Pakistan’s economy appears to be undergoing a dramatic shift, with economic indicators stabilizing after years of volatility, signaling potential for investors who have long viewed the country as high-risk.
In a recent article, “Pakistan Isn’t That Risky Anymore. Its Economy Is a Mini-Miracle,” financial news publication Barron’s has noted that the country managed to slash annual inflation from nearly 40% to close to zero in just two years. Similarly, it stated, the value of Pakistan’s Eurobonds maturing in 2031 has doubled from 40 cents to 80 cents on the dollar, and the Karachi Stock Exchange index has tripled. Additionally, the government’s inking of a $7 billion stabilization agreement with the International Monetary Fund in September 2023 has seen the release of over $2 billion already.
“Pakistan is a good story,” said Genna Lozovsky, chief investment officer at Sandglass Capital Management, which focuses on distressed emerging market debt. “So good it’s not risky enough for us anymore,” he added.
According to the article, analysts believe recent tensions with India are unlikely to derail Pakistan’s economic rebound. However, they warn, structural fragilities remain and the country has received IMF support 24 times since 1950 with a pattern of boom-and-bust cycles. Yet, they insist, the current stabilization may differ from past cycles.
Pakistan teetered on the brink of default in 2022–2023, following catastrophic floods, surging oil prices triggered by Russia’s invasion of Ukraine, and significant political instability. “Everyone thought Pakistan would default along with Sri Lanka in 2023,” said Alison Graham, chief investment officer at Voltan Capital Management. Seeking course correction, the State Bank of Pakistan raised interest rates from 10% to 22%, controlling inflation but driving the country into recession. A new government under Prime Minister Shehbaz Sharif, formed after the disputed elections of February 2024, saw support from the military, indicating political continuity through 2029.
Major creditors, including China, Saudi Arabia, and the United Arab Emirates, rolled over existing loans but did not extend new financing. Nonetheless, the country’s GDP grew by 2.5% last year. According to Khaled Sellami, an emerging markets sovereign debt manager at Barings, Pakistan is currently running a current account surplus and a primary fiscal surplus (excluding interest payments), both uncommon for the country in recent years.
However, the report notes, the IMF program mandates a difficult reform agenda: raising tax revenue by 50%, reducing electricity subsidies, and addressing systemic inefficiencies. These measures may face strong resistance from domestic political and economic stakeholders. “Pakistan remains extremely fragile to external shocks,” Graham warned. “When there is a rally, you need to be in early.”
Despite the challenges, Sellami maintains a positive outlook on Pakistani Eurobonds, signaling some investor confidence in the country’s direction. The report notes that the country had no choice but to walk the tightrope it is currently on. However, it concludes, the current government’s policies deserve some credit for navigating the country to stability, with an eye for growth.