
While addressing the World Economic Forum at Davos in January, Prime Minister Imran Khan claimed that the year 2020 will be one of economic growth for Pakistan. Khan’s words echoed his vows to the domestic audience, as he has promised fiscal “development” in the country within the ongoing calendar year.

After a tumultuous first 12 months since the Pakistan Tehreek-e-Insaf (PTI) government took over in August 2018, the fiscal positives for the country have indeed been tangible in recent months.

In September, Pakistan’s current account deficit dropped by 80 percent to a 41-month low of $259 million, with a 111.5 percent rise in foreign direct investment (FDI) and 194 percent increase in private investment. With FDI of $1.34 billion during the first half of the current fiscal year, a 68.3 percent increase was registered in January, compared to $796.8 million of the same period of the previous fiscal year.

This month, the reserves of the State Bank of Pakistan (SBP) also hit a 21-month high at $11.586 billion. The economic positivity was also reflected by the Karachi Stock Exchange (KSE), which registered a 16-month high this month, crossing the 42,000 point mark after a cumulative increase of 13,000 points in four months.

The financial developments in Pakistan have been duly recognized globally as well, with Moody’s Investor Service upgrading Pakistan’s economy outlook from negative to stable in December. The World Bank has also acknowledged Pakistan as one of the top 10 “most improved” countries in the Ease of Doing Business Index.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

While there are positives aplenty, almost all of them have come in the aftermath of Pakistan reaching a 13th bailout agreement with the International Monetary Fund (IMF) in July last year. The agreement was designed to address a multitude of macroeconomic imbalances spearheaded by a balance of payment crisis.

The PTI government was much criticized for taking over nine months to go to the IMF. Finance Ministry officials revealed at the time that the initial plan under former Finance Minister Asad Umer had been to seek aid from other countries instead of approaching the Fund, for which a Finance Bill was also passed 12 months ago.

The delay meant that by the time the government implemented an IMF instructed market-driven currency exchange rate, the Pakistani rupee had already lost over 50 percent of its value against the U.S. dollar. However, in the six months since the IMF bailout agreement, the Pakistani rupee-U.S. dollar exchange rate has eased from around 165 to the current 155.


While the government’s delayed response aggravated the currency exchange crisis, financial analysts argue that its foundation were laid by the previous Pakistan Muslim League-Nawaz (PML-N) government, whose Finance Minister Ishaq Dar had kept the Pakistani rupee-U.S. dollar exchange rate artificially afloat around the 100 mark.

“There has been an annual 5 percent depreciation for the rupee against the [U.S.] dollar since at least the 1970s. Whenever you artificially fix the value – like [former Prime Minister] Shaukat Aziz fixed it around 60-65 or Dar at 100 – that depreciation isn’t allowed. And when you do that, the currency rates snaps back into its actual place [after the period of artificial valuation],” Financial Analyst at FX Empire Shahab Jafry told The Diplomat.

“Currency markets work on trends and sentiments. This snap forms a self-fulfilling prophecy, which generates a multiplier effect. And as a result we have seen the [Pakistani] rupee fall over 40 percent and not the 20-25 percent it would have fallen over the previous four to five years,” he added.

While the IMF-dictated policies have steered the economy toward macro corrections, the impact on the masses has been especially jarring. Furthermore, the abovementioned delay in agreeing to the IMF terms meant that by the end of August 2019, inflation had hit an 87-month high of 11.6 percent. January saw a 12-year high inflation rate of 14.6, which the State Bank of Pakistan declared “transitory.”

Diplomat Brief Weekly Newsletter N Get first-read access to major articles yet to be released, as well as links to thought-provoking commentaries and in-depth articles from our Asia-Pacific correspondents. Subscribe Newsletter

The IMF conditions, coupled with the government’s negligence leading up to the bailout, continue to take their toll on the masses with persistent increase in prices of gas, power, and fuel. Furthermore, while inflation has caused an hike in the prices of commodities and food items, mismanagement has seen shortages of basic dietary ingredients like tomatoes, wheat, and sugar.

The state has attempted to address the inflation through the SBP maintaining a high policy rate at 13.25 percent, providing the increased interest rate as a savings incentive for the masses. However, critics argue that with the inflation being cost-push and not demand-pull, the enhanced rate won’t suffice in addressing it. Furthermore, the high interest rate is attracting overseas investment in treasury bills.

“The high investment is owing to carry trade, where overseas investors are putting their money here owing to the high interest rate – this is ‘hot money.’ When you’re getting hot money owing to high interest rate you’re reluctant to reduce the interest rate, especially when there are no triggers for growth,” maintains Shahab Jafry.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

Farrukh Saleem, a former spokesperson on economy for the PTI, says the government has been trapped by this hot money. “They’ve attracted the $2.2 billion owing to high interest rates – through treasury bills, and rupee convertible accounts. The interest rate in the U.S. is 1.75 percent, while Pakistan is offering 13.25 percent. So they are borrowing [U.S. dollars] and investing them. If the government lowers the interest rate, the investors will run away,” he told The Diplomat.

Saleem, whose criticism of the government’s policies prompted the PTI government to disown him as their spokesperson last year, further argues that Pakistan’s economic outlook depends on which statistics you choose to read into.

In November, Federal Board of Revenue (FBR) reported a shortfall of 220.4 billion rupees in revenue collection. A 1 trillion-rupee shortfall is expected on the revenue target of 5.230 trillion, which had been revised in December from the original 5.503 trillion rupees at the start of the fiscal year.


While it is normal for Pakistani governments to be overambitious in revenue generation targets, analysts believe that the deficit this time around might be unprecedented.

“Historically the highest was the 8.8 percent deficit in 2013. This time it is going to be the highest. Last year’s revenue collection was 3.8 trillion rupees, now they have taken it to 5.5 trillion rupees. Historically we aim for an 18-20 percent increase in budget, but this time it’s a 45 percent rise, which is unprecedented,” said Saleem.

“There will be additional sales tax, because they haven’t been able to collect direct taxes and the shortfall is evident. If you have collected 2.083 trillion rupees in the first six months, then you clearly can’t add over 3 trillion more. And the easiest way for them to collect sales tax is through increasing power and gas tariffs and fuel prices,” he added.

Officials argue that the high budget goals were set based on the growing number of taxpayers and filers in the country. The 2.7 million tax filers for tax year 2019 was almost twice the number of filers in the previous year, but still a fraction of the number of individuals that come under the tax net.

The PTI government had come to power over vows of accountability and transparency, which meant greater scrutiny on tax returns and a crackdown on largescale corruption, which Khan deems as the predominant reason behind Pakistan’s economic woes.

The government aims to bolster the economy by filling the fiscal holes caused by misappropriation, which resulted in the promulgation of the National Accountability (Second Amendment) Ordinance, 2019 in December.

Even so, given the fiscal impact felt by the masses in the first year-and-a-half of the PTI rule, a significant percentage of the populace has become more skeptical. Critics blast such measures for being “selective accountability” designed more to target political opponents than for any benefit to the economy.

This rings truer given the continued influence of former PTI General Secretary Jehangir Tareen over the government, despite having been disqualified by the Supreme Court. Furthermore, the PTI’s critics point to Tareen, and other business and mill owners in the PTI’s federal and provincial cabinets, who benefit from financial crises like inflated sugar prices.

Critics say there is a lack of economic growth in the country, which even Khan’s aide on commerce concedes, and question how the high interest rate could result in any progress for local businesses.

Salman Shah, the government’s financial advisor in Punjab, however, points to the extent of the economic crisis that the PTI inherited, and maintains that the worst is over.

“We’ve had to carry out painful reforms – made the exchange rate market-based, which led to massive devaluation and inflation particularly in energy products, and food inflation even more so, but we’ve been firefighting to ensure that the more vulnerable segments are brought into the social safety net to mitigate the impact of macro adjustment. The likes of Ehsaas Programme [to address inequality] and Kamyab Jawan [to provide opportunities to the youth] are prominent examples,” he told The Diplomat.

“We need to see why we repeatedly go to the IMF. Structural transformations are needed in Pakistan’s production system – agriculture, industry, or services – to improve our productivity and export competitiveness,” says Shah. “Import substitution with domestic production, and export promotion is important. Car manufacturing, for instance, has been declining in the country because a lot of its constituents are imported – that needs to change. In agriculture, owing to devaluation our wheat has become cheaper in dollars, hence it is being increasingly smuggled, causing the current domestic shortage.”


Enjoying this article? Click here to subscribe for full access. Just $5 a month.

“[Meanwhile], exchange rate realignment have made our exports more competitive, but we need to make them even more robust. Energy and gas export sectors are being given regionally competitive prices. Yes, there are glitches, but they are being addressed. The uproar among the Faisalabad textile businesses [over energy prices] is not as much as it was a few months ago. Similarly, this so called ‘hot money’ owing to high interest rate is not a demon that we were better off without. In fact, the $2.2 billion that has come, means the domestic banks now have [an] extra $2.2 billion which they can lend to the private sector – when that happens, the yield curve would come down, bringing the interest rates down,” he adds.

Khan’s dealings in Davos, where he met U.S. President Donald Trump and IMF President Kristalina Georgieva, are also being seen as evidence of traction that Pakistan’s regional role is getting internationally.

The potential for increased U.S. influence in the region, amid the continued search for stability in Afghanistan, and the standoff with Iran following the killing of its Quds Force commander Qassem Soleimani, could be interpreted in the power corridors of Islamabad and Rawalpindi as an opportunity for the country to make itself useful for Washington again. However, Islamabad would have to counterbalance any financial gains from Washington with its trade-war adversary, Beijing, which continues to dictate the China-Pakistan Economic Corridor (CPEC).

Relaxation at the counterterror watchdog Financial Action Task Force (FATF) is one of many financial and geopolitical benefits that Islamabad will seek in exchange for letting the IMF run its economic affairs. It is based on IMF instructions that Pakistan has been asked to keep the interest rate higher than the inflation rate, with the government having been barred from borrowing money from its own central bank.

“The borrower feels the impact. If it’s for consumption then there is less consumption, if for investment then there is less investment. We’re basically running the IMF program. As things stand we are meeting all the indicators and targets given to us,” Shah says.

“However, the CPEC is a huge factor in increasing investment. Many foreign parties are coming and buying areas in the special economic zones. The first drops of rain have come,” he adds.