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Pakistan’s Economic Dilemma

Unless Pakistan’s governing elite musters the courage to undertake the necessary changes to confront powerful organizations, the country’s future is doomed to be worse than its past or present.

By MAHNOOR INAYAT | November 2022


Pakistan is a beautiful country of more than 225 million people. It has the world's fifth largest population, but has repeatedly experienced macroeconomic crises, raging inflation, current account and trade deficits, depleting foreign exchange reserves, currency devaluations, spiralling poverty, balance of payments crises, alarming unemployment and a widening rich-poor divide. As Pakistan attempts to reclaim critical international backing driven by the IMF, the country's prospects are shrouded in unprecedented uncertainty. The challenges surrounding Pakistan today are various, ranging from political to social and economic and these altogether have contributed equally to the bad image of Pakistan in the international arena.

Not a single political party is responsible, while the actual problem is mismanagement issues which are deeply rooted in structural reforms since independence. Today’s structure of the economy includes rent-seeking elements, government involvement, inefficiency, indirect taxation and balance of payment crises. These elements consequently have been the reason behind the 1998, 2008, 2018 and now the 2022 crises. Keeping aside political and other factors and looking into economic factors in terms of State Bank of Pakistan reserves, the percentage of the current account deficit is the same as the 1998, 2008, and 2022 crises. The situation in 2018 was marginally better.

The three main structural issues of Pakistan’s economy are: productivity level, which is low; mismanagement of the unsustainable fiscal system and no change in policies; and the black economy which has sown the seeds of rampant corruption,

The story unfolding in Pakistan has a striking resemblance to Sri Lanka. Islamabad is confronted with massive socio-economic crises. Its global commodity prices surge has stoked runaway inflation at about 25% and the mounting dollar payment for the country’s food and energy import bill has eroded reserves and the value. The debt services and rating downgrades have further enhanced the weakness of the currency. In early FY23, Pakistan’s economy was undergoing a long-overdue adjustment as it recovered from the effects of Covid-19.

The economy expanded by 6.0 per cent in FY22, thanks to supportive macroeconomic measures. Strong local demand, along with sluggish productivity growth, high global commodity prices, and the global economic recession, all contributed to significant external imbalances. To stabilize the economy, the government began employing a variety of policies to restrain aggregate demand, such as a contractionary budget and hikes in administered energy prices. As a result of the stabilization measures, growth was expected to decrease, the exchange rate to stabilize, total public debt to gradually decline from the present high levels, and foreign exchange reserves to gradually accrue.

Recent floods across the country have had tremendous human and economic consequences. Pakistan has been experiencing strong monsoon rains since June 2022, resulting in catastrophic and historic flooding. Almost one-third of the country is submerged in water today and nearly 33 million people are affected. Over 2 million homes have been damaged or destroyed. The loss of life has also been significant, with more than 1,700 fatalities documented to date. More than 1.1 million animals are expected to have died, and over 25,000 livestock shelters have been damaged. More than 13,000 kilometres of road are reported to be affected while 440 bridges have been damaged or destroyed.


The agricultural sector has suffered the most economic damage, with over 9.4 million acres of cultivated land burned, resulting in major losses to cotton, dates, wheat, and rice. Lower agricultural output is projected to have a detrimental impact on the industrial and service sector, particularly considering the textile industry’s reliance on cotton (textiles account for around 25 percent of industrial output). Flooding will have a long-term impact on output due to infrastructure damage, crop cycle disruption, potential financial sector consequences (microfinance institutions indicate serious solvency issues), and human capital loss. According to preliminary estimates, the flood will increase the national poverty rate by 2.5 to 4.0 percentage points, forcing between 5.8 and 9.0 million people into poverty.

The silver lining for Pakistan is that the IMF has stated that Pakistan has met all its preconditions for the $1.2 billion finance assistance. Pakistan is likely to open more funding from allies such as China, UAE, Saudi Arabia, Iran, and Turkey and from other multinational donors such as the IMF, ADB, etc. The IMF is pushing for deep reforms in Pakistan, from higher taxes to reduced subsidies. The goal is to push Pakistan to raise resources internally, reduce reliance on dollar debts, and move away from populist politics. So far, Pakistan appears to be complying with the IMF.

By critically analyzing the current economic dilemma the question is: Would the world let Pakistan fail?

The world would not let Pakistan fail or collapse because of several reasons as mentioned below.

1. Risks regarding nuclear weapons, falling into wrong hands.
2. Taliban-ruled Afghanistan is Pakistan’s neighbour.
3. Both China and the USA want a stable Pakistan because of its geopolitical significance.
4. Pakistan’s collapse would be disastrous for Biden’s ratings.
5. China has vital strategic interests tied to Pakistan such as CPEC, BRI, etc.

Pakistan, a Cold War ally, relied on considerable funding from Washington and international donors to keep its economy viable. In the post-Cold War era, the United States found a new ally in India, while Pakistan turned to China, the United Arab Emirates, and Saudi Arabia to sustain its debt-fuelled economy. Despite this, Pakistan has remained an agricultural and aid-dependent economy. Analyzing this critically, Pakistan has destroyed its economy over the decades by attempting to match India’s military muscle, which is impossible because India is more twice the size of Pakistan, has four times more population, and has a trillion-dollar economy. Pakistan lags behind India in terms of human development, infrastructure, and socio-economic progress. Because of Pakistan’s instability and insecurity, the country has never truly invested in the foundations of an economic boom, such as robust infrastructure, autonomous institutions, vibrant or indigenous industries, or even a lively democracy. Power shortages in Pakistan have been a stumbling obstacle for domestic manufacturing investors.

The scale of reforms required to improve Pakistan’s performance in both these areas will necessitate unprecedented political will, a phenomenon rarely seen in Pakistan’s history. Unless the country’s governing elite musters the courage to undertake the necessary changes to confront powerful organizations, Pakistan’s future is doomed to be worse than its past. It is not only an issue of addressing difficult economic challenges. In fact, the way ahead would be a battle to save Pakistan’s way of life and its very future.

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