Rural Economy Reversal in Pakistan: A Fragile Recovery

Pakistan's rural economy has struggled to find sustained growth momentum over the past two years due in part to depressed farm incomes and resulting weakness in rural demand.

Agricultural commodity prices have begun to rise, improving the economics of farming and putting more cash into rural hands. However, this reversal should not obscure what came before: the government's confused agricultural policies amplified the damage from the 2023-25 commodity-price downturn and prolonged the squeeze on farm incomes.

The government sought to reform agriculture by dismantling the wheat support-price regime but continued to intervene whenever food inflation became politically uncomfortable, importing wheat when international prices were low and releasing public stocks to suppress domestic prices. This approach was neither a functioning support-price regime nor genuine liberalisation.

Rapid solarisation has reduced the exposure of many farmers to diesel and electricity costs for irrigation, helping improve margins further. The improvement in agricultural liquidity matters far beyond agriculture, as farmers are unusually important marginal consumers in Pakistan, and when crop incomes collapse, spending on motorcycles, appliances, clothing, construction materials, and packaged consumer goods falls with them.

Policymakers may be tempted to interrupt the recovery by releasing stocks aggressively or facilitating imports. However, suppressing farmgate prices is an extraordinarily crude way of protecting consumers from food-price shocks.