistan’s 23rd agreement with the Fund — a nine-month US$3 billion Stand-By Arrangement.

Beyond finances, a critical aspect of 2023 was that the government — which had ruled Pakistan since April 2022 — was replaced by a caretaker government in August 2023, with the mandate to hold elections. Both the economic and political environment in Pakistan changed radically in the middle of 2023. But the true story of Pakistan’s tumultuous 2023 is located in 2022.

In early 2022, it became clear that then prime minister Imran Khan was facing a hostile parliamentary opposition and had lost much of his military support — all of which made his exit seem imminent. At the start of the Russia–Ukraine war in February 2022, when it was expected that global prices would rise and that there would be supply chain disruptions, Khan announced that petrol and gas prices would remain frozen until June 2022.

His removal in April 2022 through a constitutional and parliamentary no confidence vote brought in a new government with Shehbaz Sharif as prime minister. The leadership change came at a time when the economy was deteriorating, with rising inflation and an imminent balance of payments crisis. The new government immediately began negotiations with the IMF and was able to secure a US$1.1 billion loan to avoid a possible default. Pakistan faced severe floods in the second half of 2022, causing further economic disruptions and inflation.

Come 2023, Pakistan’s economic situation worsened. Inflation skyrocketed to 29 per cent by the end of 2023, the highest inflation rate ever. Foreign exchange reserves fell in the first half of 2023 to the extent that the State Bank of Pakistan had to impose severe import restrictions and raise the interest rate to curb inflation. The government continued to borrow from private banks at high interest rates and the private sector was squeezed out. The economy came to a hard halt with the GDP growth rate for the 2022–23 financial year a mere 0.3 per cent.

But Pakistan’s economy showed signs of stabilising in the second half of 2023 because of the combined effects of the IMF Stand-By Agreement, the caretaker government and the global economy stabilising.

Before the 8 February 2024 elections, it was expected that former prime minister Nawaz Sharif would be a shoo-in to win prime minister for a fourth non-consecutive term. The military establishment supported him and his main political rival, Imran Khan, was in jail. Khan’s Pakistan Tehreek-e-Insaf party was also severely hampered from contesting the elections. 

Prior to the elections, the assumption was that Pakistan would elect a stable government to lead for the full five-year term and continue to work on essential restructuring of the economy. Many economic analysts had assumed that the shoo-in Nawaz Sharif government would quickly go to the IMF to negotiate a longer-term debt and assistance program. With the IMF determining the path of Pakistan’s economic reforms, it seemed that once Pakistan had elected a stable government, the economy would begin to improve.

But the results of the 2024 elections have upended all predictions and plans. Not only has Nawaz Sharif’s Pakistan Muslim League party failed to win an absolute parliamentary majority, but his party came in second to the group of independents affiliated with Imran Khan’s Pakistan Tehreek-e-Insaf party. No party won a parliamentary majority. This means that some form of coalition government will emerge. 

Pakistan’s political and economic future is now plunged into great and grave uncertainty. It is not yet clear which party or coalition of parties will form government nor who will become prime minister. It is also uncertain what economic trajectory any of the possible prime minister candidates will take.

The only certainty regarding the next few months in Pakistan is that political, economic and financial instability will continue to dominate the headlines.

S Akbar Zaidi is political economist and Executive Director of the Institute of Business Administration (IBA), Karachi.

This article is part of an EAF special feature series on 2023 in review and the year ahead.