September 26, 2025
Khyber News
After Stability, Pakistan Must Go for Growth
The last three years after COVID have been turbulent ones for Pakistan’s economy. There was raging inflation that peaked at over 30% per year, tumbling exchange rate, large current account and budget deficits, and weak to non-existent economic growth. Much of this was due to the disastrous economic policies put in place by the Sharif government after Imran Khan’s downfall from power was engineered with the real impetus coming from the military.
In his last full year in office, Khan had restored growth to the economy, coming in at a respectable 5%, while keeping inflation under 10% and seeing record remittance inflows which helped keep the current account in balance.
The Sharif government (now led by Nawaz Sharif’s brother Shehbaz Sharif), based on the PML-N party, has held power since 2022. They were basically installed by the military putting together a vote of no-confidence in the National Assembly causing the fall of the Imran Khan government, then avoiding a new election and installing Sharif instead. Elections were finally held in February 2024 after delays, and the PTI, the party of Imran Khan, clearly won in a landslide all across Pakistan, but the military stepped in, rigged the results and declared Sharif the winner. Almost all independent observers declared this a farce, but Khan was not only defeated, he was imprisoned and then convicted on trumped up charges and now remains behind bars.
Pakistan’s political economy is rather murky to outsiders. While Sharif is technically in charge, the military holds the final say on anything significant. Initially the army let Sharif put the hapless Ishaq Dar back in charge of the economy. Dar was responsible for the poor growth and minimal exports in the 2010s due to his policy of artificially boosting the value of the rupee against the dollar. The same policy almost took Pakistan to the brink of ruin in the last few years. By 2023 inflation was blistering at 30% or higher, the rupee to dollar link could not be maintained, and the current account was in deep deficit. The current account is just the trade deficit or surplus added to the remittance flows. It tells the observer whether dollars are flowing into or out of the country on a net basis. With the current account in deep deficit, Pakistan was struggling to pay the bills. For a few months, there was even concern Pakistan could default on its domestic debt, just as Sri Lanka had done. That would have had catastrophic economic results. Instead, the government turned to the IMF.
The IMF, which is effectively the lender of last resort, is who you call when you have run out of dollars, and no one is willing to lend you any. By its charter, it can help countries who are facing bankruptcy by providing large dollar loans. But in return, it demands the nations that come before it reform their economic systems and get their fiscal house in order.
For Pakistan that meant several things. First, Ishaq Dar got ejected and a technocrat, Muhammad Aurangzeb, was put in charge of the economy and the Ministry of Finance in February 2024. Aurangzeb had been CEO of Habib Bank for six years and previously had been with JP Morgan as CEO of their Global Corporate Bank for Asia Pacific Region. In many ways, he is a throwback to Shaukat Aziz, the Finance Minister under Musharraf who came from a background as senior figure at Citibank.
Aurangzeb oversaw the taming of inflation, which was achieved by stunningly high interest rates over 20% for an extended period of time. By late 2024, inflation was rapidly subsiding, and in response the State Bank of Pakistan has aggressively lowered interest rates. Meanwhile, remittances are up, and imports have been contained, resulting in a small current account surplus.
The government has also cut spending, notably eliminating a number of subsidies. Among the most important was for petrol. Subsidizing petrol, instead of simply charging what the world market price is for it, was a huge mistake. It drained the treasury of badly needed funds while providing a handout for the better off sections of society that owned cars or motorbikes. About half of Pakistani households now have a motorbike, but the other poorer half were not benefiting from the petrol subsidy. With a variety of economy measures, the government now is running a primary budget surplus, which means it collects more in taxes than it spends, not counting interest payments on existing debt. A government with a primary budget surplus is in a healthy state financially.
With these measures, Pakistan has achieved macroeconomic stability for the first time in years. But what it hasn’t done is triggered rapid economic growth. Pakistan remains a poor nation and needs 25 years of rapid growth to reach the status of a lower-tier developed society, on the order of Turkey for example. Pakistan has a huge population giving it a large domestic market, so export led growth is not as vital as it would be for a smaller nation. But Pakistan needs to mobilize substantial funds for investment in the domestic and export sectors of the economy.
The sharp fall in interest rates is already having a strong stimulative effect on the economy and domestic purchases. Motorcycle sales in August were 150,000, up 42% compared with August 2024. Car sales are also surging. In August they reached 14,000, up 28% over July and 60% compared with August 2024. Motorcycle and car sales are good markers of consumer health and the strength of demand in the economy. Car sales are still only running at about 170,000 units per year, far below the maximum figure of 350,000 reached in 2018. We need to see annual motorcycle sales reach 2.5 million and car sales to surge to 500,000 if the economy is really fully recovering. Pakistan also needs to keep its exchange rate undervalued compared with the dollar, this will help Pakistani exporters while putting downward pressure on imports without resorting to tariffs, which have a host of distorting effects on the economy. Economic growth last fiscal year did not even reach 3%, while predictions for this year are 4-5%. Pakistan needs to maintain economic stability while helping the private sector get the funds it needs to push growth up to the 7-8% range and keep it there for two decades. To keep the economy stable, the State Bank needs to keep inflation in check and allow the exchange rate to adjust to keep the currency at an appropriate value to the dollar. If Pakistan can achieve that, it will transform the country.
After several decades of military rule and poor civilian governance, Pakistan appears to have stumbled onto a formula that might give it a chance to really develop. The military is not engaging in direct rule, and there will be no coup d’etat, but it is also insisting that the important economic decisions be made by technocrats. Sharif is a fig leaf Prime Minister with little real power; he is under the thumb of the generals and lacks genuine support of the population. Sharif should focus on delivering in those areas where he can make a difference. Vastly upgrading and expanding the education system, getting every child at least a decent primary education, and improving both infrastructure for transport and solving the problem of circular debt in the power grid. This system is not sustainable in the long run, but it could be kept in place for another decade, as long as Imran Khan is kept in jail.
