Pakistan needs to end its dependence on oil and gas from outside. The rapid rise of solar power in Pakistan is a huge positive, but it needs to keep growing - The News International
Pak Economy Stable but Growth Slow
By Nayyer Ali MD
Despite the oil and natural gas price shocks from the US Iran War, Pakistan has managed to navigate the crisis without a severe economic downturn. In fact, it has done reasonably well and is expected to continue to grow this year.
The biggest challenge Pakistan had over the post-COVID years was exceptionally high inflation, which peaked at over 30% annually in 2023. Tight monetary policy, carried out by the State Bank of Pakistan via very high interest rates, drove that inflation rate down sharply, even going all the way to 0% in mid-2025. But since then, as interest rates came down and economic activity picked up, inflation has risen. The oil shock from the war drove inflation to over 11%, although it has declined modestly in last two months. The SBP has a goal of keeping inflation around 5-7%, which would normally mean tighter monetary policy given that inflation is above the target. But the SBP thinks much of this inflation is transitory and due to supply shock from the war, so it will hold off on driving interest rates higher for now.
The budget has been kept under control with tighter spending. Not counting interest expenses on the national debt, the budget has actually been in surplus for the last three years. This is called a primary surplus and means that the debt burden as percent of GDP has been steadily declining. The government has done a good job keeping its fiscal house in order. Currently, Pakistan has a debt to GDP ratio of about 70%. If the government continues to maintain a primary surplus this ratio will continue to fall. Getting it down to below 40% would be ideal, giving the government fiscal space to borrow heavily in case of an emergency or severe recession.
Pakistan has also done well on the current account front. The current account is the sum total of the trade deficit and the flow of remittances. If the current account is in surplus, the government is able to accumulate foreign exchange reserves. In the past, Pakistan has had repeated episodes of large current account deficits, which forced the government to go to the IMF for emergency loans, which obviously came with a string of conditions.
For the last year, the current account deficit has been less than 1% of GDP, with some months showing an actual surplus. This has created enough space for SBP to purchase foreign exchange in the open market. As a result, forex reserves have risen from a catastrophically low level of a mere 3 billion dollars in February 2023, to over 20 billion dollars this October. That is still a modest amount for an economy the size of Pakistan, and hopefully the SBP can gradually build reserves over 50 billion dollars.
The SBP has been carrying out a policy of fixed exchange rate, keeping the rupee at 277 to the dollar. This is a mistake. The SBP should allow the rupee dollar rate to float and be determined by the open market. As Pakistan is experiencing higher inflation than the US, the exchange rate should be falling by an equivalent amount to keep the real value of the rupee constant. If this is not done, the rupee becomes too strong, which harms Pakistani exporters and encourages imports. Keeping the currency undervalued compared to the dollar is in the best interest of development of the economy, a strategy the East Asian countries, including China, followed for decades.
While macroeconomic stability is quite welcome, the real purpose of economic policy must be rapid growth. Pakistan is still a very poor developing country. It needs to double economic output per capita and then double it again to reach the level of a low-end developed country, like Portugal or Greece for example. To do that, GDP needs to grow much faster than the population. GDP growth needs to be 6-8% for 25 years. The SBP expects this fiscal year to only show growth of 3.5-4.5%. That pace is just far too slow.
The government can do several things to increase the growth rate. Bringing women into the workforce is an obvious and straightforward policy. Women should be encouraged to work, and workplaces should be made friendly and safe for women, from doctors to factory workers. Pakistan also needs to ensure that every child gets at least 8 years of a quality education. In fact, it should shoot for 12 years, and dramatically increase university enrollment, especially in STEM fields. Sending more youth overseas for education is also useful.
Another major policy should be privatization. The government should not be running businesses. When a government runs a company, it serves too many masters. The employees insist on more wages and less actual work. There is no incentive to turn a profit. Tax revenue is then wasted on keeping businesses afloat that are running chronic losses. The recent privatization of PIA was a good step, but there are many other state-owned businesses that need to be sold to the private sector.
Finally, Pakistan needs to end its dependence on oil and gas from outside. The rapid rise of solar power in Pakistan is a huge positive, but it needs to keep growing. Batteries that can store power for nights need to be deployed. And vehicles need to switch rapidly to electric. China is building four electric vehicle factories in Pakistan which will be a major positive.
Hopefully, Pakistan is on the cusp of a prolonged stretch of rapid growth. In 1990 Pakistan GDP per capita was 50% higher than India, now India’s is higher than Pakistan. That happened because of terrible economic mismanagement under a slew of civilian governments, only interrupted by a stretch of strong growth under Musharraf from 2002 to 2009. The current hybrid regime with a civilian government that is sharing power with the military may give Pakistan the long-term stability it needs. The military is insisting on qualified technocrats to run the economic policy, much like Musharraf used the Citibank banker Shaukat Aziz during his time in power. 25 years of strong economic growth will totally transform Pakistan, making it look like Turkey or Malaysia.
