Pakistan’s economic turnaround a ‘mini-miracle’: report

Pakistan’s economic turnaround is drawing the attention of global investors, with Barron’s, a leading US financial publication, describing the country’s progress as a “macroeconomic miracle of sorts”.

According to a recent Barron’s report, titled ‘Pakistan Isn’t That Risky Anymore. Its Economy Is a Mini-Miracle’, Pakistan, a country of 255 million, has seen inflation plunge from nearly 40 per cent to close to zero over the past two years. Eurobonds maturing in 2031 have doubled in value, and the Karachi Stock Exchange index has tripled. A $7 billion stabilisation agreement signed with the International Monetary Fund (IMF) in September 2023 has already resulted in over $2 billion in disbursements.

“Pakistan is a good story,” Genna Lozovsky, chief investment officer at Sandglass Capital Management, told Barron’s. “So good it’s not risky enough for us anymore.” While the latest border tensions with India pose concerns, analysts quoted in the report suggest that they are unlikely to derail the country’s recovery. Pakistan’s real risk, they argue, lies in its economic history, marred by repeated cycles of boom and bust. The current IMF arrangement is the 24th since Pakistan joined the Fund in 1950.

Khaled Sellami, an emerging markets sovereign debt manager at Barings, believes there are signs of lasting improvement this time. Pakistan’s recovery began after a near-default episode in 2022-23, when devastating floods and soaring oil prices -- worsened by Russia’s invasion of Ukraine -- combined with domestic political upheaval. Then-opposition parties orchestrated a no-confidence vote that ousted Imran Khan, who was later jailed on corruption charges.

“Everyone thought Pakistan would default along with Sri Lanka in 2023,” Alison Graham, chief investment officer at Voltan Capital Management, told Barron’s.

Instead, the State Bank of Pakistan (SBP) sharply raised interest rates from 10 per cent to 22 per cent, triggering a recession but successfully curbing inflation. Sharif, after winning a disputed general election in February 2024, appears to have mended strained ties with the military establishment -- potentially ensuring political stability through to 2029.

The report also notes that Pakistan’s key creditors -- China, Saudi Arabia and the United Arab Emirates -- rolled over existing loans without extending new ones. Meanwhile, GDP growth rebounded to 2.5 per cent last year, and the country posted a rare current account surplus along with a primary fiscal surplus (excluding interest payments).

Yet the road ahead remains difficult. The IMF programme demands tax reforms, including a 50 per cent increase in revenue collection, and significant cuts to power subsidies -- steps that are likely to face resistance from entrenched interests and the broader population.

Comparisons with India highlight Pakistan’s developmental lag. While India has surged in industries like information technology and pharmaceuticals, Pakistan still depends heavily on low-value exports such as cotton, garments, and cereals. Though IT outsourcing revenues have risen to $3 billion annually in recent years, India’s are in the range of $200 billion, Barron’s reports.

“Pakistan remains extremely fragile to external shocks,” Graham warned, noting the country’s susceptibility to global commodity prices and political cycles. “When there is a rally, you need to be in early.”

Sellami, however, remains cautiously upbeat. He said Pakistan’s limited external options may, paradoxically, be a blessing in disguise. With support from traditional allies such as the United States no longer assured, and new partners like China and Gulf states unwilling to offer blank cheques, Pakistani policymakers have little room for deviation.

“The government knows if they deviate from the tightrope they are walking, they won’t have external finance,” Sellami said. Nonetheless, Barron’s notes that Prime Minister Sharif and his administration deserve some credit for staying the course.