In recent trading, Pakistan has witnessed a break from traditional market logic where equities and gold, usually seen as opposites, have begun rising together. On Oct 13, the KSE-100 index plunged 4,655 points (–2.85 per cent) to close at 158,443, amid intensifying geopolitical tensions, domestic unease, and profit-taking. Yet while stocks sank, gold in Karachi leapt rising from Rs431,800 per tola (Oct 12) to Rs442,600 per tola (Oct 13), according to Gold.pk.

Then came a dramatic reversal. On Oct 14, the KSE-100 surged by 7,032 points (+4.44pc) to settle near 165,476, as investor moods brightened after hints of the International Monetary Fund’s (IMF) support and political calm. But gold didn’t collapse; it nudged upward as well, reaching Rs442,700 per tola.

Even on Oct 15, when the stock market delivered a modest gain (KSE-100 added about 210 points), gold continued its ascent. The rate hit Rs452,300 per tola that day.

This sequence — a sharp stock drop followed by a fierce rebound, all while gold rockets higher — exposes a paradox in investor behaviour. When equities fall, money clearly ows to gold. But when stocks rally, investors don’t abandon their safe-haven, they hold onto it while chasing gains. In effect, they’re straddling both impulses — embracing growth but armouring against uncertainty.

With millions disrupted by the floods, balancing austerity with rehabilitation measures will be one of the toughest challenges for policymakers

In volatile times like these, the one-size-fits-all rules of asset allocation no longer apply. Rather than choosing between risk and refuge, many are holding both in parallel. And as gold transitions from a mere caution flag to a companion of ambition, the old boundaries between fear and confidence blur. This makes sense when uncertainties and hopes both surround the economy.

Pakistan’s economy, however, faces another crucial test as the IMF has announced that it had reached a staff-level agreement (SLA) with Islamabad on the second review of the 37-month Extended Fund Facility (EFF) and the first review of the 28-month Resilience and Sustainability Facility (RSF).

If approved by the IMF Executive Board, Pakistan will gain access to about $1.2 billion — $1bn under the EFF and $200 million under the RSF.

The Fund noted that Pakistan had shown “commendable progress” in restoring macroeconomic stability, recording a current account surplus for the first time in 14 years and exceeding primary fiscal balance targets in FY25. However, the Fund also warned that recent floods had disrupted millions of lives, damaged crops and infrastructure, and posed new fiscal and humanitarian challenges.

The agreement may have unlocked short-term confidence, but navigating the economy during the quarter — October to December 2025 — will be no less than walking a tightrope. The government must deliver on reform commitments even as it grapples with the social and economic cost of the floods.

The IMF has called for continued fiscal consolidation, particularly through higher revenue mobilisation and rationalisation of subsidies. Yet, relief and rehabilitation spending will have to rise, stretching the already thin fiscal space. Balancing austerity with compassion will be one of the toughest challenges for policymakers.

Pakistan’s revenue targets are ambitious and meeting them amid disrupted supply chains and slow business activity will test the Federal Board of Revenue’s efficiency and the government’s political resolve. Any revenue slippage could invite difficult spending cuts or new borrowing — neither of which sits comfortably with inflationary pressures.

The State Bank of Pakistan faces its own balancing act. The IMF expects a “data-dependent and appropriately tight” monetary stance to keep inflation in check. But flood-related food shortages and potential energy price adjustments could rekindle inflationary pressures. With real interest rates already high, further tightening may dampen private investment and growth. The IMF has projected 3.6pc growth for the current fiscal year, below the government’s initial target of 4.2pc.

While the upcoming IMF tranche will shore up foreign exchange reserves, Pakistan’s external financing needs remain substantial. Imports have started rising fast and are expected to rise further as reconstruction gathers pace, while exports’ growth remains sluggish as industries continue to struggle amid incentives withdrawals and high energy and high financial costs. This could again strain reserves.

The rupee, which had stabilised in recent months, may come under renewed pressure if capital inflows slow or global commodity prices spike. Maintaining market confidence will therefore depend on both prudent management and visible reform momentum.

Beyond the numbers, the SLA underscores long-pending structural reforms — particularly in the energy sector, state-owned enterprises, and governance frameworks. Tariff rationalisation, reduction of circular debt, and privatisation of state-owned loss-making entities are politically sensitive steps. Yet, without visible progress, the credibility of the reform agenda could erode quickly.

The IMF’s acknowledgment of Pakistan’s “rebuilding confidence” is encouraging, but this next quarter will test whether that confidence can survive under pressure. Fiscal tightening amid flood-induced losses and rising cost of national defence and war against terrorism risk slowing the fragile recovery, while any deviation from commitments could delay inflows and weaken the rupee.

Simply put, the government must walk a fine line between discipline and compassion — cutting wasteful expenditure while ensuring that relief and reconstruction reach those in need.

If the reforms stay on course, inflation is contained, and reserves improve modestly, Pakistan may emerge from the current quarter with moderate stress but maintained stability. Any political or policy slippage, however, could quickly tip the balance.

Published in Dawn, The Business and Finance Weekly, October 20th, 2025