Pakistan’s stock market has been crowned the world’s best performer, surging 98.7 percent year-on-year to 162,257 points; the rupee has strengthened to 281 against the dollar despite two consecutive months of current account deficits; and the government boasts its highest-ever primary surplus at 2.3 percent of GDP.
Officials showcase the “resolution” of Rs.1.225 trillion in circular debt through bank financing, sweeping plans for privatization of power distribution companies, and liberalization of the auto sector opening imports while pushing electric vehicle adoption.
Foreign reserves now stand just above USD 14.3 billion (as of Sept 19), headline inflation has fallen to 3.4 percent in August, and even devastating floods that destroyed 2.5 million acres of crops (nearly 8 percent of Pakistan’s farmland) are being positioned as manageable disruptions. On paper, Pakistan appears to have achieved the impossible: reform amid catastrophe.
Reading between the lines, the numbers reveal a starkly different picture. The stock market’s near-doubling masks a disturbing reality: foreign investors are fleeing. While the KSE-100 soars, foreign direct investment fell 22 percent to just USD 364 million in July-August, even as profit repatriation surged 115 percent to USD 593 million.
Chinese firms alone withdrew USD 205 million, ten times more than the previous year. In total, foreign investors pulled out USD 229 million more than they invested, suggesting that capital gains coincide with wealth transfer. Domestic commercial banks have faced withdrawals of almost Rs.1 trillion, partly due to lower interest rates, putting pressure on liquidity and fuelling speculative flows.
Valuations are now being sustained almost entirely by domestic investors. If this pattern of withdrawals continues, the rally risks collapsing into a mechanism of wealth transfer rather than genuine wealth creation.
By merely shifting the burden onto consumers already struggling with poverty, the much-celebrated Rs 1.225 trillion circular debt “solution” does little to solve any real problem.
Under this new “solution”, ordinary households will continue paying an additional Rs.3.23 per unit for six years, while the underlying inefficiencies remain untouched. As long as distribution companies continue to suffer from around 18 percent transmission and distribution losses alongside theft, the fundamental mismatch between generated capacity and payment collection will persist.
Even if this debt is repaid, the same dynamics will ensure it resurfaces. The planned privatization of distribution companies, touted as reform, ignores the cautionary tale of K-Electric. Decades of private ownership have still left Karachi with outages, line losses, and protests. Yet the government now plans to replicate this model nationwide.
The rupee’s fragile stability at 281 rests on a volatile mix of global and domestic forces. Much of the recent calm owes to a softer US dollar, driven by the Federal Reserve’s first rate cut and expectations of further easing. As the dollar weakens globally, Pakistan finds temporary respite.
Yet the relief is paper-thin. The country still pays for the bulk of its oil imports in dollars, and flood-damaged agriculture is forcing extraordinary food and cotton purchases: up to USD 1.06 billion in cotton and five million tons of wheat.
The State Bank, sensing the gravity, has kept its policy rate pinned at 11 percent while also slowing dollar purchases from the interbank market to contain pressure on the exchange rate. But it faces a double edged sword: it can either keep rates high and choke recovery or lower rates and risk renewed capital flight that could shatter the rupee’s veneer of stability. Current account deficits of USD 379 million in July and USD 245 million in August underline the vulnerability.
Although Pakistan painstakingly achieved a primary surplus by slashing healthcare and education budgets, the real question for the economic managers is whether current deficit patterns project any sustainable surplus going forward. Three critical flows expose the answer.
First; remittances at USD 3.14 billion monthly are barely keeping pace with the combined outflow of profit repatriation and debt servicing obligations that now consume 81 percent of tax revenue. Second; flood losses of USD 1.4 billion dwarf the IMF’s upcoming USD 1 billion tranche, while necessitating food imports that will balloon the current account deficit.
Third; with FDI already low, the fact that Chinese companies extracted ten times more profit than the previous year while overall investment collapsed is a sign of structural abandonment rather than temporary caution. Together, flat remittances against rising outflows, surging import bills, and foreign capital exits make projections of continued surplus mathematically impossible.
The country faces uncomfortable realities that statistics cannot obscure. Pakistan missed its tax target by Rs 1.16 trillion, with Rs.170 billion stuck in Supreme Court litigation over the super tax. Structural benchmarks requiring power sector reforms and SOE restructuring remain unmet, replaced by financial engineering.
Industrial production contracted 1.2 percent year-on-year, vehicle output continues to slump, and dozens of textile mills have curtailed or shut operations. Real estate, described by insiders as “officially dead,” remains subdued.
Poverty, meanwhile, has surged to an eight-year high. The World Bank puts the poverty rate at 25.3 percent while international measures using the USD 4.20/day threshold suggest nearly half the population lives below poverty line.
Against this backdrop, every Pakistani carries Rs. 318,252 in public debt, nearly two-thirds of the country’s per capita GDP of about Rs 480,000. The government’s own borrowing plan reveals the depth of this trap: Rs 6.4 trillion in new debt this year just to service Rs 8.2 trillion in interest payments. This is borrowing to pay interest on borrowing.
The external financing requirement of USD 22-25 billion annually against inflows targeting SUD 19.9 billion that depend entirely on USD 9 billion in Chinese and Saudi rollovers creates a mathematical impossibility. The celebrated doubling of foreign assistance to USD 1.377 billion means little when 93 percent arrives as loans requiring repayment. Non-project loans jumped 235 percent for budget support rather than development, confirming Pakistan is borrowing to survive, not grow.
Pakistan’s economy today resembles a Potemkin village. Every achievement dissolves under scrutiny: the primary surplus through austerity that strangles growth, market records amid capital flight, currency stability propped up by temporary factors, and debt solutions that simply rename the problem.
The tragedy lies not in the fact that Pakistan lacks solutions; its economic managers are skilled enough to engineer rallies and navigate creditor reviews. Applied to actual reform through broadening the tax base, restructuring SOEs for efficiency, improving agriculture, or developing exports, this ingenuity could transform the economy. Instead, Pakistan has perfected the art of illusion, creating just enough statistical success to unlock the next tranche while the real economy steadily deteriorates.
The retail investors buying into market euphoria, consumers paying restructured circular debt, farmers facing flood losses without support, and young Pakistanis entering a contracting job market will bear the cost of maintaining this mirage. And in Pakistan’s economic theatre, the show must go on.
Copyright Business Recorder, 2025
The writer is an economist and an educationist
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