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Pakistan’s economy was once close to failing, but it has made a strong comeback that has surprised experts around the world.
Over the past two years, the country has achieved what Barron’s describes as a “macroeconomic miracle of sorts,” though this progress is still laced with vulnerabilities.
Indicators of Recovery
Barron’s, a Dow Jones weekly magazine since 1921, outlines that the Key economic indicators now reflect a vastly different picture than that of 2022-23. Inflation, which hit a historic high of 38% in May 2023, has now plunged to just 0.3% as of April 2025. This drastic reduction has been credited to bold monetary tightening, particularly the State Bank of Pakistan’s decision to hike interest rates from 10% to 22%, a move that subdued inflation, albeit at the cost of recession.
With the worst seemingly behind, the central bank has since eased the policy rate by 1,100 basis points, bringing it down to 11%. Meanwhile, Eurobonds maturing in 2031 have doubled in value from 40 cents to 80 cents on the dollar. The KSE-100 index has also surged, tripling in value during the same period.
IMF Bailout and International Backing
The turnaround was further supported by a $7 billion stabilization agreement with the International Monetary Fund (IMF) finalized in September, with more than $2 billion already released.
China, Saudi Arabia, and the UAE rolled over their loans, helping Pakistan maintain liquidity despite not providing any new credit. Alison Graham of Voltan Capital Management recalled that in 2023, most investors had bracketed Pakistan alongside Sri Lanka as a potential defaulter.
“Everyone thought Pakistan would default… but it didn’t,” she stated.
Pakistan’s economic progress has not gone unnoticed by global markets.
Genna Lozovsky, CIO at Sandglass Capital Management, noted, “Pakistan is a good story… so good it’s not risky enough for us anymore.”
Khaled Sellami, sovereign debt manager at Barings, acknowledged the country’s positive current account and primary fiscal surplus (excluding interest payments), calling it a rare achievement in Pakistan’s fiscal history. GDP growth also rebounded to 2.5% in the previous fiscal year.
However, Graham warned, “Pakistan remains extremely fragile to external shocks,” emphasizing the cyclical nature of the economy.
Underlying Challenges
Despite the optimism, Barron’s points out that Pakistan’s economic model still leans heavily on external support. The country aims to increase tax revenues by 50% and cut electricity subsidies under the ongoing IMF programme. It is challenging goals that could test its political will.
Export diversification remains another uphill battle. Currently, cotton, apparel, and cereals make up two-thirds of Pakistan’s export portfolio. While the country is making modest gains in IT outsourcing, climbing from negligible levels to $3 billion annually. It still lags far behind regional players like India, whose IT exports stand at around $200 billion.
Without expanding into higher-value sectors, analysts warn that Pakistan risks slipping back into the boom-and-bust patterns that have long haunted its economy.
India Tensions and Market Resilience
Surprisingly, recent hostilities with India have had a limited impact on investor sentiment.
Finance Minister Muhammad Aurangzeb termed the skirmish a “short duration escalation,” indicating that its financial impact was manageable within existing fiscal space.
Market behavior echoed this resilience. The Pakistan Stock Exchange surged by a record 9% following a ceasefire announcement, signaling restored investor confidence. “
“The market has reacted jubilantly… after Pakistan established effective deterrence against India,” remarked Yousuf M. Farooq, Research Director at Chase Securities.
Pakistan’s future, analysts agree, hinges on its ability to maintain fiscal discipline and win investor trust without expecting endless bailouts.
As Sellami observed, “The government knows if they deviate from the tightrope they are walking, they won’t have external finance.”
The consensus? Pakistan’s recent achievements are commendable, but they’re not irreversible. Continued prudence, reform, and strategic economic diversification will determine whether this “miracle” becomes a sustainable success story or just another temporary escape from crisis.
