doi: 10.1111/aepr.

12486 Asian Economic Policy Review (2024) 9999, 1–19

Pakistan’s Economy: Fallout of 2022

Economic Distress Magnified the Need for
Structural Reforms
Pierre VAN DER ENG†
The Australian National University

This present paper discusses the main issues gripping Pakistan’s economy. It takes a long-term
perspective to indicate that several economic issues are structural, going back at least 60 years.
The present paper substantiates that Pakistan’s current issues were aggravated during 2022, par-
ticularly by the damage caused by large scale floods. Government relief efforts increased budget
deficits, public debt, and inflation. Crop failures dampened export earnings, increased the current
account deficit and added urgency to the need to mobilize foreign exchange for foreign debt ser-
vicing during 2023. In 2024, resolving foreign debt servicing obligations is the touchstone for
achieving macroeconomic stability and initiating reforms to change structural factors inhibiting
Pakistan’s economic growth.

Key words: balance of payments, economy, foreign debt, IMF, Pakistan, structural reforms
JEL codes: N15, N45, O19, O53

Accepted: 8 July 2024

1. Introduction

The 2023 population census of Pakistan confirmed it to be the world’s fifth most popu-
lous country with 247 million people.1 The country became independent after the
decolonization and partitioning of British India in 1947.2 Before then, its four prov-
inces specialized in agricultural production, producing a surplus of food grains and
agricultural raw materials, particularly cotton, in exchange for manufactures from what
after 1947 became India. With around 30 million people at independence, Pakistan
had a relative abundance of natural resources, particularly agricultural land, but no
modern manufacturing sector (Husain, 2019; pp. 10–12).
Figure 1 shows that economic growth remained modest during the 1950s, when
plans took shape for the country’s economic development. These included import-
replacing industrialization and a role for state-owned enterprises (SOEs) in upstream
industries. Particularly the growth of an export-oriented textile industry was expected
to spur economic development and diversification (Papanek, 1967). This took effect

†Correspondence: Pierre van der Eng, Research School of Management, ANU College of Busi-
ness and Economics, The Australian National University, 26 Kingsley Street, Canberra, ACT
2601, Australia. Email: [email protected]

© 2024 The Author(s). Asian Economic Policy Review published by John Wiley & Sons Australia, Ltd on behalf of 1
Japan Center for Economic Research.
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs
License, which permits use and distribution in any medium, provided the original work is properly cited, the use
is non-commercial and no modifications or adaptations are made.
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Pakistan’s Economy Pierre van der Eng

Figure 1 GDP per Capita in Four South Asian Economies, 1950–2022 (10,002,017 international
dollars). Sources: Data for 2000–2022 comes from World Bank (2024) which is linked to data
for 1950–2000 from Maddison (2006). [Color figure can be viewed at wileyonlinelibrary.com]

after 1960 when Pakistan’s gross domestic product (GDP) per capita commenced a
period of almost sustained growth lasting until 1993, with a brief interruption related
to the 1970 independence war in Bangladesh. In broad terms, Pakistan’s GDP per
capita kept pace with Sri Lanka and by 1970 Pakistan overtook India in this respect.
Despite industrialization, agriculture remained the mainstay of Pakistan’s economy.
Farmers produced food crops like rice and wheat for domestic consumption and
export, and also cotton for domestic processing and export. Newly discovered natural
oil and gas reserves came on stream in the 1960s. Low-cost energy supplies facilitated
the industrialization process. Processing of locally produced cotton increased export
production of textiles. In the 1960s, analysts expressed optimism about Pakistan’s eco-
nomic future, noting a rate of industrialization comparable with Japan (for example,
Papanek, 1967, pp. 30 and 239).
Figure 1 shows that economic growth did not accelerate to the levels post-war
Japan experienced. Starting 1993, Pakistan’s per capita GDP growth slowed and the
economy entered successive ‘slow-go’ episodes. On balance, economic growth slowed.
India in 2010 and Bangladesh in 2018 overtook Pakistan in GDP per capita terms.
Why did Pakistan’s economic growth slow down since the early 1990s? Do answers
help to understand the current episode of low growth since 2019 and offer pointers to
issues Pakistan needs to resolve to secure sustained growth?

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Pierre van der Eng Pakistan’s Economy

The next section discusses key macroeconomic characteristics of Pakistan’s econ-

omy during the past 60 years. Section 3 explains why Pakistan’s economic growth
worsened and why it applied for support from the International Monetary Fund (IMF)
in 2019. Section 4 discusses the immediate and most urgent issues which Pakistan’s
government needs to resolve during 2024. Even if that can be done, various structural
issues require resolutions. Section 5 briefly addresses one of those structural issues.

2. Pakistan’s Long-Term Economic Development Experience

Based on the growth of GDP per capita, Table 1 identifies the broad phases of ‘slow-
go’ economic growth in Pakistan. The years after 1992 are characterized by alternating
‘slow’ and ‘go’ growth periods. As a consequence, average per capita GDP growth has
been a low 1.4% per year during the last 30 years. While GDP growth was significant
at 5% to 6% during ‘go’ periods, on balance that was insufficient to offset high popula-
tion growth and setbacks during the ‘slow’ episodes. Since 1947, Pakistan’s govern-
ments were on average in office for just 2.7 years. The regular changes in party
dominance of the democratically elected governments, interspersed with periods of
martial law and military rule, suggest discontinuities in the policies that affected the

Table 1 Phases of economic growth in Pakistan, 1950–2024

GDP Per Number of

(constant capita governments, IMF
Period Phase prices) Population GDP military rule facilities

1950–1960 Slow 3.1% 2.5% 0.6% 7, 1 1

1961–1992 Go 6.2% 2.9% 3.2% 5, 3 10
1993–2002 Slow 3.3% 2.4% 0.9% 3, 1 8
2003–2007 Go 6.2% 2.5% 3.7% 3 1
2008–2012 Slow 2.6% 2.5% 0.1% 2 1
2013–2019 Go 4.6% 2.4% 2.2% 4 2
2020–2024 Slow 2.5% 2.0% 0.6% 3 2
1993–2024 - 3.8% 2.4% 1.4% 11, 1 12

Notes: 1 Period refers to fiscal years, for example, 2023 is FY2022-23.

2 The number of governments in each period excludes caretaker governments.
3 IMF facilities cover stand-by arrangements, extended fund facilities, and one structural adjust-
ment facility.
4 Data on 2024 GDP is provisional.
5 Annual average growth rates for GDP, population, and GDP per capita growth.
6 Some of the same governments and IMF facilities feature in successive periods.
Sources: FBS (1998), SBP (2020), IMF (2020), Pakistan Bureau of Statistics online, available from
URL: https://www.pbs.gov.pk/content/national-accounts (accessed 21 June 2024).

© 2024 The Author(s). Asian Economic Policy Review published by John Wiley & Sons Australia, Ltd on behalf of 3
Japan Center for Economic Research.
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Pakistan’s Economy Pierre van der Eng

economy. Nevertheless, there is no obvious correlation over time between ‘slow-go’

periods and changes of government.
Figure 2 shows four structural features of Pakistan’s long-term development experi-
ence. First, the country’s economy started its growth in the 1960s with a high depen-
dence on agriculture for employment and income. As industrialization progressed, the
share of agriculture in total output decreased, until it stagnated since the early 1990s at
around 25%. The share of industry in output also stagnated at a modest level of
around 20%.
This stagnation of structural change in the economy is consistent with slowing
GDP per capita growth. However, Pakistan’s share of agriculture in GDP is higher and
the share of industry in GDP is lower than the averages for all low- and middle-
income countries in the World Bank’s databank during 2018–22 of 9% and 33%,
respectively (World Bank, 2024). Given the continued high 2.5% population growth
and the 1.4% average GDP per capita growth, this suggests that labor absorption con-
tinues to take place mainly in agriculture and services, rather than industry, and proba-
bly at decreasing average and marginal rates of labour productivity.

Figure 2 Four structural characteristics of Pakistan’s economy, 1960–2024 (% of GDP). Sources:

Mitchell (1982); SPB (2020); FBS (1998); Pakistan (2024) and Pakistan Bureau of Statistics
online, available at URL: https://www.pbs.gov.pk/content/national-accounts (accessed 21 June
2024). Notes: Years refer to fiscal years so that 2023 = FY2022-23. Based on series reported in
current prices. There are breaks in the series in 1999 due to a change in the national accounting
methodology used by the Pakistan Bureau of Statistics. Agriculture includes animal husbandry,
forestry and fisheries. Industry includes manufacturing, mining, and utilities. Imports and
exports include goods and nonfinancial services. Public expenditure and revenue refers to total
amounts for the central and provincial governments. The data for 2024 are provisional. [Color
figure can be viewed at wileyonlinelibrary.com]

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Pierre van der Eng Pakistan’s Economy

Second, Figure 2b shows that gross fixed capital formation has been a modest con-
tributor to GDP growth. It was around 20% on average, decreasing to less than 15% in
recent years. This is much lower than the average of 33% for all low- and middle-
income countries in recent years (World Bank, 2024). Pakistan’s current national
accounts give no indication of the overall rate of depreciation, which may be low if
outdated capital goods are repaired and made to last rather than discarded. Pakistan’s
older national accounts indicate an annual 6% capital consumption. At that rate, net
capital formation has in recent years been less than 9% of GDP, which is quite low.
This points to a very low national savings rate and/or difficulties mobilizing savings
for investment through the formal financial system.
In addition, during the last five years, Pakistan’s public sector contribution to total
capital formation has been 21%, or just 3% of GDP. Low public investment in infra-
structure may in part be a consequence of the fact that many infrastructure projects
are of the Build-Own-Operate-Transfer type, or a variation. Particularly projects car-
ried out under the China-Pakistan Economic Corridor (CPEC) program use this
model. CPEC started in 2015 and involved Chinese firms constructing a range of pro-
jects in sectors such as transport and power generation and transmission. Finance for
these projects enters Pakistan as private sector foreign direct investment (FDI), in the
form of loans by Chinese banks to the initial owners of these projects. In due time,
public agencies or SOEs in Pakistan are scheduled to assume responsibility for the
operation of these projects (see later).
Third, Figure 2c reveals a very low ratio of goods and services exports to GDP. This
ratio increased from around 7.5% in the 1960s to around 17% in the 1990s, but stag-
nated and decreased and was around 10% during the last two years. This is lower than
the average of 23% for all low- and middle-income countries (World Bank, 2024). The
low ratio points to structural limitations in the capacity of Pakistani companies to
make use of opportunities of international trade. This is more crucial if we note that
Pakistan’s export earnings have long been insufficient to cover the cost of imports.
During the last few years, Pakistan’s trade deficit widened again to around 10%
of GDP.
Pakistan’s trade deficit indicates that its economic development has long been ham-
pered by current account deficits, if we exclude the remittances of Pakistani workers
overseas. These deficits were covered by remittances and surpluses on the capital
account in the form of inflows of foreign aid and net foreign investment. Given the
modest inflows of FDI, the latter largely took the form of foreign borrowing. This
points to an accumulation of foreign debt and the urgency for Pakistan’s monetary
authorities to secure foreign exchange earnings to service foreign debt, constraining
imports in the process. Consequently, limitations on foreign borrowing long placed an
upper limit on the country’s ability to import needed goods and services.
The fourth structural characteristic in Figure 2d is modest total public spending as
a share of GDP. It fluctuated between 20% and 25% of GDP until 2000, when the new
national accounting procedures reduced it to less than 15%, increasing to around 20%
in recent years. In an international perspective, this is low and indicative of limitations

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Pakistan’s Economy Pierre van der Eng

in the ways in which targeted discretionary government spending may encourage eco-
nomic growth. Some reasons for relatively low public spending are low tax rates and/or
the low ability of Pakistan’s central and provincial governments to raise revenues.
Figure 2d indicates that tax rates and/or revenue raising ability increased during the
1960s–1980s, but stagnated and then regressed since 2016.
Pakistan’s public accounts reveal that for the last five years 90% to 95% of total rev-
enues are raised by the central government, leaving provincial governments largely
dependent on annual central government subventions. During those years, the central
government raised only around 35% of revenue in the form of direct taxes, and 50% as
indirect taxes. This relatively low contribution of direct taxes points to significant chal-
lenges in the country’s income tax system. Lastly, Figure 2d shows that in the long
term, and particularly in recent years, Pakistan’s government worked with significant
budget deficits, which points to an accumulating public debt and a growing share of
public spending earmarked for debt servicing.
Several other structural indicators characterize Pakistan’s economy, such as bank
assets as a ratio of GDP which indicates a relatively shallow financial sector, or the low
market capitalisation of Pakistan’s largest firms which indicates difficulties firms expe-
rience in mobilizing external capital through domestic securities markets. Like the four
characteristics discussed earlier, these too indicate continuity in the country’s macro-
economic issues, despite the political discontinuities indicated in Table 1. For example,
Pakistan’s regular current account difficulties led its government to appeal 23 times
since 1958—on average every 3 years—to the IMF for assistance (IMF, 2020). Each
time, IMF conditions led governments to implement austerity measures such as cutting
public expenditure and selective tax increases. These contributed to economic stabiliza-
tion but were insufficient to change the structural factors impeding sustained economic
growth.
What caused this ‘slow-go’ pattern of growth since the 1990s? Two Pakistani econ-
omists, Akmal Hussain (2004) and Shahid Javed Burki (2018; pp. 131–134 and 169–
189), analyze economic change in the 1990s. They elaborate that political instability,
poor governance, increased corruption in governance, and the worsening law and
order situation during the alternating governments of Prime Ministers Nawaz Sharif
and Benazir Bhutto had adverse consequences for investment and GDP growth.
Hussain (2004) also argues that the deterioration of governance was due to democrati-
cally elected governments adopting an authoritarian governance style to pursue their
personal interests at the expense of national interests. In deducing this, Hussain echoes
the conclusions in Ishrat Husain’s 1999 book entitled The Economy of an Elitist State
(Husain, 2019).
The military government of Pervez Musharraf established the foundations for the
next ‘go’ episode and a return to democracy in 2002. But Table 1 indicates that
changes of government and alternating ‘slow-go’ episodes resumed. There is no com-
parable assessment of the fundamental reasons for the two subsequent ‘slow-go’ cycles.
Husain (2019; p. 449) concludes that little changed in how the economy operated,
using the term ‘elite capture’ to characterize the issue. This term expresses the notion

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Pierre van der Eng Pakistan’s Economy

that both economy and political power are controlled by a self-serving elite able to
manipulate both in order to deliver much of the benefits of economic growth to itself
and obstruct meaningful change in economic policy to maximize economic growth. It
points to an ingrained inertia of governments and public service to resolve the coun-
try’s economic issues, as its political culture is characterized by kinship ties, factional-
ism, and patronage networks (Gul, 2017). If the four indicators in Figure 2 are
sufficient proxies for the economic difficulties during the 1990s, the same four suggest
no change in the reasons for ‘go-slow-go’ growth since 2003. Governments alternated
with a similar regularity, and when the current account deficit deepened to 7.7% of
GDP in 2008, the government again negotiated an IMF facility during 2008–2011.

3. Economic Aggravation in 2022, Continued Problems in 2023

An increase in Pakistan’s current account deficit to 5.3% of GDP in 2018 ended the
2013–19 ‘go’ episode. It led Pakistan’s government in May 2019 to negotiate a US$6
billion IMF facility for 2019–2022. The IMF required Pakistan to meet conditions such
as raising tax revenues, re-prioritizing public spending and lowering public debt in
stages, as well as removing regulatory impediments to growth, increasing transparency
and social spending (Dawn, 19 May 2019). More prudent fiscal policy was a reason for
the economic slowdown that followed, but the more significant impediments were
what Pakistan knows as the ‘Three Cs’: Covid19, conflict and climate change.
Covid19 reached Pakistan in February 2020. Disagreement about the responsibili-
ties of the federal and provincial governments resulted in inconsistent and ineffective
lockdowns (Zaidi, 2023, pp. 5–6). Testing was equivalent to just 13% of the population.
Tests identified 1.5 million infections cases, of whom 30,664 passed away; a death rate
of just 0.1% of the population, much lower than countries with higher testing rates
(Our World in Data, 2024). Since 2021, the immunization rate slowly increased until it
stagnated at just 59% in mid-2022. Pakistan’s exact Covid19 human toll is unknown
but was most likely much higher than is officially reported.
The 2020 lockdown and the COVID-19 infections increased unemployment.
Pakistan’s exports decreased due to disrupted international supply lines. Pakistani
migrant workers in the Middle East lost their jobs and reduced foreign exchange
remittances, straining the country’s current account. The government’s 2020 economic
bailout package aimed to support households and companies but increased public debt
(Zaidi, 2023; pp. 6–8). All contributed to negative GDP growth during 2020, as
Figure 1 indicates.
The rebound of Pakistan’s economy was constrained by three forms of conflict.
Firstly, conflict in neighboring Afghanistan, where the Taliban’s return to power in
August 2021 caused Afghan refugees to flood into Pakistan. Pakistani authorities esti-
mated there were 600,000 to 800,000 new arrivals, increasing the number of Afghans
in Pakistan since the 1970s to 1.7 million (Aljazeera, 31 October 2023). Pakistan
received foreign support to host them. Nevertheless, government-provided facilities for
refugees strained the public budget.

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Pakistan’s Economy Pierre van der Eng

Second, the Taliban return in Afghanistan emboldened the nominally independent

Pakistani Taliban (formally Tehreek-e-Taliban-e-Pakistan, TTP). TPP aims to over-
throw Pakistan’s state in favor of a fundamentalist regime. It mainly operates in the
tribal regions of Khyber Pakhtunkhwa province. Emboldened, TTP resumed attacks on
Pakistani security forces after December 2021. The attacks and the need for heightened
security had negative consequences for business.
The third conflict was the tug of war in parliament between the leading political
parties, particularly, the Pakistan Muslim League-Nawaz of then exiled former Prime
Minister Nawaz Sharif, represented by his brother Shehbaz Sharif, and the Pakistan
Tehreek-e-Insaf (PTI) party of popular politician and former cricket player Imran
Khan. After years in opposition, PTI’s July 2018 electoral success resulted in Khan’s
appointment as Prime Minister.
After the IMF facility started in 2019, Khan’s government cut public spending and
raised revenues, among others by reducing subsidies and imposing higher import tar-
iffs. It took new initiatives in education, health care, and social security. It also
launched an anti-corruption campaign and reined in budget and current account defi-
cits. But Khan lost office in April 2022 after publicly drawing on classified documenta-
tion to expose an American suggestion for his removal from office for not opposing
Russia’s invasion of Ukraine.
Parliament voted opposition leader Shehbaz to be Prime Minister. His government
faced the economic consequences of the third C, climate change. Higher than normal
spring temperatures in the Himalayas triggered increased water flows coming down
the mountains. They combined with excessive monsoon rainfall in July and August,
causing massive floods in the plains of the large Indus River during July–October
2022. Assessments indicate that the floods affected 33 million people, 8 million were
displaced, more than 1700 died, 2.3 million houses, 30,000 schools and 2000 health
facilities were damaged or destroyed, over 800,000 livestock perished, and 1.7 million
hectares of cropland were affected (UNOCHA, 2023).
The damage to physical assets such as houses and infrastructure was estimated at
US$14.9 billion and the loss of revenues due to, for example, destroyed crops and live-
stock, at US$15.2 billion (MPDSI, 2022). The reduced production of staples like rice,
cotton, and sugar cane decreased Pakistan’s modest exports by 13%. The requirements
exceeded the US$587 million assistance and relief from foreign donors, necessitating
increased public spending on acquiring and importing emergency supplies and provid-
ing relief (UNOCHA, 2023). Consequently, GDP growth turned negative during
FY2022-23 and Pakistan’s twin deficits worsened. Increased net public sector borrow-
ing was equivalent to 110% of the growth of money in circulation (M2) and was the
factor causing increasing inflation (SBP, 2024).
Figure 3 shows that inflation measured using the consumer price index (CPI)
already increased in 2020 but remained around an annualized 10%. It increased to
around 15% after the February 2022 invasion of Ukraine, which raised global oil prices
and Pakistan’s domestic energy prices. Flood-related supply shortages accelerated infla-
tion to around 25% in late-2022. Inflation peaked at 38% in May 2023, before settling

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Pierre van der Eng Pakistan’s Economy

Figure 3 Monthly CPI and yearly inflation rate in Pakistan, 2019–2024.Source: PBS (2024).
Notes: rh = right hand Y-axis, lh = left hand Y-axis. The inflation rate (“YoY CPI change”) is
measured as the year-on-year change of the consumer price index (CPI). [Color figure can be
viewed at wileyonlinelibrary.com]

at around 30%. Given the high 35% share of food, CPI inflation was indicative of sig-
nificant increases in the cost-of-living pressures on Pakistan’s population.3
High inflation aggravated Pakistan’s domestic credit crunch. The State Bank of
Pakistan (SBP) sought to rein in inflation by raising interest rates, lifting its policy rate
to 22% in June 2023. This had no effect on prices, because the higher cost of borrow-
ing from SBP was not the reason why banks restricted their lending to companies and
households. In the context of increasing economic uncertainty, banks became more
protective of their assets and increased their purchases of government treasury bills.
The rates on 12-month bills peaked at 25% in September 2023, before leveling at
around 21%. Despite their possibly negative real interest rates, banks viewed these
securities as more secure than lending to companies.
Pakistan’s exports remained disappointing, despite high inflation depreciating the
rupee-US$ rate from 175 in February 2022 to 300 in September 2023, as Figure 4
shows. A possible reason being the relative stability of the real effective exchange rate.
Together, inflation and the rupee depreciation aggravated the current account deficit
during 2023. The IMF acknowledged the impact of the flood disaster on the public
budget, but in November 2022 it disagreed with Pakistan’s government about the tar-
gets for the next stage of the IMF facility. The facility stalled with US$2.6 billion of the
loan program remaining. Negotiations dragged on, aggravating current account

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Pakistan’s Economy Pierre van der Eng

Figure 4 Exchange rates of Pakistan Rupee, 2018–2024.Source: SBP (2024). Notes: NEER refers
to the nominal effective exchange rate and REER refers to the real effective exchange rate. Both
are re-based to 2015 = 100 and inverted. [Color figure can be viewed at wileyonlinelibrary.com]

concerns. Pakistan’s credit ratings fell and foreign loans proved hard to find. Heeding
calls from their governments, the central banks of the United Arab Emirates (UAE)
and Saudi Arabia and also China’s State Administration of Foreign Exchange deposited
some of their foreign exchange holdings with the SBP. Nevertheless, Pakistan’s modest
official liquid reserves decreased to just US$4.2 billion in March 2023. Debt default
loomed, until the government and the IMF reached a new agreement in July 2023
about a nine-month US$3 billion ‘stand-by arrangement’.
By September 2023, the exchange rate of the Rupee stabilized as Figure 4 shows.
This was not primarily a result of the IMF facility. The main reason was Pakistan’s
Federal Investigation Agency cracking down on illegal foreign exchange dealers and
SBP taking measures to improve the capital and governance requirements on exchange
companies operating in the open market (Bloomberg, 8 September 2023). This achieved
exchange rate stability and lower import costs, but in combination with continued
inflation and increasing cost of living pressures, this outcome risked an overvalued
exchange rate and a loss of export competitiveness.

4. The Touchstone Issue for 2024

In August 2023, Pakistan’s government called for elections, held in February 2024.
They returned Shehbaz as Prime Minister, supported by a coalition of parties in parlia-
ment. One of the most urgent issues the new government had to resolve was servicing

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Pierre van der Eng Pakistan’s Economy

foreign debt and/or negotiating foreign debt rescheduling. Apart from maintaining
credit ratings, this would allow it to prepare measures to secure economic stabilization
under the IMF facility and work toward some of the structural reforms needed to re-
start sustained economic growth.
During FY2023-24, Pakistan needs to mobilize US$24.9 billion to service the for-
eign debts that fall due, particularly by mid-2024.4 The government’s first step in April
was securing the last tranche of the current IMF facility. However, disbursement of this
US$3 billion IMF loan is insufficient to meet the foreign exchange requirements for
debt servicing. Public information about other options is limited. SBP expects a total of
US$11.3 billion to be rolled over during FY2023-24 (Bloomberg, 1 August 2023).
Pakistan’s FY2023-24 government budget expects to sell US$1.5 billion of Sukuk and
Eurobonds, and mobilize US$4.6 billion of new commercial loans from foreign banks
(Pakistan, 2023, pp. 17–18).5 But this still insufficient. IMF reporting expects that
Pakistan will be able to muster sufficient foreign exchange by mid-2024 (IMF, 2023;
pp. 36, 44; IMF, 2024; pp. 26, 34). However, it is unspecific about, for example, which
‘private creditors’ will be contributing US$6.6 billion or which ‘official creditors’ will
offer Pakistan US$4.4 billion in debt rollovers (IMF, 2024; p. 26).
SBP’s quarterly overview of the country’s current foreign debt and liabilities, sum-
marized in Table 2, offers further details, but at the time of writing only up to March
2024. Pakistan’s total foreign debt was then $130.4 billion, of which 82% owed by gov-
ernments and state-owned enterprises. Relative to GDP, foreign debt was just 37% of
GDP in mid-2023, which is modest by international comparison. However, Figure 2
shows that the country’s annual foreign exchange earnings from exports are low and
insufficient to pay for imports. For example, excluding remittances by Pakistanis’
working abroad, the current account deficit was US$30.5 billion during FY2022-23.
This was for almost 90% covered by remittances of Pakistanis working abroad, and the
rest mainly by new foreign borrowing.
Various domestic developments may impede the options to increase exports. For
example, textiles are Pakistan’s main exports, but textile producers closed their work-
shops during 2023 as rising electricity prices reduced their ability to produce (BBC
News online, 4 December 2023). Pakistan decided to suspend the production licenses
of car makers for failing to meet their export targets in 2023 (ARY News, 25 October
2023). While this reduces exports, suspension of production also reduces imports as
Pakistan’s automotive industry depends on imported parts. In addition, the stabilized
exchange rate since September 2023 restrained remittances by Pakistani expatriate
workers because the open market used to offer them a more favorable exchange rate.
In other words, impediments related to Pakistan’s current account may have repercus-
sions on the capital account, which thus impacts on the required debt servicing solu-
tions during FY2023-24.
With whom do Pakistan’s authorities have to negotiate solutions? Table 2 shows
that Pakistan owes US$38.4 billion to multilateral institutions, including the World
Bank and Asian Development Bank, up from US$27.8 billion in mid-2019, when the
2019–2022 IMF facility started. This debt is generally concessional and therefore low-

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Pakistan’s Economy Pierre van der Eng

Table 2 Pakistan’s external debt and liabilities, 2019–2024 (billion US$)

June 2019 June 2023 March 2024

A. Public External debt 83.9 94.9 98.5

A1. Long term (>1 year) 66.5 76.8 78.6
Paris club 11.2 7.9 7.2
Multilateral 27.8 37.4 38.4
Other bilateral 12.7 17.6 18.9
Sukuk and Eurobonds 6.3 7.8 7.8
Commercial loans/credits 8.5 5.6 5.6
Certificates overseas Pakistanis 0.0 0.6 0.7
A2. Short term (<1 year) 1.3 0.2 0.3
A3. IMF 5.6 7.1 7.7
A4. Foreign exchange liabilities 10.5 10.8 11.8
Central bank deposits 6.2 2.7 3.7
Swaps 2.9 4.2 4.2
Special Drawing Rights allocations 1.4 3.9 3.9
B. Public sector enterprises 3.9 7.5 7.8
B1. Guaranteed debt 2.8 6.6 7.0
Bilateral (non-Paris club) 2.6 6.1 6.5
Commercial loans 0.2 0.5 0.5
B2. Non-guaranteed debt 1.1 0.9 0.8
Long term (>1 year) 0.4 0.1 0.0
Short term (<1 year) 0.7 0.3 0.3
Bonds - 0.5 0.5
C. Banks 4.7 6.5 6.7
C1. Borrowing 3.2 3.7 3.6
C2. Nonresident deposits 1.5 2.6 2.8
D. Private Sector (non-guaranteed) 10.5 12.7 13.0
E. Debt liabilities to direct investors 3.5 4.5 4.4
Total 106.3 126.1 130.4
GDP (current market prices) 232.9 338.9 -
Total as % of GDP 46% 37% -

Source: Adapted from SBP (2024).

interest and repayable over 15 to 30 years in relatively small tranches. Pakistan owes a
further US$7.7 billion to the IMF, which is also concessional. Pakistan has had past
difficulties repaying foreign debt, when it renegotiated bilateral debts with 17 members
of the ‘Paris club’ of major creditor countries, particularly Japan, France, and
Germany. They agreed to convert debt to concessional long-term loans of 40 years
with a modest 1% interest rate. US$7.2 billion of these debts remain.
In recent years, Pakistan’s government incurred new, non-concessional debt. For
example, through the sale of Sukuk and Eurobonds, amounting to US$7.8 billion,

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Pierre van der Eng Pakistan’s Economy

possibly repayable at different terms of 5, 10, 30 years but most likely at relatively high
interest rates. Then there are foreign exchange liabilities as a consequence of arrange-
ments with central banks of Saudi Arabia and the UAE and also China’s State Admin-
istration of Foreign Exchange (all non-Paris Club members) depositing some of their
funds with SBP. These are not interest-bearing loans, but they need to be returned.
Together with the net balance of swap arrangements and allocations of Special Draw-
ing Rights, a total of US$11.8 billion. Of the remainder, US$19.7 billion is foreign debt
held by Pakistan’s banks and private enterprise: not government-guaranteed, therefore
subject to private sector acceptance of risk.
That leaves US$33.3 billion of external debt, which is largely owed by Pakistan’s
government or by SOEs. Of this, US$6.1 billion are unspecified ‘commercial loans’, US
$25.4 billion unspecified ‘other bilateral loans’, and possibly some of the US$4.4 billion
in unspecified ‘debt liabilities to direct investors’, that is, intercompany debt. Commer-
cial creditors generally extend short-term loans, expecting repayments over 1 to
3 years. Commercial interest rates vary but are generally relatively high. More impor-
tant and least known about are the remaining ‘other bilateral loans’. It is likely that
many of these were extended by financial institutions in China as part of the financing
of many infrastructure projects Chinese companies undertook in Pakistan.
Since 2015, these projects are part of the bilateral CPEC program
(McCartney, 2022). Despite extensive publicity, CPEC’s financial details are vague.
Before CPEC, Pakistan was already one of the world’s largest hosts of Chinese infra-
structure projects (Dreher et al., 2022; pp. 30–38, 60–61, 116–118). Under CPEC, it
possibly became the world’s largest host of such projects, whether these are formally
part of China’s ‘Belt and Road’ or not. CPEC was expected to involve a US$62 billion
spend (McCartney, 2022; p. 212). Pakistan received US$16.0 billion of direct invest-
ment by Chinese companies and US$51.2 billion worth of contracted work executed
by Chinese firms during 2005–2023 (AEI, 2024).
AidData found that Pakistan’s cumulative gross debt to China during 2000–2021
was US$67.2 billion, higher than the US$45.9 billion debt Pakistan reported to the
World Bank (Parks et al., 2023; p. 384). AidData explained the reasons why recipient
countries underreport their debts to China. One is that debt reaches a recipient
country as FDI from China, which is financed with loans from Chinese banks to
Chinese-owned subsidiary companies in the host country that build and initially own
and operate the infrastructure projects. In Pakistan, such companies are among the
many independent power producers (IPPs) that by contract deliver electricity to state-
owned regional electricity distribution companies. This construction keeps new debt
off the loan book of the government of a recipient country. In Pakistan’s case, the gov-
ernment shares responsibility for the foreign debt of the IPPs; they receive income in
Pakistani rupees but service their debt to overseas creditors in foreign currency. This
may be captured as ‘debt liabilities to direct investors’ in Table 2.
In light of Pakistan’s negative trade balance and the fact that its official liquid
reserves with the SBP amounted to just US$9.2 billion at the end of April 2024
(SBP, 2024)—equivalent to about two months of imports—the new government must

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Pakistan’s Economy Pierre van der Eng

have started negotiating either the rescheduling of foreign debt due before the end of
FY2023-24 and/or finding the required foreign exchange to avoid default as a matter
of urgency. Most likely discussions with Chinese creditors are a key part of that effort.
Given the current difficulties in China’s financial sector, it may be challenging for
Pakistan’s negotiators to expect concessions from Chinese creditors. These companies
have limited experience with debt restructuring (Hameiri & Jones, 2024). In addition,
bilateral cooperation in CPEC became less convivial since China withheld agreement
on further expansion of the CPEC program in September 2023 (The Express Tribune,
26 September 2023).
Concluding arrangements to meet the US$24.9 billion in debt-related payments
and/or securing additional credit sources is an urgent task for the Shehbaz government
seeking to avoid a repeat of the June 2023 threat of debt default. Not succeeding could
aggravate economic difficulties. After securing the April IMF tranche, the government
made representations for financial support and foreign investments to Saudi Arabia,
UAE, and China. Other potential lenders are likely to look to the IMF’s reporting to
establish whether Pakistan is meeting the IMF’s loan conditions. With few other
options, in May 2024 the government started negotiations with the IMF for a 24th
support facility. It also proposed a FY2024-25 budget to parliament that clearly aims
to placate the IMF (Dawn, 13 June 2024). Even if arrangements for FY2023-24 debt
servicing are concluded and a 24th IMF facility secured, the government will have to
search for US$22.2 billion during FY2024-25 to again stave off the risk of debt default
(IMF, 2024; p. 26).

5. The Need for Structural Reforms

Arranging new loans and negotiating debt rollovers would be less onerous if Pakistan’s
economic fundamentals were in better shape. Improving those is what current and past
IMF facilities sought to accomplish through interim targets which Pakistan was
expected to achieve. However, these IMF targets are not sufficient to secure sustained
economic growth. The main reason is inherent to IMF support, which is to achieve
economic stabilization. It may aim for some structural reform, but not the more com-
prehensive reforms that Pakistani economists have identified as necessary to maximize
the chances of achieving sustained growth (for example, Husain, 2019; pp. 400–432).
For example, the 2019–2022 IMF program in Pakistan aimed to increase public
revenue to 15% of GDP, but annual tax revenues continued to hover around 10% dur-
ing 2019–2023 (IMF, 2023; p. 6). A reason was that Pakistan’s governments took deci-
sions that contradicted the agreed change program. For example, following rising
international oil prices after Russia’s Ukraine invasion in 2022, the Khan government
increased fuel subsidies, even though these were not budgeted for and worked against
the targets agreed with the IMF (IMF, 2023; p. 9). Another reason were applications
for waivers or modifications of performance criteria in the course of a program. IMF
facilities also have a limited duration and aim to secure macroeconomic stability in the
short- to medium-term rather than comprehensive structural reforms. For example,

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Pierre van der Eng Pakistan’s Economy

Pakistan’s current IMF facility does not project a solution to the twin deficits, not even
by mid-2028 (IMF, 2024; pp. 23–24).
What are the key structural reforms needed to achieve a sustained rate of economic
growth in Pakistan? Economists Ishrat Husain (2019) and Nadeem Ul Haque (2020)
identify the key required reforms. Most are not part of an economist’s standard analyt-
ical and policy toolbox. For example, Husain (2019; pp. 407–418) stresses the need for
political consensus among the major political parties on reforming three key institu-
tions: judicial, educational, and financial. He considers these fundamental to a ‘move
away from the corrupt system of industrial production to one that can compete inter-
nationally’ through technological upgrading, the mobilization of risk bearing capital,
and the abolition of ‘favors bestowed by the government through price controls,
import restriction, tariff duties, or other forms of licensing’ (Husain, 2019;
pp. 420–421).
While a more comprehensive approach helps to comprehend the multitude and
depth of issues holding back economic growth in Pakistan, it also yields a long list of
required changes that are difficult to rank by significance or priority, and impossible to
recount here. They include, for example, decentralization and decreased central gov-
ernment control, deregulation of markets, privatization of SEOs, improvement of the
investment climate, reforms of the judicial system, improving quality of education and
health care, and reducing inequality and poverty.
We briefly discuss just one issue related to the required structural reforms: the
structural public deficit and accumulating public debt. The public policies that shape
public finance and contribute to budget deficits have undergone reforms. But the diffi-
culties in resolving the related issues indicate that more profound structural reforms
are necessary to mitigate the public deficit.
Reining in the public deficit is a condition in the current IMF facility, but IMF pro-
jections do not expect that the loan conditions will resolve it by mid-2028. That may
be unnecessary if they achieve the aimed-for macroeconomic stability in the form of
sufficient foreign exchange earnings and reserves to service external debt, exchange rate
stability at a realistic rate, and low inflation through a more balanced public budget.
That seems to be materializing. Pakistan’s government in January 2024 reported hav-
ing met almost all targets in the current IMF facility (IMF, 2024). Its total official liq-
uid foreign reserves increased to US$13.8 billion in April 2024 (SBP, 2024). Figure 3
indicates that inflation has fallen, and Figure 4 shows the stabilization of the exchange
rate. What then are the underlying difficulties in sustaining the momentum of budget
reform?
Figure 2d shows that Pakistan’s public revenue has long been relatively low and
that it has experienced a sustained budget deficit. This points to the need for fiscal
reforms to lift the tax-to-GDP ratio and find ways to economize on public expenditure.
The direct consequence of the sustained budget deficit has been an increase of public
debt, which as a percentage of GDP was 46% in mid-2023. While modest in an inter-
national perspective, in light of the low 11% of GDP raised as public revenue and high

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Pakistan’s Economy Pierre van der Eng

domestic interest rates, public debt servicing significantly limits discretionary public
spending.
During 2023–24, tax revenues are just 10% of GDP and direct taxes were just 29%
of total public revenue, followed by sales and value added taxes (27%) and customs
duties (10%) (IMF, 2024; p. 27). The conditions of IMF facilities consistently urged for
changes to Pakistan’s direct taxation regime to increase direct tax revenues. With the
support of the World Bank, Pakistan’s Federal Board of Revenue (FBR) worked on
increasing the number of registered taxpayers and reducing the large number of with-
holding taxes that complicate tax liability assessments and impose significant compli-
ance costs on companies. This increased the number of registered taxpayers to 11.4
million, of whom only 5.3 million filed tax returns (Business Recorder, 27 December
2023). FBR estimates that 65% of all income earners have incomes below the income
tax threshold, and that, after accounting for those that file tax returns, 15 million
income earners remain who are not filing tax returns and are not paying income tax
(Dawn, 26 October 2023). The threshold for salary income for 2023–24 is Rs 1.2 mil-
lion per year or US$4300 (FBR, 2024; p. 463). However, the tax threshold and rates of
taxation vary by type of income earned, which complicates working out income tax
obligations. The solution would be to simplify various aspects of the tax system (Nasir
et al., 2022). Work to that effect is underway with World Bank support.
An additional approach could be to improve the approaches to tax collection. Ran-
domized experiments conducted by tax authorities in Punjab province uncovered that
offering property tax collectors monetary or nonmonetary incentives to improve their
performance increased the revenues raised and that the gains exceeded the costs of the
incentives (Khan et al., 2016, 2019).
A further issue is that significant sections of Pakistan’s income earners are excluded
or are able to evade income tax obligations. For example, the agricultural sector is
effectively excluded, because taxing agricultural income is the prerogative of the prov-
inces, where large landowners have considerable influence in the local parliaments. As
a minority of large landholders possess the majority of agricultural land in Pakistan,
revenues from agricultural income tax are minimal (Haq, 2023). Other income earners
are able to evade income tax, because they are employed in Pakistan’s large informal
economy (Modern Diplomacy, 21 April 2023).
Another reason for low tax revenues are the discretionary tax exemptions, known
as ‘tax expenditures’, which various authorities extend to businesses and well-
connected individuals (Khalid & Faraz, 2022). During FY2022-23, they handed out a
record US$13.9 billion in tax exemptions, of which 73% are exemptions from sales tax,
14% from import tax and 12% from income tax (Pakistan, 2024; p. 289). The public
purse missed out on the equivalent of 40% of total public revenue that year.
On the expenditure side of the public budget, a key issue is very low discretionary
spending. For example, for FY2022-23 debt repayment is 11% of expenditure, interest
on public debt and government-guaranteed debt is 35%, security and defense is 10%,
and subsidies are 6%, leaving just 38% or US$35 billion for discretionary expenditure,
including social services and public infrastructure (IMF, 2024; p. 27).

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Pierre van der Eng Pakistan’s Economy

The conditions of the IMF facilities include lowering various government subsidies.
Pakistan’s government uses these to lower the prices of staples (such as wheat, sugar,
and ghee), energy (electricity and petrol for all users, LNG for companies) and fertil-
izer (for farmers). The rationale for many subsidies is to support low-income earners,
but due to their untargeted nature they benefit all users. In addition, the government
pays many of these subsidies to SOEs involved in the production and/or distribution
of these goods. As it struggles to pay the promised subsidies, the backlog of payments
reduces the financial outcomes of many SOEs. This contributes to the fact that, in the
aggregate, Pakistan’s SOEs are net loss-making ventures, recording Rs500 billion or US
$3.0 billion in losses in 2020 (Dawn, 22 September 2023). SOEs balance revenue short-
falls with government subventions and government-guaranteed loans. The latter
includes what Pakistan knows as ‘circular debt’: the accumulation of government-
guaranteed SOE debt due to unpaid government subsidies. The targets associated with
the IMF facilities include meaningful reforms of SOEs, possibly privatization. While
reforms are being implemented, privatization actually proceeds very slowly, to the
extent that the IMF in its projections to mid-2028 does not include any public reve-
nues from privatization.

6. Conclusion

This present paper explains that Pakistan’s current economic predicament is the latest
in a series of crises related to structural features of the country’s economy and society,
aggravated in 2022. It substantiates the urgency for Pakistan’s authorities to find solu-
tions for the immediate issue of foreign debt servicing, which is a touchstone for neces-
sary structural reforms. Some of these reforms are being addressed as conditions in the
current IMF facility. However, this present paper indicates that the IMF facility is not
a sufficient solution. It essentially aims at macroeconomic stabilization through twin
deficit mitigation, exchange rate stability, and reduced inflation, not comprehensive
structural reforms. In addition, the timeframe of an IMF facility makes it difficult to
achieve encompassing reforms.
Consequently, it is pertinent for Pakistan’s authorities to find ways to embed the
aims of the current and future IMF facilities into more comprehensive plans for struc-
tural reform. The discussion of some of the features that contribute to the structural
budget deficit that Pakistan continues to experience underline the need for this
approach. If not, it is possible that the country will continue to experience episodes of
‘go-slow’ growth and a continuation of what Ahmad and Mohammad (2017) have
labeled the ‘Great Game’ between Pakistan’s government and multilateral and bilateral
donors of foreign assistance.
This present paper is not the first to outline this. It noted the views of prominent
Pakistani economists who in much more detail have articulated the need for profound
and comprehensive structural reforms, well beyond what the IMF and other donors
can encourage Pakistan’s government and society to undertake. While not necessarily
using the term ‘elite capture’, those economists did identify it as the core cause of the

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Pakistan’s Economy Pierre van der Eng

structural difficulties Pakistan’s economy faces, and implicitly they identified it as

the main obstacle to the necessary process of structural reforms.

Notes
1 The 2023 census counted 241.5 million people, excluding 6 million people in self-governed
Gilgit-Baltistan and the Pakistan-administered part of Kashmir.
2 At independence, Pakistan consisted of two ‘wings’ on either side of India. West Pakistan
comprised the four provinces of Sindh, Punjab, Balochistan and Khyber Pakhtunkhwa as well
as the Pakistan-governed part of Kashmir. East Pakistan became Bangladesh in 1971. This
paper recounts the experience of West Pakistan.
3 Details of changes in average real wages are not available. The last comprehensive wage data
were collected as part of the last national labour force survey in 2021.
4 In July 2023, the IMF expected that Pakistan during FY2023-24 needed to find $28.3 billion
to service its foreign debt (IMF, 2023). In November, the IMF revised this requirement down
to US$24.9 billion (The Express Tribune, 18 November 2023; IMF, 2024; p. 26).
5 A Sukuk is a bond-like financial certificate that complies with Islamic religious law.

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