Lately, Pakistan’s economic narrative — or its explanation of recurring economic cycles — has rested on two flawed assumptions: that imports drive growth spurts, and that governments can maintain long-term exchange rate stability. Both are misleading.

Pakistan’s economic booms, such as those in the early 2000s and mid-2010s, were primarily fuelled by external factors: foreign aid, debt inflows, remittances, and low oil prices. Periods of modest stabilisation (eg, 2004–07, 2014–17) were linked to relatively stable reserve buffers. For a country with chronically weak foreign exchange reserves, sustaining a “desired” exchange rate path beyond 12–18 months is largely a myth.

Even today, Pakistan’s official reserves of $14.5 billion are propped up by $14 billion in short-term deposits from friendly countries. Time and again, external shocks — especially oil-price spikes — have depleted reserves, triggered sharp devaluations, and led to more foreign borrowing, exposing the structural vulnerabilities at the core of Pakistan’s economic cycles.

Pakistan’s growth spurts have seldom stemmed from internal strength. In the early 2000s, under General Pervez Musharraf, GDP rose six to seven per cent annually (2002–2007), not due to an import-led strategy, but to a surge in US aid after 9/11, when Pakistan became a key non-North Atlantic Treaty Organisation ally.

For a country with chronically weak foreign exchange reserves, sustaining a ‘desired’ exchange rate path beyond 12–18 months is largely a myth

Aid jumped from $228 million in 2001 to $2.7bn in 2002, funding infrastructure and fuelling a consumption boom. Imports of cars, electronics, and machinery soared — but as a result of incoming capital, not as growth drivers. Between 2002 and 2008, US aid totalled around $13.7bn.

When oil prices spiked in 2008, the economy stumbled, revealing its dependence on external support. The US stepped in again, providing $17bn in aid (2009–2014) and backing a $7.6bn International Monetary Fund (IMF) loan to stabilise the economy. In a rare move, General David Petraeus met IMF officials in October 2008 to push for Pakistan’s bailout.

A similar pattern unfolded in the mid-2010s with the launch of the China-Pakistan Economic Corridor (CPEC). As US aid tapered post-2014, Chinese debt capital flows filled the gap. But unlike the US aid (mostly grants), China’s support came largely as loans for infrastructure, inflating foreign debt without boosting exports.

Initiated in 2013, CPEC poured billions into energy and infrastructure, pushing GDP growth to 5.8pc in 2017–18. Imports of equipment and materials and construction activity soared in the backdrop of lower oil prices and low interest rates. But this debt-driven growth widened the trade deficit to $37.3bn to over 10pc of the GDP.

In 2017-18, imports rose by $9.4bn, but exports increased only $2.7bn. By 2018, reserves had fallen from $17bn to below $10bn. The boom collapsed — imports reflected externally funded consumption, not productive activity.

Remittances have also been a vital prop. Pakistan ranks among the top global recipients, with inflows rising from $4.2bn in 2002 to $19.3bn in 2017, and $38bn recently. These funds, sent by overseas Pakistanis, bolster reserves and fuel household consumption — often of imported goods.

In 2018, remittances hit $20bn annually, but couldn’t offset trade deficits widened by CPEC borrowing. While cushioning the economy, they drive consumption demand without expanding productive capacity, reinforcing dependency.

For a nation heavily reliant on imported energy, oil price swings are a critical driver of economic ups and downs. In the early 2000s and from 2014 to 2016, Brent crude at $40–50 per barrel fuelled economic growth above 5pc. Between 2016 and 2018, oil averaged $56 per barrel, but by 2018–19, it climbed to $68, squeezing the current account and pressuring the rupee. When prices soared past $100 in 2008 and 2022, skyrocketing import costs drained reserves and hit the currency hard.

If imports truly drove growth, exports or industrial output would rise in tandem. Yet Pakistan’s export-to-GDP ratio remained stuck at 9.5pc for the past decade, well below Bangladesh (14pc) or Vietnam (86pc). Manufacturing contributes just 13pc of GDP, hobbled by red tape and energy shortages. Imports have been the result — not the cause — of growth spurts.

With chronic fiscal deficits near 7pc of GDP and thin buffers, Pakistan is vulnerable; a 20pc rise in oil prices adds billions to its import bill, while its export base continues to lack diversification

Attempts to “manage” the rupee have been similarly misguided, ignoring the “impossible trinity”: a country cannot simultaneously maintain a fixed exchange rate, independent monetary policy, and free capital flows.

Pakistan has attempted all three — with damaging results.

In 2017–18, the State Bank of Pakistan (SBP) pegged the rupee at 105–110 to stabilise prices and aid importers. Imports surged, fed by CPEC loans and remittances, while the current account deficit widened by 40pc.

Reserves plunged from $17 billion to under $10 billion. By mid-2018, with reserves covering less than two months of imports, the rupee crashed to 138, then 162 by June 2019, triggering double-digit inflation.

This cycle has repeated for decades. In 1998, sanctions after nuclear tests caused aid to dry up and reserves to vanish, sinking the rupee by 20pc. In 2008, the global financial crisis and oil price spike led to a 23pc devaluation and 25pc inflation.

Delaying adjustments only worsens the fallout — steeper crashes, higher inflation, and lost trust. With reserves barely covering two months of imports, exchange-rate management is an illusion, not a policy.

With chronic fiscal deficits near 7pc of GDP and thin buffers, Pakistan is vulnerable. A 20pc rise in oil prices adds billions to its import bill, while its export base — heavily reliant on textiles — continues to lack diversification.

SBP interventions are band aids on systemic flaws. Persistent current account deficits, underpinned by an average trade deficit of 8.7pc of GDP over the past decade, have undermined the country’s ability to build sufficient foreign exchange reserves needed to sustain a stable exchange rate over the long term.

The economy rests on shaky foundations. Exports, reliant on low-value textiles and agriculture, can’t finance imports. Agriculture employs 40pc of the workforce but delivers poor productivity. Manufacturing is bogged down by inefficiencies. These weaknesses make the economy dependent on fickle props: aid, loans, remittances, and cheap oil. When these vanish, crises erupt — as in 2022, when reserves dried up and the rupee plunged.

The social and political costs are steep. Devaluations trigger inflation —25pc in 2008, double digits in 2019 — hitting the poor hardest. Trust in the rupee and institutions erodes, fuelling capital flight, black markets, and political instability. Investment stalls.

Pakistan must abandon myths. Pakistan’s booms have been externally driven. Sustainable growth has to be export-led, underpinned by growth in productivity, while reducing dependence on imported energy. Until the economic reforms tackle these core issues, the economy will continue to swing between fleeting highs and painful lows, as the duration of the boom gets shorter and average GDP growth is likely to stay around 4pc, even lower if oil prices rise, in the foreseeable future.

The writer is the former head of Citigroup’s emerging markets investments and author of ‘The Gathering Storm’Citigroup’s emerging markets investments and author of ‘The Gathering Storm’

Published in Dawn, The Business and Finance Weekly, August 18th, 2025