April 16, 2023


As Pakistan faces one of its worst economic crises, there is so much speculation about the present, past and future scenarios. Amidst the noise of what could have been done, what should be done, and what will be done is the reality of what is. Sifting through the propaganda and paranoia, it is important to have a critical assessment of the factors that have led to the financial abyss Pakistan currently finds itself in and the way forward.

A solid economic roadmap is of utmost importance to a regular Pakistani like me who despite being mortified at the unprecedented inflation and other dismal financial indexes of Pakistan’s economy believe in my beloved homeland’s resolve to get out of the current morass with a long-term agenda to fix its micro and macro ills. Is there a tangible plan or will Pakistan continue to teeter on the edge of political self-serving promises and empty slogans of all-will-be-well?

With several doomsday scenarios swirling around Pakistan’s economy, I’m of the simple opinion that the first step to the formation of a roadmap is an analytical evaluation of the reality. Economic experts with decades of tangible work to support their theories and ideas bring forth a multi-dimensional assessment that is greatly more important than the rhetoric and blame games of the fourteen-party incumbent government and their one-party opposition.

Uzair Younus is the “director of the Pakistan Initiative at the Atlantic Council’s South Asia Center. He also works as the Vice President at The Asia Group, where he advises global companies on developing and executing strategies to align their business strategy with public good needs across South Asia. He also supports companies develop strategic initiatives and communications strategies to credibly increase their reputation in key markets.

Younus previously served as manager for engagement and strategy at Dhamiri, an innovation firm helping companies align their business competencies with public good needs. He was also a director at the Albright Stonebridge Group’s South Asia practice. In this role, he helped clients develop strategies for long-term growth in the region and assess political and economic developments.


MT: Pakistan’s external debt and liabilities are almost US $130 billion or around 95 per cent of its GDP. The cash-strapped country has to return a total of US $80 billion in the next three-and-half years, when the reserves are only at US $3.2 billion and the economic growth rate a mere two percent. What can be the short, medium and long-term goals to reduce Pakistan’s external debt and increase the foreign exchange reserves?

UY: There are a few ways in which countries can get foreign currency inflows, key among them being exports, remittances, foreign direct investment, and borrowing. In the case of Pakistan, the country has faced external sector crises because it has not built up sufficient capacity to earn greater export earnings and attract more FDI, especially in export-oriented sectors.

So in the long-run, shifting to a more export-oriented economy and improving ease of doing business is critical to meeting debt repayment needs.

In the medium-term, the country’s policymakers must commit to prudent macroeconomic policies, especially as they relate to the fiscal deficit. Most forget that excessive fiscal deficits have a direct link with external sector crises, and Pakistan’s current woes have a lot to do with the sovereign’s inability to raise sufficient taxes.

In the immediate term, the country must engage with the IMF, the global lender of last resort. Being in an IMF programme provides comfort for foreign creditors, including bilateral lenders, that the country is committed to a baseline level of reforms and prudent policies. This then unlocks financing that is critically needed to rescue the economy.


MT: Pakistan is the fourth largest debtor of the IMF with an outstanding debt of $7.85 billion, and now in the twenty-third IMF bailout programme since 1958, with $1.1 billion tranche still hanging in the balance. What are the reasons that have forced Pakistan to seek twenty-three bailouts from the IMF when most countries sort out their economic crises in three or four programmes? Second, what is the cause of the delay in reaching the Staff Level Agreement with the IMF for this latest tranche?

UY: A continuous refusal to follow common sense policies is the reason why Pakistan keeps going back to the IMF time and time again. If one reads the prescriptions offered in the successive IMF documents, it is quite evident that not much has changed, be it recommendations focused on broadening the tax net, reforming the power sector, or eliminating distortions in the economy that reduce investments in productive sectors.

In addition, a reliance on geopolitical rents has meant that Pakistani elites have become used to getting bailed out. This has reinforced bad habits and fostered a Dutch disease problem in Pakistan, as access to cheap foreign currency in exchange for geopolitical compromises has historically delivered spurts of growth.

We are not reaching a new SLA because of the credibility gap the country has with the IMF due to the disastrous policies of two successive governments. This credibility gap has grown since the resumption of the ongoing programme in February 2022. The Khan government soon upended the agreements with the IMF, pushing through a disastrous fuel subsidy that set a minefield for his successors. Soon after this credibility gap was bridged, the Sharif government made a U-turn, bringing in Ishaq Dar as finance minister. Dar’s desire to shout down the dollar and negotiate by looking into the IMF’s eyes was counterproductive, bringing an economy already on its knees to its deathbed.

At the same time, shifting priorities for countries like Saudi Arabia and China meant that they were not willing to dole out money to a state and government that is not keen to mend its ways. Remarks by Saudi interlocutors, public and private, have been the clearest demonstration that the old ways of doing business will no longer be pursued. But rather than course correct and introspect, Pakistan’s ruling elites continue to be stuck in the past.

Finally, the United States, the old patron that is broadly criticised in mainstream discourse in Pakistan, has left Afghanistan. This means that Pakistan’s relevance has declined in Washington, leading to the Biden administration’s policy that can be best described as ‘strategic inattention’ towards Pakistan. The outcome of this posture in Washington is that the United States is not willing to leverage its clout to push for an easing of conditions on Pakistan through the IMF, especially given the country’s reliance on China in an era of growing US-China rivalry.


MT: The most recent government-released figures on inflation depict a major year-on-year increase of thirty-one percent, whereas food inflation has reached an all-time high of over forty-five percent. Despite Pakistan government’s claim that inflation is a global phenomenon, Afghanistan’s inflation rate is five per cent, India’s six per cent, and Bangladesh’s nine per cent. Why is Pakistan’s inflation rate so much higher than that of its neighbours?

UY: When you print too much money while squeezing the economy through things like import curbs, then you end up with too much money chasing after too few goods. This, coupled with disastrous agricultural policies and a devastating flood has unleashed the inflation we are seeing today. Despite this, the sovereign is unwilling to control fiscal profligacy and raise taxes—the State Bank continues to print money through the backdoor by providing liquidity to banks.

When too much money chases fewer and fewer goods, inflation like the type we are seeing is but a natural outcome. To date, those in charge of managing Pakistan’s economy are running large fiscal deficits, financing them through the backdoor through Open Market Operations (OMOs), and keeping negative real interest rates in the economy. So long as this continues, the inflation nightmare will continue to erode purchasing power and inflict generational trauma on millions of ordinary citizens.


MT: Pakistan’s energy sector has been a major retardant of economic growth. The energy crisis has resulted in a loss of $82 billion in GDP between 2007 and 2020, and a twenty-three percent reduction in per capita GDP. The energy sector circular debt, including PKR 2.3 trillion in power sector, PKR1.4 trillion in gas and PKR 600 billion in oil, has now crossed the PKR 4.2 trillion mark and is growing. What needs to be done to solve the circular debt crisis?

UY: Privatisation and regulation of the power sector is step number one. It then must be accompanied by directing the savings from privatisation to beefing up a regulator, so it can monitor and govern the market.

The issue in the energy sector has been that politics has driven policy, whether it be on what kinds of power projects are pursued and in what regions, to the setting of prices across the value chain. So long as politics determines energy and power sector policies, circular debt will forever continue to grow.


MT: For decades, successive governments have privatized state-owned enterprises (SOEs) to improve their performance and to lower fiscal risk. In Pakistan, SOE performance continues to be dismal with losses in billions every year. Almost half of the two hundred and thirteen SOEs are in loss. Why hasn’t any government been successful in either fixing the SOEs or disposing them off through privatisation?

UY: This remains a problem because every political party in opposition stands against privatisation but then is for privatisation when it is in power. SOEs are ways to hand out political patronage and accumulate political capital. Successive governments are borrowing from future generations to keep this farce going.

In addition, the influence and role of military-run businesses continues to grow. These businesses are not guided by the global norms of maximizing shareholder returns, meaning that they lead to inefficient allocation and utilization of capital in a country that is already struggling to attract capital. The military’s influence on the economy also distorts markets, stunts private sector participation, and forces policy interventions that further close of the economy and reinforce rent-seeking behaviour.


What Pakistan needs are shock and awe reforms that fundamentally alter the political economy. But for that to happen, the very people that benefit from the status quo—across the political and institutional aisle—will have to lose their benefits. And this is the fundamental tragedy with Pakistan: we expect the beneficiaries of the status quo to reform and alter it.

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