Who is responsible for the poor economic state?

The April Economic Update and Outlook, a Finance Division monthly publication, has released some disturbing macroeconomic data raising questions as to whether the Middle East conflict is to be held responsible or past flawed economic policies or the severely contractionary fiscal and monetary policies agreed by the Pakistan authorities with the International Monetary Fund (IMF) under the ongoing 7 billion-dollar Extended Fund Facility? Or, whether it is an amalgam of all three?

A good gauge would be to look at the Consumer Price Index (CPI) for the past four years. Inflation has risen post US/Israel attack on Iran with the July-March 2026 CPI estimated at 5.9 percent, the March 2026 rate of 7.3 percent against July-March 2025 rate of 5.3 percent and March 2025 of 0.7 percent.

Pakistan Bureau of Statistics (PBS) calculates the CPI for April 2026 at 10.8 percent with a national average July-April rate of 6.19 percent against 4.73 percent in the same period the year before, though it registered a much higher rate of 25.97 percent July-April 2023-24.

The ‘hyperinflation’ in 2023-24 is attributable to the severely flawed policies of the then Finance Minister Ishaq Dar (28 September 2022 to 10 August 2023) as well as mitigating policies agreed with the Fund in the 3 billion dollar nine-month long Standby Arrangement (SBA) agreed in June 2023 that included: (i) a massive rupee depreciation in June/July 2023 necessitated by the then existing multiple exchange rates (that lowered remittance inflows through official channels by 4 billion dollars) – a direct result of the policy to sustain the official rupee-dollar parity in violation of the agreement with the Fund — a policy that was continued even when foreign exchange reserves plummeted to less than 3 billion dollars in February/March 2023.

The then Prime Minister, Shehbaz Sharif, had to personally step in to secure the SBA; (ii) Dar announced a 110 billion rupee electricity subsidy at the taxpayers’ expense to wealthy exporters in October 2022 at a time when more than 30 million Pakistanis were living under the open skies due to floods, another decision violative of a pledge made to the Fund; (iii) massive tax increases in the budget 2023-24 to raise total collections were agreed under the SBA; (iv) a high policy rate – 22 percent; and (v) high utility rates to ensure full cost recovery – a challenge to say the least, given the government’s policy to encourage renewables (particularly solar panels for households). This reduced demand from the national grid and thereby raised capacity payments to Independent Power Producers that were agreed with the Nawaz Sharif government in 2014 under the China Pakistan Economic Corridor umbrella.

Thus while flawed policies can and did great damage in terms of their impact on the general public’s quality of life yet IMF standard conditions, that focus on containing the primary and budget deficits through implementing contractionary monetary and fiscal policies, have had negative implications on ensuring a growth rate that would have been able to absorb those entering the labour market – a cause of rising poverty levels in the country.

Successive administrations, including the incumbent, have raised salaries of those paid at the taxpayers’ expense (comprising 7 percent of Pakistan’s total work force) yet private sector salaries have remained largely static.

Poverty reached 25.3 percent in 2023-24, from 24.8 percent in 2022-23 (and 18.31 percent in 2021-22) and rose to 28.9 percent in 2024-25 – a rate calculated at the 3.20 dollar per day; however, if calculated at calorific method (food energy intake) the World Bank calculated poverty at a high of 44 percent.

Sadly, flawed policies continue to this day especially with respect to the power sector with the government incurring loans (1.25 trillion rupees borrowed this year to retire previous loans borrowed at a higher rate of return) and passing on the cost of servicing these loans onto the consumers.

The Fund’s focus on revenue rise rather than current expenditure curtailment and a high policy rate to contain inflation (a rate mainly payable by the government due to its massive annual deficit financing which, in turn, raises the budgeted debt servicing cost as opposed to the contribution of much lower borrowing by the private sector) is at present almost double that of regional competitors and accounts for the steady erosion of Pakistani industry to compete regionally.

Total foreign investment July-March 2026 plummeted to 410.7 million dollars against the 1.5 billion dollars in the comparable period the year before – a decline that is propitious but in terms of other countries it was appallingly low to begin with — India’s FDI April-December 2025 was nearly 48 billion dollars. This bears testimony to the failure of government’s efforts to lure foreign investment through specific incentives (fiscal and monetary) coupled with guarantees of security to investors through the establishment of Special Investment Facilitation Council represented by federal and provincial governments as well as the armed forced in all sectors to ensure prompt resolution of all concerns.

In addition, FDI has yet to materialize given two factors: (i) the fragility of the economy has not abated indicated by the rising trade deficit mainly due to a rise in the prices of petroleum products due to the Middle East conflict which account for a substantial portion of our total imports coupled with debt based reserves of 15.1 billion dollars as of 24 April 2026 (the same day as the announcement by the State Bank of Pakistan of full clearance of the 3.45 billion dollar UAE loan repayment though it is unclear whether the reserves included this debit with the credit of 3 billion dollar loan from the Saudi Arabia or not).

No out of the box solutions are under consideration with full acceptance of the IMF conditions notably anti-growth contractionary monetary and fiscal policies while, bafflingly, PBS would have Pakistanis believe fuelled large scale manufacturing (LSM) growth.

PBS includes petroleum and products as LSM output, though these items are mainly imported, and calculated July-March LSM growth at 6.48 percent year-on-year while registering a high of 7.3 percent in March 2026.

However, with oil prices rocketing globally one may be tempted to conclude that the rise in value rather than volume of petroleum and products contributed to LSM growth.

To conclude, there is an urgent need for formulating and implementing out of the box solutions that envisage a massive reduction in current expenditures – be they through a wage freeze, a procurement freeze (other than operational costs) as well as massive reforms in pensions (initiating employee contributions for the 7 percent employed by the state today) and a freeze on domestic borrowing.

Copyright Business Recorder, 2026