A labourer arranges tomatoes in crates at a market in Lahore. Photo: AFP

Navigating the economic maelstrom — no respite from old woes in new year

A look back at why 2022 was rough on the economic front and why things may not change in the new year.
Published January 1, 2023

The year 2022 has been a nightmare for Pakistan on the economic front.

Everything is much more expensive as we witness decades-high inflation, the rupee has plummeted, there are fears the country may default as the central bank’s reserves remain critically low and industry is struggling to operate with many large companies partially suspending operations.

The already fragile situation worsened when floods ravaged large parts of the country, destroying almost half the country’s agricultural land and sweeping away entire villages. Some estimates put damages from floods at $30 billion.

It seems Murphy’s law has found a comfortable home in Pakistan.

Why is this happening all at once? Let’s step back and look at why we are in this situation and how we got here.


Pakistan has a basic budgeting problem, often referred to by experts as a structural problem. We continue to spend more than we earn. And we have been doing so for decades. This is true for our fiscal budget, presented each year by the federal government in June, as well as our balance of payment: our imports heavily outweigh our exports.

Over the decades, Pakistan’s policymakers have miserably failed in creating a framework that incentivises manufacturing at home and as a result, we have been unable to shore up our exports. Our industry continues to lag behind the world and we have been unable to add value, even where we can, to compete internationally.

A lot of it has to do with dismal levels of investment in human capital. Large parts of the population, especially women, remain outside the education net which is why innovation and entrepreneurship have not taken deep roots in our national fabric.

And to top it all off, our economic policy structure encouraged imports. It won’t be completely off the mark to say it all comes down to the dollar. Let me explain.

Pakistan has for decades opted for a fixed exchange rate regime. For years on end, the dollar oscillated between the Rs90-100 band by design when the actual rate, had it been left to market forces, would have been much higher.

Often referred to as Daronomics, taking its name from our incumbent finance minister, this policy was akin to a drug for our country. That’s because it incentivised imports by making them cheaper, while at the same time it hurt our exports by making our goods expensive in the international market.

As time passed by, our industry became addicted to cheap imports while our exports struggled to compete globally. Instead of manufacturing inside Pakistan, improving our production processes and bringing more and more components of the supply chain inside the country, we kept taking the easy way out by importing goods and machinery.

Today, there is hardly any industry in Pakistan that can continue operations uninterrupted without importing key components.

On the flip side, a market-based exchange rate would have pushed our businesses to rethink this strategy, in some cases simply because importing would not have made economic sense.

It is important to understand that these business processes and habits take years to develop and perfect. None of this happens overnight. Therefore even though Pakistan has now shifted to a market-based exchange rate regime (under IMF pressure), it will take time to find a new equilibrium while we go through this painful phase of inflation and economic stagnation.


Now that we have established the root of the disease, let’s look at how it translates into the onset of symptoms.

The structural issue discussed above means that our forex reserves perpetually remain under pressure because our current account deficit keeps spiralling out of control and therefore, any economic growth that comes with it is unsustainable because it comes at the cost of our reserves. With imports overshadowing exports, Pakistan is always on the qui vive for dollars.

When the country does not have enough dollars to meet its external obligations, i.e., make payments for debts and essential imports, it is staring at default. To avoid this, Pakistan has been scrambling to the IMF to bail it out every few years over the past six decades.

Pakistan signed its first Standby Arrangement with the IMF in 1959. Since then, we have gone to the IMF multiple times every decade: twice in the 60s, four times in the 70s, twice in the 80s, five times in the 90s, thrice in the 2000s, and twice since 2013 with the last programme signed in 2019 still ongoing.

The IMF, or the lender of last resort, comes into play when countries have nowhere else to go. Its objective is to not simply dole out the money but also require countries to address the problems that led them into the crisis in the first place.


As a result, during its latest programme that began in 2019, the international lender strong-armed Pakistan into making the changes it should have made decades ago: a market-based exchange rate, an autonomous central bank free from government pressure, higher tax revenues and so on and so forth.

For a country (and politicians) addicted to the high of cheap imports, tax evasion, and printing money on a whim, these changes have pushed us into a painful phase.

Because we are heavily reliant on imports for our consumption, a market-based exchange rate regime that caused the dollar to rally considerably has seen Pakistanis reel with inflation since 2020.

Global impact

In 2022, however, the inflation problem was exacerbated because of international factors as well as an unprecedented natural disaster.

Prices have gone up globally after supply chain disruptions in the aftermath of the coronavirus pandemic and the fallout of the Russia-Ukraine war. In particular, oil prices shot through the roof, surpassing $100 per barrel, after Russia’s invasion of Ukraine on supply concerns since Russia is a major supplier.

This not only caused petrol prices to surge in the country but also had a significant impact on electricity prices since Pakistan’s energy mix is heavily skewed towards fossil fuels.

And the floods that damaged around 45pc of our cultivable land also caused shortages of essential food items, which had to be imported to meet domestic needs.

With all these factors combined, Pakistan saw five-decades high CPI inflation of 27.3pc in August.

Although it has eased slightly since then, the outlook is not rosy with the State Bank expecting inflation for financial year 2023 to fall between 21 to 23pc.

Central banks across the world tame inflation through hiking interest rates which leads to an economic slowdown, known as monetary tightening or a contractionary monetary policy.

But even though 2022 saw the State Bank hike its main policy rate by 6.25 percentage points to a 24-year high of 16pc, inflation continued to remain well above 20pc, indicating that the rise in prices is not demand-induced but a result of supply-side factors, such as a rise in the cost of critical raw materials.

Forex reserves and default threat

As Pakistan’s forex reserves kept falling throughout 2022, the political chaos in the country certainly did not help the economy as it threatened to derail the IMF programme. Facing an inevitable ouster, the previous government put in place a petrol subsidy even though it violated the international lender’s conditions for the release of funds. When the new government came to power in April, much to everyone’s surprise, it continued with the subsidy for another two months, causing losses to the national exchequer and giving rise to fears of default.

During this time, Prime Minister Shehbaz Sharif toured Saudi Arabia and the UAE in a bid to secure funds for the country but was asked to first put things in order with the IMF. Eventually, the government took the difficult decision to do away with the subsidy in phases and increase the price of petrol at a time when inflation was already soaring. After critical talks with the IMF on the seventh and eighth review of the programme, led by then finance minister Miftah Ismail, Pakistan was able to secure $1.1 billion from the lender in August, averting the threat of default for the time being.

But that victory was short-lived because in less than two months, finance minister Ismail was sent packing and in came the father of Daronomics, Ishaq Dar, who promised to bring the dollar back to 180 from the mid-200s.

It did not take long for the default mantra to make its way back into the mainstream because despite the IMF’s money and Saudi Arabia rolling over its deposits, Pakistan’s obligations remained much more than its inflows.

By October, Pakistan was expecting to have received another $1.2 billion from the IMF after the ninth review of the ongoing programme but the tranche has been delayed, apparently due to an impasse between the two sides over the revenue target and the lender’s concerns over accuracy of budgeted flood expenditure.

This delay fed into default fears, with Pakistan’s perceived default risk, measured by the five-year credit default swap, soaring to over 100pc in late November. But in what was seen as a rare positive, Pakistan repaid a $1bn international bond in December two days before its maturity, putting the risk of immediate default to rest.

Despite that, the situation remains precarious. As of Dec 23, reserves with the State Bank stood at $5.8 billion, the lowest in eight years and barely enough to cover a month’s imports.

With Pakistan’s international payment obligations for the ongoing financial year, which ends in June, still in excess of $13bn and the forex reserves cutting a sorry figure, fears of default remain.

The IMF tranche is critical for Pakistan, even though it is less than a tenth of the size of the country’s pending payments, because it acts as a green signal for other lenders.

Even Pakistan’s friends, Saudi Arabia and China, from whom the finance minister promised $13bn worth of inflows two months ago, have come forward with assurances only as they wait for the IMF to move first.

In such a situation, the finance minister’s outburst against the IMF on live TV in December did nothing other than add to the market’s jitters and reveal that Pakistan and IMF were at odds over the ninth review.

Even though the government has repeatedly assured us that we won’t default, unless there is clarity on when and from where the inflows will come, these words would continue to ring hollow.

It does not help our case that three of the world’s top ratings agencies — Fitch, Moody’s and S&P — downgraded Pakistan’s long-term sovereign debt rating into junk in 2022.

Import restrictions

In a bid to protect its dwindling forex reserves and indirectly influence the soaring dollar exchange rate, which rose 27pc in 2022 — from Rs178 on Jan 1 to Rs226 on the last working day of the year — the government first banned the import of luxury items for two months, eventually lifting the ban in July.

But since then, the central bank has imposed administrative restrictions, requiring banks to seek permission from it before initiating any import transaction, leading to delays in opening of letters of credit (LCs) and hurting several businesses in the country that were dependent on imports to continue operations.

As a result, several automakers, including Indus Motor and Suzuki, suspended operations temporarily, citing import delays due to which they could not run their plants.

Similarly, the textile sector also faced production hits owing to supply disruptions, depressed demand and liquidity constraints, with one of Pakistan’s largest textile mills, Nishat Chunian, partially suspending operations.

Dollar: Interbank vs black market

The government’s policy to ration the dollar by imposing administrative restrictions on those looking to buy it led to another major issue: the rise of the black market.

With the dollar not easily available through formal means, its price in the black market began rising. By the end of the year, the spread between the interbank rate (Rs225) and the black market rate (Rs255) widened to almost 13pc.

This discrepancy has adversely impacted remittances, a crucial way for Pakistan to earn its dollars. Because the black market is offering a much higher return, expats sending money home have opted to use hawala and hundi as opposed to formal banking channels, which experts believe is one of the reasons why Pakistan has seen three consecutive months of decline in remittances.

Stocks down, gold outshines all

When there’s economic uncertainty, currency devaluation and high inflation, the usual investments in stocks and bonds do not remain as lucrative.

This was seen in Pakistan’s case as well, with the stock market losing 9.3pc of its value in 2022.

Gold, on the other hand, which is a defensive investment in uncertain times, shot up over 40pc, outshining all other assets, as investors flocked to it hoping to store the value of their wealth.

The great stagflation

After a rollercoaster ride, where does Pakistan stand at the end of the year? And what’s the way forward?

To answer these questions, I talked to a few economists. Almost everyone agreed that Pakistan had now stepped into an economic slowdown.

“We’re very much in a recession,” said Dr Hafiz Pasha, former UN assistant secretary general and federal minister.

He said both domestic and global factors had induced this, noting that there’s a slowdown in economic activity globally. In Pakistan’s case, he said, the already adverse situation had been exacerbated by floods.

“Industrial production fell 7pc in October while agriculture is also expected to see a plunge of around 6pc,” he said.

“We’d be lucky if we see even 1.5pc GDP growth this year.”

Sajid Amin Javed, a macroeconomist with the Sustainable Development Policy Institute, said Pakistan is going through a period of “stagflation”, a phenomenon when economic slowdown and high rates of inflation co-exist.

With headline inflation rate continuing to stay in the high 20s while industrial and agricultural growth was declining, he termed it “the great stagflation”.

Javed said Pakistan’s best-case scenario this fiscal year was a 3.5pc growth, almost half the 6pc achieved a year ago, while inflation outlook remains around 23pc.

Shahrukh Wani, economist at the Blavatnik School of Government, University of Oxford, said Pakistan is going through an “unmistakably significant economic crisis” which hadn’t translated into a recession yet but had led to a significant reduction in economic growth both because of government measures to stabilise the macro outlook and the reduced confidence of investors.

He said the administrative measures taken by the government to curtail imports had particularly dragged down economic activity.

Maha Rehman, a research fellow at the Mahbub ul Haq Research Centre at Lums and a former faculty member there, said the global slowdown along with our fiscal fundamentals was leading the economy into a recession.

“The political uncertainty will not make it any easier since the political parties in power will be extremely wary of making the tough economic decisions required in this climate.”

Tough times ahead

Javed said it takes a long time to come out of stagflation since there are not many policy options at disposal which is why there are long-term social and economic costs associated with it.

Among his key recommendations, Javed said the government will have to convince the IMF to lower tax revenue targets in light of floods and in return reduce or remove taxes from some key items.

To check food inflation, he said, the government needed to remove taxes, especially sales tax, on essential food items as well as do away with import duties on them. He also recommended formation of price control committees at the district level to ensure there was no hoarding and profiteering. He said social protection cash flows for lower-income groups through BISP needed to be revised upwards by 25pc to protect people’s purchasing power.

Wani said Pakistan needs an explicit short-term roadmap for the next year that includes a clear commitment to implementing the IMF programme, including a pledge to the market-based exchange rate and a strategy to service its debt.

“If debt restructuring is needed, it is better to do so sooner than later.”

Wani went on to say there will likely be a significant contraction in economic activity and an increase in the cost of living over the coming year, and so the government needs to direct its spending to effectively target lower-income groups.

He said it was critical to recognise that the current crisis is a symptom of long-run structural challenges in Pakistan’s economy that include low levels of productivity and domestic savings. “These challenges have made Pakistan’s growth fundamentally constrained by its balance of payments, leading to repeated macroeconomic crises.”

A credible break from the current crisis requires undertaking long-overdue reforms that target these structural impediments to economic growth, he said.

Rehman said the government will need to start incentivising increased productivity investment and increased production in export sectors in order to cushion the impact on export slowdown and potential job losses.

“Similarly the policy focus will need to shift away from sectors that lock capital in unproductive areas. The fuel mix will need active policy intervention and the government will need to proactively change policy focus to mitigate impact.”

An abridged version of this article was published in Dawn, January 1st, 2023.

Header photo: A labourer arranges tomatoes in crates at a market in Lahore. — AFP/File