Pakistan is a good story

Pakistan, which seems to be under the euphoria of having its economic recovery termed a ‘good story’ by international analysts, must not miss out the multiple underlying critical factors threatening its economic sustainability.

“Pakistan is a good story,” Genna Lozovsky, chief investment officer at Sandglass Capital Management, was quoted by Barron’s as saying. “So good, it’s not risky enough for us anymore.” Another analyst, Alison Graham, chief investment officer, at frontier markets specialist Voltan Capital Management stated, “Everyone thought Pakistan would default along with Sri Lanka in 2023.”

On the side of optimism, there is a note of caution. A market analyst, while replying to a pointed question, cautioned: “conflict with India won’t likely knock Pakistan’s recovery off course” but the “country’s own shaky underpinnings might”. “Pakistan has been known for boom-and-bust cycles throughout its history,” according to Khaled Sellami, sovereign debt manager at Barings.

Behind this euphoria of all good with the economy of Pakistan, there are several challenges which continue to threaten the sustainability of the country’s economy. The phenomenon of boom-and-bust cycles throughout Pakistan’s history’ as identified by the analyst is for the reason that when the nation spins into euphoria of all good it distances itself from addressing the inherent imbalances and shortcomings in the fiscal and economic discipline of the country. Invariably, when the economy stabilises the difficult task of reforms and consolidation is put on low burner. While celebrating the economic recovery, the state functionaries must look for cracks, which could throw us again into a bust cycle.

On a broader scale, considering the economic impact on the vast population of the country, an estimated lower-middle income poverty rate stood at 42.3 percent (USD3.65/day 2017 PPP) for FY24 with an additional 2.6 million Pakistanis falling below the poverty line from the year before. This is the highest in the South Asia region. Pakistan’s peers in the region are systematically winning over poverty through a consistent growth in their economy.

According to a World Bank report, Pakistan needs a consistent growth of over 6 percent for the next many years to progressively win over poverty. This is not likely to happen anytime soon.

According to estimates, the GDP growth is projected to gradually recover but remain below low. Real GDP growth is estimated to reach 2.6 percent in FY25, supported by robust private consumption and investment, buoyed by lower inflation, high remittance inflows and increased credit to the private sector. While economic activity is expected to strengthen in FY26 (3.2 percent) and FY27 (3.5 percent), growth will likely remain constrained by tight macroeconomic policies focused on rebuilding fiscal and external buffers and mitigating risks to economic imbalances.

The government has made significant progress towards macroeconomic stabilization and critical structural reforms. However, the downside risks remain elevated with elevated debt levels, large interest payments, the fiscal deficit is estimated to remain elevated at 6.7 percent of GDP in FY25, financial sector risks, and policy and external uncertainties pose significant risks.

What remains largely unaddressed, leading to slow and volatile growth, is the financially unsustainable energy sector riddled with circular debt, the deep structural reforms, trade liberalization, reducing the state presence in the economy, and addressing business environment constraints. All of this is undermining growth.

Then there are sectors which are held back out of political expediency, notably, the privatisation of loss-making public sector enterprises, taxation of the agriculture sector and liberal government expenditures. To achieve growth, all of these holy cows have to be brought into the tax orbit.

Pakistan is walking on a thin line of boom and bust and the nation is not walking out of this dilemma anytime soon. But, the country is once again on step one of the trajectory of boom and has an opportunity to sustain it if it can set its house in order.

Copyright Business Recorder, 2025