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Pakistan’s Existential Economic Crisis

There is a real danger that Pakistan could default on its debt, which could lead to intensifying political turmoil amid already surging terrorism.

Thursday, April 6, 2023 / By: Shahbaz Rana

Publication Type: Analysis

Pakistan’s stability increasingly depends on the outcome of an ever-worsening economic crisis. Amid skyrocketing inflation, political conflict between Prime Minister Shehbaz Sharif’s government and former Prime Minister Imran Khan, and surging terrorism , the country is facing the risk of a default due to its massive external debt obligations. This burden has been exacerbated by the derailment of the $6.5 billion International Monetary Fund (IMF) program Pakistan entered in 2019, as the international lender is unsatisfied with Pakistan’s commitment to reform and ability to arrange for funds to meet external financing requirements. Troublingly, Pakistan’s official foreign exchange reserves are hovering around $4 billion, which is insufficient to finance even a one-month of the country’s import bill.

A market in Karachi, Pakistan, Aug. 28, 2019. Pakistan’s stability depends on the outcome of an ever-worsening economic crisis  (Mustafa Hussain/The New York Times)

Can Pakistan recover from the economic abyss? To determine, it is important to consider: (1) the composition of Pakistan’s overall external debt; (2) repayment pressure on the debt in both the short- and medium-term; (3) potential inflows that can offset the debt outflows; and (4) Pakistan’s external debt management strategy.

1. Pakistan’s Debt Composition — and the Terms on the Debt

As of December 2022, Pakistan holds external debt and liabilities of $126.3 billion. Nearly 77% of this debt, amounting to $97.5 billion is directly owed by the government of Pakistan to various creditors; an additional $7.9 billion is owed by government-controlled public sector enterprises to multilateral creditors.

Who are these creditors? Pakistan’s creditors fall in four broad categories: multilateral debt, Paris Club debt, private and commercial loans, and Chinese debt.

Multilateral Debt

A major share of Pakistan’s debt is owed to multilateral institutions, amounting to roughly $45 billion. Islamabad’s main multilateral creditors include the World Bank ($18 billion), the Asian Development Bank ($15 billion) and the IMF ($7.6 billion). Pakistan owes smaller amounts to the Islamic Development Bank and the Asian Infrastructure Investment Bank as well.

While a significant amount of Pakistan’s total debt, multilateral debt doesn’t present major short-term risks for Pakistan. The terms of most loans are largely concessional with a repayment timeline spanning 18 to 30 years; most repayments are spread in many small transactions. In 2022-23, Pakistan repaid a total $4.5 billion debt to multilateral creditors, which is a fifth of the total debt repayment for the year.

Paris Club Debt

Pakistan owes $8.5 billion to the Paris Club, a group of 22 major-creditor countries. This debt is scheduled to be repaid over 40 years with less than 1% interest rate, and is mostly owed to Japan, Germany, France and the United States.

Private Debt and Commercial Loans

Pakistan holds a large amount of private debt; much of this is in the form of private bonds, such as Eurobonds and global Sukuk bonds, amounting to $7.8 billion. Some of this debt is recent: In the last fiscal year, Pakistan raised $2 billion by floating Eurobonds of 5, 10, and 30 years at an interest rate ranging from 6 percent for five years and 8.87 percent for 30 years.

Pakistan holds foreign commercial loans to the tune of nearly $7 billion, which is likely to increase to nearly $9 billion by the end of the current fiscal year. Much of Pakistan’s commercial loan stock is owed to Chinese financial institutions, as Pakistan has repaid major non-Chinese commercial loans of institutions.

Most commercial loans come with steep terms; they have to be repaid to the lenders between one to three years. The rates on the loans are high as well. Some are benchmarked against the London Interbank Offered Rate (also known as LIBOR). Others, like Chinese commercial loans, are pegged against the Shanghai Interbank Offered Rate (SHIBOR). For example, Pakistan recently obtained a $2.2 billion commercial loan from the China Development Bank at six-month SHIBOR rate plus 1.5 percent; this loan is to be repaid over a three-year period.

Chinese Bilateral Debt

Pakistan holds around $27 billion of Chinese debt. This includes around $10 billion of bilateral debt and $6.2 billion in debt provided by the Chinese government to Pakistani public sector enterprises, and Chinese commercial loans of around $7 billion. In addition, China’s State Administration of Foreign Exchange (SAFE) has placed $4 billion worth of foreign deposits with Pakistan’s central bank. The bilateral debt is on concessional terms with a maturity period of 20 years. In addition to the $27 billion in debt, Pakistan also has a currency swap facility with the Chinese.

2. Short- and Medium-Term Debt Repayment Pressure

Pakistan’s large external debt comes with considerable repayment pressure. From April 2023 to June 2026, Pakistan needs to repay $77.5 billion in external debt. For a $350 billion economy, this is a hefty burden. The major repayments in the next three years are to Chinese financial institutions, private creditors and Saudi Arabia.

Pakistan faces near-term debt repayment pressure. From April to June 2023, the external debt servicing burden is $4.5 billion. The major repayments are due in June when a $1 billion Chinese SAFE deposit and a roughly $1.4 billion Chinese commercial loan would mature. Pakistani authorities hope to convince the Chinese to refinance and rollover both debts, something the Chinese government and commercial banks have done in the past.

Even if Pakistan manages to meet these obligations, the next fiscal year will be more challenging, as the debt servicing will rise to nearly $25 billion. This includes $15 billion of short-term loans and $7 billion in long-term debt, including a vital $1 billion repayment on a Eurobond in the fourth quarter. The short-term debt repayments include $4 billion Chinese SAFE deposits, $3 billion Saudi deposits and $2 billion UAE deposits; the Pakistani government assumes they will be rolled over by the creditors each year. Separately, Pakistan will need to repay another $1.1 billion of long-term commercial loans to Chinese banks.

In 2024-25, Pakistan’s debt servicing is likely to be around $24.6 billion, which includes $8.2 billion long-term debt repayments and another $14.5 billion short-term debt repayments; this includes major repayments to Chinese lenders of $3.8 billion. In 2025-26, the debt servicing burden is likely to be at least $23 billion; that year Pakistan is to pay back $8 billion in long-term debt, including repaying $1.8 billion for a Eurobond and $1.9 billion to Chinese commercial lender.

3. Exports, Investments and Remittances — and Pakistan’s Repayment Calculus

In order to repay its debt and avoid a sovereign default, Pakistan’s earnings from exports, foreign direct investment and remittance inflows from foreign workers are vital. However, all three inflows are projected to not keep pace with the import bill as well as the mounting debt repayment pressure.

For example, over the last three years, Pakistan’s export earnings and remittances were a total of $164 billion, compared to $170 billion worth of imports of goods. Over the next three years as well, imports are likely to be higher than the total dollar amount of exports and remittances, which will lead to a current account deficit requiring external financing. On the export side, the IMF had projected nearly $36 billion exports for 2022-23. That has now been revised with a new estimate of $28-29 billion, partly due to the rising cost of business and economic dislocation resulting from the uncertainty in the country.

Foreign direct investment is projected to remain subdued as well. In recent years, investment has averaged a dismal $2 billion annually due to challenging business environment and frequent policy changes; similar levels of investments are the best case for the next few years. Investor sentiment has also been impacted by the government’s recent restrictions on the movement of capital outside the country.

4. Options to Manage External Debt

Pakistan’s economic managers have only two options for addressing its external debt burden. The first is to take fresh loans and seek rollovers of debt. However, due to downgrades by international credit rating agencies, Pakistan’s ability to access sovereign financing market is limited. So Pakistani leadership will depend on Middle Eastern partners and China, not just for existing rollover but also fresh loans if it seeks to avoid a default. The specific amount Pakistan may seek will depend on negotiations with the IMF. If the derailed IMF program is revived, the amount will be smaller than the one it would seek if the program collapses. And in case the currently derailed IMF program is revived and completed over the summer, Pakistan will need a new IMF program, in addition to new loans and rollovers from its Middle Eastern and Chinese partners, due to its external debt burden over the new three years.

Another possibility is that Pakistan seeks pre-emptive restructuring of debt. Doing so will reduce the repayment pressure and spare scarce dollars in the economy to finance the country’s current account deficit. The Pakistani government has met with investment banks and advisors to explore restructuring options. However, for now, officials are reluctant as a restructuring process will be both painful and long, and also because of the political backlash of associated austerity measures.

What Does this Mean for Pakistan’s Stability?

There is a real danger that nuclear-armed Pakistan with a population of nearly 230 million people may be unable to meet its external debt obligations — which will trigger a sovereign default. To avert this scenario, Pakistan needs IMF’s continued support as well as help from Chinese and Middle Eastern partners. Pakistani leadership has been asking the United States to intercede with the IMF, but that effort hasn’t borne fruit in the way they hoped for. Pakistani leadership is also making frantic efforts for bailouts from foreign partners, but it is unclear if they will make the difficult reform choices necessary to win the trust of the IMF. If Pakistan ultimately defaults, there will be a cascade of disruptive effects. Crucially, Pakistan’s imports could be disrupted, which could lead to a shortage of some essential goods and commodities. In Sri Lanka , the disruption of oil imports stoked public discontent, protests and a change in government. Pakistan, which is already seeing intense political conflict between Sharif’s government and opposition leader Khan, may also see the economic crisis creating more political turmoil. And given Pakistan’s demographic profile and surging terrorism threats, the resulting crisis could go in unexpected directions.

Shahbaz Rana is an economic correspondent with Pakistan’s daily English newspaper The Express Tribune and the host of a primetime TV show, The Review, at Express News.

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Response of Pakistan’s economic growth to macroeconomic variables: an asymmetric analysis

  • Research Article
  • Published: 23 December 2022
  • Volume 30 , pages 36557–36572, ( 2023 )

Cite this article

  • Hafiz M. Sohail   ORCID: orcid.org/0000-0002-7885-5549 1 ,
  • Mirzat Ullah   ORCID: orcid.org/0000-0002-7715-0352 2 ,
  • Kazi Sohag 2 &
  • Faheem Ur Rehman   ORCID: orcid.org/0000-0003-1517-0611 3  

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This study examines the impact of several important macroeconomic variables such as quality of education, infrastructure development, foreign direct investment inflow, and green energy transitions on economic growth. We analyzed annual time series data sample for estimation of the above macroeconomic indicators during 1990 to 2020. We use nonlinear auto-regressive distributive lag model (NARDL) approach to detect the short-term and long-term effects of undermentioned macroeconomic variables on economic growth of Pakistan. The results primarily reveal that the quality education, foreign direct investment inflow, and infrastructure development are playing a significant positive role in the economic growth of Pakistan. Similarly, in short term the foreign direct investment inflow, infrastructure, and green energy transition coefficients are significantly positive related to sustainable development goals. However, the education found as unsubstantial as contributive as other variables. Moreover, the Granger causality and structural break estimations are employed to estimate the causal association between the selected parameters and unexpected change over the economy. The estimated outcomes find the unidirectional causality from education and green energy transition towards economic growth, where education is found within relation to infrastructure. Additionally, bidirectional causal relationship is found between FDI and infrastructure towards economic growth which shows that the increase in foreign investment has the potential to boost the economic growth. Finally, all the estimated indexes are considered as important sources towards the economic growth.

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Avoid common mistakes on your manuscript.


The current transition towards green economy is affecting the world economies and dynamics. Given the considerable hydrocarbon dependency, we scrutinize the key aspects among sustainable development goals (SDGs) that have the potential to make remarkable change in the developing economies especially the case of Pakistan. As other developing economies: Pakistan is adopting the United Nations (UN) endorsed campaign of green transition of 17 SDGs. The UN Agenda-2030 for SDGs intends to solve the current environmental challenges of the twenty-first century in the interests of citizens. The sustainable development efforts are considered to contribute to economic growth without affecting the green environment of the society. It is indispensable to address interconnected pillars of economic growth through supportive policies to attain sustainable economic growth. Sustainable development objectives include providing quality education, building resilient infrastructure, promoting of clean energy transition especially the use of natural gases, and inviting foreign investments to boost the domestic economic growth.

The education at both levels industry and society are very important in the way to build green environment and make economic growth. The demand for edification is one of the most critical human assets since it can increase productivity in allocation with resources. In contrast, it has been observed by Seetanah ( 2009 ) that education fosters economic development and increases human livelihoods by boosting the quality of the workforce, promoting democratization, better life, decreasing fertility, and boosting equality. According to the United Nations Research Institute for Social Development, economic sustainability comprises healthy living, education, access to products, and socio-economic achievement (Armeanu et al. 2018 ; Beets 2005 ; Johnston 1998 ; Schwab 2018 ). The current study reveals that improving education in society can contribute to economic growth in long run. Moreover, there is an association between transportation infrastructures and energy consumption by examining the economic growth. To create sustainable environment the study reveals that the economic growth is veiled in creating less CO 2 emission and energy consumption. In adopting the green energy, the study uses the adaptation of natural gas, which is considered as crucial clean energy source as comparison with other petrochemicals such as petroleum and coal. The increase in natural gas consumption is predicted to enhance Pakistan’s environmental quality and allow the country to maintain its economic performance. Apergis and Payne ( 2010a ) examined that natural gas can minimize CO 2 emissions. IEA ( 2016 ) reported the adaptation of natural gas consumption from 2012 to 2030 that use of natural gas in the power sector will rise by 2.2% and in industry can boost by an average of 1.7% per year. It is expected that converting power and industrial sector form petroleum into natural gas the Pakistan can save 17% CO 2 emission and economy can grow with the same ratio (Sadiqa et al. 2022 ).

Achieving targeted economic growth is one of the critical challenges of government policymakers in case of developing countries like Pakistan. The prevailing concern for all economies is to sustain the economy (Shabbir 2013 ). According to UN Agenda-2030 the SDG-8 support the sustained, inclusive, and sustainable economic growth; productive employment; and clean environment for all. According to the World Business Council for Sustainable Development, companies may meet human desires by inventing the modern technologies, improving efficiency, creating jobs, and ensuring that solutions are accessible to a broad range of people (Carree et al. 2007 ). For measuring economic growth, current study has adopted the same proxy used by (I. Khan et al. 2021 ; Omri 2013 ). Yusuf et al. ( 2020 ) documented that most economies aspire to attract foreign direct investment ( FDI ) because of its recognized benefits as a catalyst for economic growth. Likewise, this research looks at the empirical association between FDI and economic growth in Pakistan, as well as the factors that influence FDI into the Pakistani economy.

As a result, this study focused to develop a theoretical and statistical solution to the question: do the goals of the UN Agenda-2030 of SDGs impact the economy of Pakistan? This study aims to develop and test the models to determine the association between education (SDG-4), FDI (SDG-17.3), infrastructure and technology (SDG-9), clean energy (SDG-7), and sustainable economic growth (SDG-8) in Pakistan (Fig.  1 ). This research study examines the impact of sustainable development goal indexes (SDGs) include the levels of quality education, resilient infrastructure, clean energy transition proxied by use of natural gases, and foreign direct investments on domestic economic growth of Pakistan (Fig.  2 ). These SDGs are selected form current stream of United Nations Agenda-2030 of green energy transitions. This paper contributes to existing efforts for economic growth narrative in several ways like introducing new statistical measurement of nonlinear auto-regressive distributed lag (NARDL) model which is considered as most superior to the conventionally used auto-regressive distributed lag (ARDL) model. This model has the potential to predict the effects of the explanatory variable in domain of both positive and negative shocks on the outcome variable (Neog and Yadava 2020 ). Additionally, the existing literature studied toured the impacts of energy consumption on economic growth with the conventional ARDL linear modeling methods which only assessed the impacts of external shocks related to consumption of energy on the nation’s GDP (Sohail et al. 2022 ).

figure 1

Source : Author’s calculations

Conceptual framework of the study.

figure 2

Source : Author’s calculations. b Historical trending in the economic growth of Pakistan. Source : Author’s calculations

a Trend in the economic growth of Pakistan with respect to Bangladesh and Iran economies.

In line with the above discussion, this research study aimed several specific goals. First , we assess the economic impact of inclusive and equitable quality education to encourage possibilities for lifelong learning. Second , we assess the impact and enactment of the global partnership to invite more foreign direct investment to home country on economic growth. Third , we analyze the effect of resilient infrastructure, sustainable industrialization, and foster innovation on economic growth. Finally , we determine the effect of affordable, reliable, sustainable, and modern energy on economic growth. This study is different from previous studies in several ways, where we focused on each category of SDG impact on national economy. We mainly focused on the SDGs which are included in UN agenda, where the member developing countries are UN suggestions. Most important, the impact of such SDGs was used in our study, for example, the long-run effect of education on national economy. The government subsidizes and spends more on higher education to produce skill full labors where the impact of such spending is negative on economic growth, which is against the previous research studies and opposing the general theoretical support. This impact is very true to current economic situation of Pakistan. There are several reasons like citizens are getting the stipend and scholarships for higher studies and leave the country. On the other hand, government failed to provide jobs to graduates so skillful labors are contributing negative to economic growth in the long term. Additionally, the FDI inflow into the developing economy has vast substantial impact of economic growth. In this study we used several statistical estimations like VECM and NARDL to find out the enactment of the global partnership on economic growth proxied by FDI inflow.

The remaining manuscript is set as follows: a historical overview of Pakistan’s economy is presented in the “ Overview of Pakistan economy ” section, review of literature is summarized in the “ Literature review ” section, whereas the methodology and empirical results are covered in the “ Methodology and data source ” and “ Empirical analysis ” sections, respectively. Finally, the “ Conclusion and policy implications ” section presents the conclusion and policy implications.

Overview of Pakistan economy

Pakistan stands in developing economy with GDP of $264 billion. In comparison with other geographic economies the Pakistan economy grew up with many challenges and experience serious issues. Pakistan has recurrently experienced economic and financial crises, including rampant inflation, trade deficits, depleted foreign reserves, and currency depreciation. The economy confronted with a mixture of overpopulation, terrorism, bad governance, and low literacy level.

The two most serious threats to the country’s low GDP are the accumulation of rising inflation and a payment crisis triggered by a mixture of global and regional elements (Tehsin et al. 2017 ). Similarly, the pandemic (COVID-19) has exacerbated, and Pakistan’s foreign exchange reserves plummeted to multiyear low (Pakistan 2021 ).

Over a given time period, this secures the difference between a country’s exchange of goods and services, as well as net transactions such as overseas aid. A persistently high deficit may result in a surplus of a country’s currency in the foreign exchange market, reducing the currency’s value. This is one of the reasons why the Pakistani rupee (PKR) has plummeted (Khan et al. 2022 ). To overcome all the issues Pakistan requests to IMF bailout package and, additionally, borrow from other countries like China, Saudi Arabia, and USA. The Pakistan’s economy experienced significant regime changes, during every regime the level of uncertainty changed for the trade effected, and this is the main issue faced to the economy. The volatility behavior of Pakistan economy is divided in four major phases. First was the phase where it is generally agreed that Pakistan had economic progress during the 1960s (Looney 2004 ). However, at the same time the defense spending throughout the late 1960s slowed the country’s economic growth and caused it to stagnate (Looney 1991 ). During 1958–1973, increased defense spending harmed economic growth, particularly during the conflicts with neighbor country in 1965 and 1971 (Looney 1994 ).

The second phase of economic expansion emerged in 1980s, with the most significant annual GDP growth of 10.2% reported in 1980 and a yearly growth rate of 6.1% over 10 years of 6.1% on average (Tehsin et al. 2017 ). Despite this progress in economic development, Pakistan may perhaps be not maintained it until miliarial administration. Similarly, following the previous regime the military acquired the country administration and several structural changes were enabled, accepted globalization, and welcomed international trade and investment; Pakistan’s economy progressed toward sustainable economic growth. This was the era from 2000 to 2007 during which the economy grew at a rapid pace (Amjad and Awais 2016 ). Based on the lessons learned during the miliarial administration, it can be predicted that the social and economic consequences of another effort at economic development will manifest themselves in the structure of extreme right-wing violence in society. Ultimately, due to the worldwide coronavirus outbreak, Pakistan’s GDP growth fell to 1.9% in 2019, down from a decade-high of 5.8% the previous year when the new elected administration took the charge. The economy grew, ranging from 7.0 to 7.5% in the final years of the miliarial administration, primarily due to advances in the recital of the service sector (Looney 2009 ). The final phase could be considered in economy favor to reduce the country’s large budget deficits and excessive public debt caused by the prior newly elected democratic administration have act as poor economic management (Looney 2004 ). According to Looney, the miliarial administration did not adhere to the effective governance indicators set forth by the World Bank (Looney 2004 ). These include political freedoms, the efficiency of government, and anti-corruption (Kaufmann et al. 2011 ).

Literature review

This part includes a detailed assessment of previous work that has been done in context of economic growth, development in education, green energy transition, foreign direct investment, and infrastructure development. This part will assist the readers in fully understanding the bridge and connection between SDGs and the economic growth of Pakistan. The following is a review of the literature on each domain subject.

  • Economic growth

In the perspective of economic growth of Pakistan, it has been facing number of challenges like high fiscal deficit and low investment, rising rate of poverty and unemployment, and heavy external and domestic debts. For success of any economy, it depends upon stable, efficient, and active government financial structure. To support the ongoing economic projects, Sohail et al. ( 2022 ) examined that the economy has been facing the lowest growth rate among South Asian countries since 1990. They concluded that the exogenous factors could enhance the current low growth and award a development in economy. Additionally, the economy of Pakistan has been facing a large spillover effect of war on terror, internal instability that is promoted by frenemies and hostile neighbors (Sadiqa et al. 2022 ). Endogenous mishandling of energy crises started from 1990 and which is the result of poor economic management, governance, and institutional framework. Yusuf et al. ( 2020 ) concluded that the economy needs to improve the political stability for promotion of investment form of domestic and foreign investors and suggested the openness to international trade and private foreign investment. It created untenably large lags in policy formulation and implementation (Sohail et al. 2022 ). Nazir et al. ( 2021 ) documented that the manufacturing sector contributed its share in economic growth and played a key role. They examined that Pakistan due to this sector progressed from its status as a low-income to a lower middle-income country. It helps the nation to achieve the objective of poverty reduction. In the current scenario, Pakistan needs to significantly increase foreign direct investments, as well as national saving, to overcome the budgetary issue and to address the domestic and external debt burden.

Education and economic growth

Pakistan’s literacy rate is substantially lower as comparison with other developing countries. The literacy rate is being significantly higher for males with high difference than for females, and for the females, the educational levels are much lower. Sustainable development goal comprises the ensuring of inclusive and quality education and promoting lifelong learning opportunities for all (Seetanah 2009 ). Similarly, Kingdon ( 2007 ) stated that the education quality in Pakistan is different from other developing countries and needs a serious attention; it is concluded that certain economies with a high educational level (for example, Taiwan) also have a thriving economy. Self and Grabowski ( 2004 ) examined the determinants of education on economic development, that the educational attainment is accountable for fluctuations in a financial product. Their study also demonstrated educational levels which are related to each other. Chowdhury ( 2022 ) investigated the internationalization of education on economic growth; the main findings revealed significant disparities between education levels in terms of their effect on economic growth. The tertiary education does not appear to have a causal effect on development. They examined the association between level of education and economic growth and conclude that when the population is separated into groups based on the gender of the individuals then education has a significant causal effect on the nation’s economic growth in the long term. Many other experts have concentrated their efforts on investigating the relationship between education and the economic prosperity of a country, but in developing economies, this is considered as first time to examine the effect of education on economic growth.

Lin ( 2003 ) studied the association of economic growth, education, and technical progress and confirmed the long-run association of parameters. Hassan and Rafaz ( 2017 ) study the association between gender’s education and economic growth in Pakistan. Using OLS regression and data spanning the years 1990 to 2016, the results reveal that increasing female education, female labor force participation, education expenditure, and fertility rate by 1% resulted in a 9.6% rise in Pakistan’s gross domestic product (GDP). Hanif and Arshed ( 2016 ) employed three indices for educational level in the SAARC countries to determine that higher education enrollment has the most significant impact on growth. Saeed and Awan ( 2020 ) attempted that the technical improvement has a significant impact on Pakistan economy and suggested the positive association between research and development and innovations and those discoveries can help to increase the pace of GDP growth. Yasmin et al. ( 2021 ) employed a generalized method of moments (GMM) to investigate the link between economic growth and several factors such as education, poverty, and unemployment in Pakistan. Educational attainment and trade expansion both have a favorable impact on the economy, whereas joblessness has an adverse influence on the determination of economic expansion, according to the conclusions of the research. Despite the fact that each researcher took a distinct strategy to their investigation, the outcomes appear to be comparable. The question is if the connection between educational factors and economic growth in Pakistan has altered over time, and whether there are any other factors that are associated with these variables. As a result, explanation and specificity of the association between education and economic growth may be regarded valuable information. A trend of education is shown by Fig.  3 .

figure 3

Trend in education including primary, secondary, and higher education (1990–2019).

Foreign direct investment and economic growth

The theoretic basics of the foreign direct investment ( FDI ) to economic growth is founded on the neoclassical and endogenous growth models. Chanegriha et al. ( 2020 ) deliberate that the FDI has an optimistic effect on economic growth by growing investment level. However, in the endogenous growth models the FDI increases total economic growth in host countries by familiarizing new inputs, technologies, and products; augmenting managers and labor skills; and increasing local competition. Ciftci and Durusu-Ciftci ( 2021 ) studied that the FDI inflows for the host countries have several advantages, such as creating new business areas and human capital enhancement, lessening the market power of present firms, being a catalyst for domestic capital stock, and tax revenues in respect to other types of financial capital.

Ahmad et al. ( 2022 ) investigated the Chinese FDI flow into Pakistan. They documented a massive increase after the groundbreaking of Belt and Road Initiative (BRI) and China-Pakistan Economic Corridor (CPEC). According to the Chinese government, investments in Pakistan increased from $695.9 million in 2014 to $1002.9 million in 2020. Similarly, Abdouli and Omri ( 2021 ) conducted an empirical study to investigate the association between FDI and GDP. They suggested that they would have a significant impact on Pakistan’s economic growth. Thereby, FDI provides a number of benefits to the host country, including the formation of new jobs, technical progress, resource optimization, and competitive merchandise. According to these figures, Chinese investment accounted for an average of 43.8 percent of total FDI . Murshed et al. ( 2022 ) claimed that FDI puts stress on local firms to innovate and develop technologically, which may explain why developing countries welcome FDI . With FDI assistance, Pakistan’s economy is poised to close the savings-investment gap. This FDI creates new job opportunities, technology transfer, increased productivity, and contest. Benefits like these encourage developing economies like Pakistan to adopt FDI -friendly policies.

Hamid et al. ( 2022 ) scrutinized the impact of FDI and imports on economic growth; they discovered a dual-directional relationship between output and FDI and imports. The findings support the assertion of output growth caused by FDI and imports. Ulucak and Erdogan ( 2022 ) investigated the ambiguous environmental effects of FDI inflows. They demonstrated the negative environmental consequences of hosting FDI , which indicates that as FDI flows into host countries, environment protection tends to worsen. Similarly, according to Wang et al. ( 2022 ), pollution halo effect highpoints the optimistic environmental significances of FDI . In this respect, these FDI are supposed to be immersed in tidy industries within the host nations, thereby plummeting the possibility of FDI making contributions to augmented CO 2 emissions. Khan et al. ( 2020 ) studied the FDI inflows and CO 2 emission nexus, applied data of BRICS countries from 1986 to 2016, highlighted the harmful environmental effects of FDI inflows, and documented that higher FDI inflows contribute to higher emissions of CO 2 . Furthermore, the country-specific results revealed that, with the exception of Russia, the pollution haven hypothesis holds true for the other BRICS nations. Moreover, Fig.  4 presents the trend of FDI in Pakistan.

figure 4

Trend in foreign direct index inflow to Pakistan.

Infrastructure and economic growth

The sustainable development goal in UN Agenda-2030 is to create resilient infrastructure, promote inclusive and sustainable industrialization, and inspire innovation. Reliable infrastructure is required to connect supply chains and efficiently move products and services across the borders (Sohail et al., 2021 ). Construction of infrastructure links households throughout urban regions, helps in flow of trading commodities, provide quick access to quality healthcare facilities, and award access to educational opportunities. Infrastructure plays a significant role in connecting markets by transporting products and consumers of an economy (Brons et al. 2014 ). As a result, efficient transportation methods allow contractors to deliver their goods and services to the market on time while also facilitating the movement of people to the most relevant occupations in demand. A good telecommunication infrastructure allows for a rapid flow of information, which improves the country’s overall economic efficiency (Rehman et al. 2022 ; Schwab 2018 ). Because of their connection, air and road transportation stimulate a broader range of activities. The authors also provided proof for a significant optimistic reaction of passenger-kilometer due to favorable change in earning (Rehman and Sohag 2022 ; Marazzo et al. 2010 ). It has been estimated that an increase of 1% in air passenger traffic results in a rise of 0.943% in the gross domestic product (Hu et al. 2015 ). Figure  5 shows the trends of infrastructure in Pakistan.

figure 5

Trend in infrastructure including rail lines, container, air, and rail passengers (1985–2019).

Natural gas consumption and economic growth

The purpose to ensure access to affordable, reliable, sustainable, and modern energy for all depicts that sustainable goal is included in UN Agenda-2030. Natural gas is considered a reliable source of green energy transition. In this research study we are considering that the natural gas is a significant energy supply for almost every economy of the country, more specifically the developing country like Pakistan. Natural gas is used to generate the country’s total national output. Additionally, it is a cleaner and environmentally friendly resource of energy in comparison to other petrochemical or coal. Increasing the natural gas consumption level in Pakistan is expected to advance the country’s environmental quality, and will allow the government to maintain its economic performance (Sohail et al. 2022 ). One effective option for achieving energy structure optimization is transitioning from coal to low-carbon energy sources (Li et al. 2019b ). Compared to coal and oil, natural gas usage produces much fewer CO 2 emissions per unit of energy (Solarin and Shahbaz 2015 ).

Natural gas has been considered as a low-carbon and environmentally friendly among all other energy sources; it can significantly reduce air pollution (Xiao et al. 2016 ). Increased NGC can contribute to the achievement of the twin dividend, i.e., economic growth and emission reduction (Feng et al. 2015 ). Because natural gas is one of the energy input variables at the micro-level, the price of natural gas will directly influence the use and production of all industries, particularly the secondary industry, which is one of the most energy-intensive industries. Promotion and exploitation of natural gas as an industrial material in factories and as a household commodity could significantly impact the way people live and produce, especially when compared to other alternative energy sources, remarkably price, and accessibility. Much academic research has been undertaken on the causality relationship between NGC and economic growth, most of which have been conducted at the national level and compared the results of other countries. For example, the research from 67 nations over the period 1992–2005 revealed that NGC and economic growth were linked in a two-way causal manner both in the short and long terms (Apergis and Payne 2010b ). Among G7 member countries, there were three types of causality between NGC and economic growth (unidirectional causality, reverse causality, and bidirectional causality) (Apergis and Payne 2010b ), the first being the most common (Ozturk and Al-Mulali 2015 ). The evidence from the Gulf Cooperation Countries throughout the period 1980–2012 demonstrated that NGC was beneficial to long-term economic growth. Depending on the outcomes of their research, different experts have come to different conclusions about the connection between natural gas use and economic development.

As a result, while numerous studies have established that NGC has a favorable effect on economic growth (Ozturk and Al-Mulali 2015 ), others have claimed that economic growth has a detrimental impact on NGC (Sari et al. 2008 ). Furthermore, there was a mismatch among regions regarding the association between NGC and economic growth (Fatai et al. 2004 ). In this aspect, the association between NGC and economic growth was statistically insignificant in Australia and New Zealand. According to the findings from different OPEC member countries, there were growth, conservation, and neutrality correlations between NGC and economic development, in other OPEC member countries. It was shown that the association between NGC and economic growth differed significantly between China and Japan. In China, there was no evidence of indirect causality, whereas in Japan, there was evidence of two-way causality (Sari et al. 2008 ). Finally, trend in natural gas consumption in Pakistan is shown in Fig.  6 .

figure 6

Source: Author’s calculations

Trend in natural gas consumption.

Methodology and data source

To estimate the growing stream of Pakistan economy, in the consideration of UN Agenda-2030 of green transition SDGs, we analyze that a long period contains three-decade annual time series data for the SDG’s indexes from period 1990 to 2020. Further, we apply the principal component analysis and vector error correction model vector auto-regression method advanced by Antonakakis and Gabauer ( 2017 ). VECM econometric techniques are used to investigate the statistical significance of considered SDG’s indexes to study the effect both in long and short terms. From the UN Agenda-2030 of green transition SDGs, we are considering the five most vulnerable variables along with indexes to examine the affect in most effective way. These indexes are education index ( EDI ), foreign direct investment ( FDI ), infrastructure index ( INFRI ), and natural gas consumption ( NGC ). For batter examination we are considering the GDP per capita as the proxy of economic growth ( EG ).

Estimation process

We scrutinized the influence of four SDGs on economic growth along with the indexes. Hence, a statistical tool called principal component analysis (PCA) can minimize the number of variables in a multivariate data set. The foremost benefit of this approach is that it permits the variance to keep the input data’s maximum informative value intact while simultaneously minimizing the dimensions (Tripathi and Singal 2019 ). PCA is a well-accepted approach for selecting independent variables and removing duplicate or strongly correlated parameters commonly used in economic estimations. Using the PCA estimations this method to identify the variation within an extensive collection of associated variables are proposed by (Jolliffe 1972 ).

However, the empirical investigation starts with determining the sequence of the variables’ integration (Fig.  7 ). This sequence is critical because ARDL methods can accept variables incorporated at level or at first difference, but not at second difference. This model has a single disadvantage: it cannot be used if the parameters are integrated at the I (2) (Ibrahim 2015 ).

figure 7

Estimation strategy.

Vector error correction model

Here is the long-run association among the series I (1); it is, therefore, the VECM approach that estimates the long-run and short-run association among the selected variables (Tran 2018 ). Additionally, for better representation of causal association between the time series variables this study used Granger causality techniques (Rossi and Wang 2019 ). This current study analyzes the causal association between selected indexes of SDGs such as education (EDI), foreign direct investment (FDI), infrastructure (INFRI), and green energy transition (NGC) and check the impact on economic growth (EG).

Nonlinear cointegration results

PESARAN et al. ( 2001 ) examined the cointegration analysis to deliver the proof of a linear relation between dependent variables. The NARDL is a nonlinear stretched form of usual ARDL model to study the effect of both short run and long run. For the conceivable asymmetric effects, this model is practical for investigation in the short and the long run. Similarly, the present study employs the estimation of nonlinear auto-regressive distributive lag (NARDL) model developed for the first time by Shin et al. ( 2014 ). By using this modern statistical model the presence of an association between levels of education, infrastructure, FDI inflow, and natural gas consumptions in Pakistan is investigated. Using NARDL in this study have several advantages over other techniques like it reduces the characteristic supposition in the cointegration analysis that all selected variables necessarily be integrated of the same order with excluding the second difference I (2) variables. Additionally, as studied by Li et al. ( 2019a ), it examines the potential cointegration, so that it evades neglecting any association which is not evident in an existing established linear setting. Similarly, Economou ( 2019 ) documented that the NARDL estimator allows to discriminate the existence of linear cointegration, nonlinear cointegration, and lack of cointegration. The present study is using the NARDL model that covers the optimistic and pessimistic partial sums and also the short- and long-run effects on economic growth. Furthermore, as Pakistan have witnessed sever crisis in 1998, 2008, and 2019, structural-break test is very vital for the current study. The study utilized unit root test against the alternative of trend stationary process with a structural breakpoint both in intercept and slope is based on the analysis. Thus, using an error correction model the NARDL model studies the resultant equations for

where EG t is the economic growth in Pakistan in year t ; EDI t shows the education index in year t ; FDI t presents the foreign direct investment inflow in year t ; INFRI t stands for the infrastructure index in year t ; NGC t shows the natural gas consumption in year t ; \({\hat{e} }_{t-1}\) shows the error correction term; α 1 , α ij \(\left(i\right)\) , and β 1 are the parameters; and \({\varepsilon }_{\mathrm{log}egit},{\varepsilon }_{\mathrm{log}ediit},{\varepsilon }_{\mathrm{log}fdiit},{\varepsilon }_{\mathrm{log}infriit}, \mathrm{and }{\varepsilon }_{\mathrm{log}ngcit}\) are the white noise disturbance terms that may be correlated with each other. The rank of cointegration in VECM designates the total cointegrating vector. For instance, the number of rank (2) specifies that the linear combination of two nonstationary repressor variables will become stationary. A significant negative sign of the e t  − 1, also called the error correction model (ECM) parameter, displays that any variation in the short-run association between the independent variable and dependent variable will set up a significant long-run association between them.

Empirical analysis

This study used the augmented Dickey Fuller (ADF) estimation proposed by Dickey and Fuller ( 1979 ) and PP (Phillips and Perron 1988 ) tests for conformation of integration level among the selected variables; the results are presented in Table 1 . The outcome shows that all the other variables are integrated at level I (1). The exact order of integration level guides to apply the VECM estimation technique (Pradhan and Bagchi 2013 ). In above econometric equation we estimate the structural break to estimate an unexpected economic change over the study time frame in the parameters of regression model; such estimation enables us to measure the unreliability and forecasting errors of the estimation model used in our study. The empirical results of structural break-ZA are shown in Table 2 . The results show that the structural breaks, i.e., 2003, 2005, 2007, 2008, 2009, 2010, 2012, and 2013, are founded in the selected variables such as EG , EDI , FDI , INFRI , and NGC . Most of the breaks are started from 2003 to 2012. This break may happen due to financial crisis shocks of Pakistan.

Prior to the application of Johansen cointegration test, it is imperative to confirm the long-run association among the selected parameters; we have to select the lag order by utilizing the VAR approach for I (1) variables (Nielsen 2001 ). The number of lag selection criteria has been applied in previous studies such as Akaike Information Criterion, Hannan-Quinn Information Criterion, Modified Ranking LR test statistics, Schwartz Information Criterion, and Final Prediction Error. In Table 3 , many tests confirm a (1) lag length.

At the moment, the cointegration test is used to determine whether there are any long-run equilibrium relationships between the four variables EDI , FDI , INFRI and NGC and economic growth. This employs the maximum likelihood ratio test and examines two test statistics trace statistics and leading eigenvalue statistics. The result of the Johansen cointegration rank test is shown in Table 4 , which indicates that there are two cointegrating vectors at 5% levels of significance (i.e., the null hypothesis of no cointegration is forbidden for a rank of 0 and less than or equal to 2). This indicates that there is a long-run association between the four variables. The favorable results in Table 4 require the modeling of VECM and not a vector auto-regressive (VAR) model as stated in the model selection process.

In Table 5 , both long-term and short-term coefficients were obtained through the VECM. The long-term coefficients of EDI , FDI , INFRI , and NGC are statically significant. Additionally, the study established that the education index has a favorable effect on economic growth in nine remittance-receiving countries. At a 1% significance level, this optimistic effect of education on economic development is highly noteworthy. The coefficient of EDI implies that increasing the EDI by 1% increases economic growth by 0.08 percent. Our results are the same as the recent study on nine selected remittance-receiving countries exposed (Zaman et al. 2021 ). In comparison, other studies showed that increasing educational levels boosts economic growth (Habibi and Zabardast 2020 ; Hanushek and Woessmann 2020 ; Kousar et al. 2020 ). Likewise, numerous studies have also demonstrated a beneficial correlation between education spending and economic growth (Glewwe et al. 2014 ; Jalil and Idrees 2013 ). These research findings corroborate our findings, indicating the existence of a noteworthy long-term optimistic link between economic expansion and education.

The FDI coefficient affirms that a 1% augmentation in FDI will boost economic growth by 0.504 percent. A 1-percent drop in FDI will conversely influence economic growth with the same quantity. Modern studies examining the relation between FDI influx and economic growth indicated that FDI inflow increases economic growth (e Ali et al. 2021 ). Similarly, other studies reported that FDI increased economic progress in the long run (Saleem and Shabbir 2020 ; Tiwari and Mutascu 2011 ).

In addition, the VECM model’s long-run fallout shows that INFRI (infrastructure index) also leads to an essential positive connection in the direction of economic growth at a 1% significance level. The coefficient of INFRI increases by 1%; economic growth will also augment by 0.757, respectively. The outcomes logically aligned with Mohanty and Bhanumurthy ( 2019 ) and C. Wang et al. ( 2020 ) showed a significant positive association between economic growth and infrastructure. Another study conducted in India also authenticated our results that increasing infrastructure enhances economic growth (Mohanty and Bhanumurthy 2019 ; Chakamera and Alagidede 2018 ).

Finally, the selected VECM model shows that NGC also helpfully manipulates the economic growth in the chosen country. As NGC is raised by 1%, it boosts economic enlargement by 0.460%, while declining NGC by 1% will move down economic growth with the identical percent in the case of Pakistan. This positive bond between NGC and economic expansion is highly noteworthy at a 1% significance level. Our consequences are associated with the recent study by Sohail et al. ( 2022 ) and previous studies (Apergis and Payne 2010b ; Shahbaz et al. 2013 ; Solarin and Ozturk 2016 ) showing that economic growth can be improved with the increase of NGC .

In the second part of Table 6 , the error correction term ( CointEq1 , CointEq2 ) is significant. It has a negative sign, which means that the series are cointegrated and go together toward long-term equilibrium (Mahadevan and Asafu-Adjaye 2007 ). The negative response is required for balancing the EG series in the long term. As the error correction term is adverse and significant, we have causality in at least one direction. The short-run consequences of the nominated VECM model display that FDI inflow has an essential positive connection with economic growth, indicating that a 1% increase in FDI inflow will enhance economic growth by 0.315 percent in the short run.

During the short-run term, EDI has a significant pessimistic association with economic growth, which means that increasing education by 1% reduces economic expansion by 0.460 percent. INFRI has a considerable positive link with economic increase in the short run. In the near run, a 1% increase in INFRI boosts economic growth by 0.149 percent and vice versa. NGC demonstrated a substantial negative link with economic intensification in the short run, indicating that a 1% increase in NGC causes economic growth to decelerate by 0.321 percent. The R 2 value is close to 1 ( R 2  = 0.835). It can be said that the interpretation is consistent. This result supports the result obtained from the cointegration test. Therefore, the comments made for this equation are consistent as well.

The advance methodology was introduced by Shin et al. ( 2014 ) to examine the time series data for nonlinear and significant relationship. The results from NARDL are estimated in Table 7 , where we follow the estimation from Shin et al. ( 2014 ). We examined that there is cointegrated and significant association between economic growth and education, natural gas, and infrastructure. Additionally, we extend the model to check the short-run and long-run asymmetries. The level of significance is examined at every model from 1 to 3. In this study we employed the structural break to estimate an unexpected economic change throughout in our study timeline. In line with this, we have proposed our estimation as basic model for economic growth ( EG ), model 2 represents the secondary economic growth ( EG-S ), model 3 the primary growth ( EG-P ), and model 4 indicates the tertiary economic growth ( EG-T ) for making such supposition we follow (Shin et al. 2014 ). Additionally, the economic growth is based on cointegration consequences and VECM is organized to recognize the path of causality. The results from short-run NARDL represent that education and infrastructure have no effect on secondary and tertiary economic growth ( EG-S ; EG-T ). However, in the long run the education has significant and positive impact over primary economic growth ( EG-P ). Similarly, in all models the FDI has vital role in determination of economic growth at every level. Moreover, the consumption of natural gas impacts in the long term and in the long run.

The consequences of Granger causality are presented in Table 8 . The outcome shows the unidirectional causality from EDI to economic growth ( EDI  ≥  EG ), natural gas to economic growth ( NGC  ≥  GCF ), and EDI to infrastructure ( EDI  ≥  INFRI ).

Bidirectional causality is found between economic growth and FDI ( EG  < = >  FDI ) and economic growth and infrastructure ( EG  < = >  INFRI ). Bidirectional causality implies that when one parameter is increased, the other parameter also increases. When the parameters are exchanged, the parameters reinforce one another and become self-reinforcing. As a result, the policymaker would have an easier time dealing with this circumstance (Kónya 2006 ). However, if this is not the case, the study must incorporate more variables, and policy formation becomes more complicated (Riman and Akpan 2010 ). In summary, EDI has a noteworthy consequence on economic growth in Pakistan, owing to its bidirectional causation.

To check the result health of this study, we also report some problem-solving tests (Sohail et al. 2022 ) such as LM test, White test, and Jarque–Bera test. The results are provided in Table 9 and confirmed the model’s strength on the relationship among EDI , FDI , INFRI , NGC , and Pakistan economy.

Conclusion and policy implications

In adaptation of green energy transition and responding to the United Nation Agenda-2030 of sustainable development goal initiation, this research study focused with the impact of sustainable development goals (SDGs) on economic growth of Pakistan. More specifically, we examined the association of several important SDGs on economic growth with regards to previously missing links of sustainable economic development. Interestingly, this study is considering several new dimensions through the influence of SDGs: firstly the education (SDG-4) which is found in opposing to the theoretical approaches, secondly the foreign direct investment (SDG-17) which is found to more contributive to national economy, thirdly infrastructure and technological development (SDG-9) which is found as an important factor to boost the economy, and lastly the clean and green energy of increasing usage of natural gas (SDG-7) on the economy of Pakistan. Specifically, this research study provides help to the policymakers to overcome several permanent issues faced to the economy like the authorities should review the current policies regarding equitable quality education and lifelong learning opportunities to make it more contributive to the economic growth. Additionally , the economy needs more friendly policies to attract more FID inflow. Moreover , the policymakers should provide attention over the existing infrastructure to make it more sustainable business environment for industrialization and foster innovation. Finally , the usage of natural gas is considered more affordable and sustainable environmentally friendly in account of national economy.

We examined the impact several substantial SDGs that has potential to influence the economic for long time period historical data starting from 1990 to 2020. The structural break estimation indicates that there is presence of unexpected growth in several years. In line with this, we used the VECM and NARDL estimation techniques, where we found that the long-term coefficients of education, FDI inflow, and usage of natural gas impact the economy. We determined that FDI inflow and infrastructure are the most potent goals for Pakistan. Similarly, usage of natural gas and education are found contributions to economic growth. The consequences of asymmetric probing are stimulating, which confirmed the mi x outcomes regarding short-term and long-term asymmetries. The short-run and long-run results obtained from NARDL are significant and interesting in the case of developing economy. The government needed to motivate more FDI inflow to improve the infrastructure, and shell also improves education system at different level. Similarly, the adaptation of natural gas is creating a favorable environment. Collectively with the finding of four SDGs, all indicators are essential.

Recommendation and policy implications

The authorities need to imply more appealing policies to attract more foreign investment inflow. The existing policies related to quality education especially in the long term need to be revised to obtain the projected goals. The infrastructure that builds with aim of sustainable development can provide gateway to expansion for business operations. While the usage of natural gas is deemed as more clean energy source in comparison to oil and coal, the production level is to be increased, which could result in increasing of economic growth. This study can be extended to examine the relationship among sustainable development goals by analyzing the influence of other SDGs towards economic growth for other developing economies with fresh date data set.

Availability of data and materials

The data sets used during the current study are available from the corresponding author on reasonable request.

Ethical approval.

Not applicable.

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Sohail, H.M., Ullah, M., Sohag, K. et al. Response of Pakistan’s economic growth to macroeconomic variables: an asymmetric analysis. Environ Sci Pollut Res 30 , 36557–36572 (2023). https://doi.org/10.1007/s11356-022-24677-z

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The Struggles of the Pakistani Economy

economic crisis in pakistan research paper

Written by Tarini Sathe

Ever since becoming a country in 1947, Pakistan has dealt with political instability, cycling through periods of democracy and military rule. Of the country’s 29 Prime Ministers, not a single one has completed their five year term, all either being dismissed or overthrown. As a result, the Pakistani economy has also had its ups and downs, and the COVID-19 pandemic, trade disruptions, and the removal of Prime Minister Imran Khan have not helped. The crisis is all the more important because Pakistan held its general elections on February 8th—resulting in a hung parliament—and the new government will begin its term with significant challenges. Currently, the Pakistani economy is plagued with high inflation rates, trade deficits, and debt. There are already some policies in place to rectify these problems, as well as proposed solutions; they will determine the trends and future predictions of the economy. 

The pandemic, the Russia-Ukraine conflict, serious floods, and political instability all had a hand in creating the current crisis at hand. The inflation rate reached a record high of 38% in May 2023, and was approximately 30% as of January 2024 (Romei & Smith, 2024); this was partly a result of the State Bank of Pakistan dropping its cap on the Pakistani Rupee—as directed by the IMF—subsequently causing rapid devaluation of the PKR. Consumer prices have risen by 28% since January 2023, which has made it hard for many Pakistanis, especially poorer households, to make ends meet (Mangi & Koswanage, 2024). 

Pakistan also imports a lot of its food and fuel, meaning they constantly record trade deficits; coupled with high prices, foreign currency reserves dwindled to just about $4 billion in June—not enough to support even a month’s worth of imports (Hussain, 2023). The government managed to get a $2 billion loan from Saudi Arabia, as well as a $3 billion bailout from the IMF—its 23rd since independence—which comes with strict conditions to begin rectifying the crisis (Hussain, 2023). Currently, Pakistan has an absolute external debt of $125.7 billion, and faces $24.6 billion in debt repayments by the end of June (Kozul-Wright, 2024). The bulk of this debt is owed to China, who already agreed to roll over over $2 billion because of Pakistan’s lack of ability to repay on time; economists also expect that the new government might appeal to the IMF for long-term funding since its current deal expires in April. 

Pakistan’s massive debt and ability to repay loans stems from its tax collection abilities. According to Professor Tariq Banuri at the University of Utah, “‘Pakistan is one of the world’s worst performers on tax collection,’” (Kozul-Wright, 2024) with the government allowing the exemption of taxes on agricultural income and real estate. The government has also avoided aggressive tax policies out of fear of upsetting powerful businesses and the military. Among the IMF’s biggest debtors, Pakistan has the lowest tax revenue as a percentage of GDP, at ~10% (Kozul-Wright, 2024). Essentially, the lack of tax revenue ensures that there are not enough funds to modernise state-owned enterprises and improve public goods, or repay loans on time, which has led to increased borrowing and debt. This vicious cycle has only been exacerbated by high inflation and currency depreciation.   

May-June 2023 was when the crisis seemed to have been the worst, with 38% inflation and the government narrowly securing IMF funding in order to keep importing essential goods. The IMF bailout, however, came with stipulations for the government to adhere to that are aimed at economic recovery. They began with the State Bank having to drop its exchange rate controls in early 2023, causing the PKR to plummet by 9.6% in a single day (Shahid & Shahzad, 2023). Despite being beneficial for exporters, this depreciation was largely the cause of inflation rates increasing to record highs in 2023. Additionally, because Pakistan pays for a majority of its essential imports in dollars (Shahid & Shahzad, 2023) the much weaker currency suddenly made these goods more expensive—both to import and for consumers—and ultimately led to Pakistan’s foreign exchange reserve depletion and most recent IMF bailout. The SBP also raised interest rates to  22% (Shahid) in order to counter inflation.  

The government is also required to lower subsidies for the energy and utilities sector and instead increase taxation for the same (Kozul-Wright, 2024). As a result, government spending—an inflationary factor— will reduce and potential revenue will increase, although both energy/ utility providers and consumers will be affected negatively, consumers more so. Reducing subsidies means that suppliers’ production costs will increase significantly, and because so many industries—including the energy and utilities sector—lack quality infrastructure, consumers are likely to face more frequent power outages. In addition to outage-related inefficiencies, the increased costs for utilities will be pushed onto consumers and, being essential to daily life, many poorer consumers will be hit harder than the rest. While considered anti-populist, these solutions will need to be kept in place for the government to make progress with reducing its spending and current account deficit, as well as remain in a negotiating position with the IMF to continue getting much-needed loans (Hussain, 2024). 

Additionally, the government will have to implement more aggressive taxes—perhaps beginning with taxing agricultural income and capital gains—in order to significantly increase tax revenue. While those being taxed will be dissatisfied, especially since they were never taxed on these income streams before, not only can debt/ loan payments be made on time, but government spending in the long run can be directed towards infrastructure, public goods, education, etc., that would result in structural improvements in the economy. 

Overall, while the Pakistani economy is still in bad shape, it seems to be on the path to recovery. Inflation is starting to slow down; each month, the inflation rate is lower than the previous month. There is hope that the solutions currently in place will be successful in aiding economic recovery. Furthermore, with the rupee’s value being determined on the open market now and its expectation to continue “trending down slightly” (Kozul-Wright, 2024), Pakistan’s current account deficit is also expected to reduce. A review conducted by the IMF of the country’s economy showed that confidence in the economy, while still low, is improving and is in the nascent stages of recovery (Hussain, 2023). However, the economy is still in a delicate position, according to Karachi-based economist Asad Sayeed (Hussain, 2023), and there are many factors—both domestic and international—that could derail this recovery. The most important factor currently is the formation of the Pakistani government. The February 8th general elections resulted in a hung parliament—no party won a majority of the seats in Parliament to form a government—and there is still a ‘caretaker’ government in place. It is likely that a coalition government will be formed and any policies they implement will be critical to the recovery of the economy. The new government needs to prioritise economic recovery regardless of political affiliations and aspirations so as to not create another, potentially worse, crisis. Ultimately, while the economy is beginning to recover, this trajectory will only continue if aggressive solutions remain in place and the political landscape is relatively stable.  

Works Cited

Ahmed, M., & Sattar, A. (2024, February 12). Pakistan election results: Thousands of Imran Khan supporters block highways | AP News. AP News . https://apnews.com/article/pakistan-election-protests-imran-khan-7cedd1123c222834ce73ae8c647b9297

Hussain, A. (2023, November 16). Pakistan and IMF reach deal for releasing $700m from $3bn bailout package. Al Jazeera . https://www.aljazeera.com/news/2023/11/16/pakistan-and-imf-reach-deal-for-releasing-700m-from-3bn-bailout-package

Hussain, A. (2024, February 7). Pakistan’s election: Can the next government bring economic stability? Al Jazeera . https://www.aljazeera.com/economy/2024/2/7/pakistans-election-can-the-incoming-government-bring-economic-stability

Kozul-Wright, A. (2024, February 6). In Pakistan, old hopefuls jostle to turn around struggling economy. Al Jazeera . https://www.aljazeera.com/economy/2024/2/6/in-pakistan-old-hopefuls-jostle-to-turn-around-struggling-economy

Maini, T. S. (2023, January 31). Pakistan’s elite and the current economic crisis . Modern Diplomacy. https://moderndiplomacy.eu/2023/02/01/pakistans-elite-and-the-current-economic-crisis/

Mangi, F., & Koswanage, N. (2024, February 6). Economic Pessimism in Pakistan Hits Record in Pakistan Ahead of Election . https://www.bloomberg.com/news/articles/2024-02-06/economic-pessimism-hits-record-in-pakistan-ahead-of-election

Peshiman, G. (2024, February 12). How will Pakistan form a coalition government after split election results? Reuters. https://www.reuters.com/world/asia-pacific/how-will-pakistan-form-its-next-government-2024-02-12/

Romei, V., & Smith, A. (2024, February 14). Global inflation tracker: see how your country compares on rising prices. Financial Times . https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2

Shahid, A., & Shahzad, A. (2023, January 26). Pakistani Rupee Plummets as Markets Adjust to Removal of Unofficial Controls . Reuters. https://www.reuters.com/markets/currencies/pakistani-rupee-records-sharp-drop-early-trading-vs-dollar-trade-data-2023-01-26/

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An Economic Crisis in Pakistan Again: What’s Different This Time?

Photo: AAMIR QURESHI/AFP/Getty Images

Photo: AAMIR QURESHI/AFP/Getty Images

Critical Questions by Daniel F. Runde and Ambassador Richard Olson

Published October 31, 2018

Pakistan’s newly-elected government is already dealing with a balance of payments crisis, which has been a consistent theme for the nation’s newly elected officials. Pakistan’s structural problems are homegrown, but what is different this time around is an added component of Chinese debt. Pakistan is the largest Belt and Road (BRI) partner adding another creditor to its already complicated economic situation.

Pakistan’s system is ill-equipped to make changes which would avoid future excessive debt. A bailout from the International Monetary Fund (IMF) is probably the safest bet for the country although it is unclear whether the United States will support the program. How Pakistan decides to handle its debt crisis could provide insight into how the U.S., IMF, and China will resolve development issues in the future. Beijing is a relatively new player in the development finance world so much is to be learned from how it deals with Pakistan and how it could possibly maneuver in other developing countries in Asia, Africa, and Latin America.

Q1: What is Pakistan’s current financial and economic situation?

A1: Pakistan held its most recent elections in July 2018. The Pakistan Tehreek-e-Insaf party gained over 100 seats in the parliament, and its founder Imran Khan , a famous cricket team captain, was installed as prime minister. Prime Minister Khan has inherited a balance of payments crisis , the third one in the last 10 years. By the end of June 2018, Pakistan had a current account deficit of $18 billion , nearly a 45 percent increase from an account deficit of $12.4 billion in 2017. Exorbitant imports (including those related to the China-Pakistan Economic Corridor (CPEC)) and less-than-projected inflows (export revenues and remittances) have led to a current account deficit widening, with foreign currency reserves levels covering less than two months of imports—pushing Pakistan towards a difficult economic situation .

Part of Pakistan’s financial crisis stems from the fact that 2018 was a poor year for emerging markets. Global monetary tightening, increased oil prices, and reduced investor confidence have negatively impacted the country’s already precarious economic situation. But the country’s deep structural problems and weak macroeconomic policies have further exposed the economy to an array of debt vulnerabilities.

Pakistan has had an overvalued exchange rate, low interest rates, and subdued inflation over the last few years. This loose monetary policy has led to high domestic demand, with two-thirds of Pakistan’s economic growth stemming from domestic consumption. An overvalued exchange rate has led to a very high level of imports and low level of exports. Pakistan’s high fiscal deficit was accelerated even further in 2017 and 2018 because elections have historically caused spending to rise (both of the most recent fiscal crises followed elections). Perhaps the greatest financial issues facing Pakistan are its pervasive tax evasion and chronically low level of domestic resource mobilization. Taxes in Pakistan comprise less than 10 percent of GDP , a far cry from the 35 percent of countries that are part of the Organisation for Economic Co-operation and Development (OECD). Pakistan also suffers from impediments in the energy sector through frequent and widespread power outages that hurt its competitiveness.

In Western media, Chinese investment is often cited as the main driver of Pakistan’s debt crisis. This is somewhat true as China’s BRI makes Pakistan a key partner through the shared CPEC. The CPEC is a $60 billion program of infrastructure, energy and communication projects that aims to improve connectivity in the region. CPEC infrastructure costs have certainly placed a greater debt burden on Pakistan, but the current structural problems are homegrown; the root cause of the energy shortages is now less a matter of power generation, and more of fiscal mismanagement of the power sector .

Q2: What are Pakistan’s options?

A2: Pakistan appears to be in perpetual crisis-mode, and for too long the Pakistani government has been overly reliant on U.S. bilateral assistance. While it may not be the first choice of the Pakistani government, an IMF bailout is the most likely outcome of this financial crisis because it is probably the only path for Pakistan to regain its macroeconomic stability. Any “bailout” from a bilateral donor (meaning China or Pakistan’s Gulf State friends, including Saudi Arabia which has recently provided Pakistan $3 billion for a period of one year as balance-of-payment support) will not get at the root issues that Pakistan faces—its loose macroeconomic, fiscal, and monetary policies. Pakistan needs to get its house in order and remedy many of its domestic economic issues. 18 out of Pakistan’s 21 IMF programs over the last 60 years have not been completed despite obtaining over $30 billion in financial support across those programs. Just like today’s current financial crisis, Pakistan’s last two IMF packages (in 2008 and 2013) were also negotiated by incoming governments.

Q3: Would the U.S. support a new IMF Pakistan program?

A3: The current U.S. administration and Congress would not be supportive of additional bilateral funding to Pakistan—meaning money coming directly from the United States. Since 2001, Pakistan has been the beneficiary of the U.S. Coalition Support Fund (CSF), which reimburses allies for costs incurred by war on terrorism. The CSF is used to reimburse Pakistan for U.S. military use of its network infrastructure (e.g., ports, railways, roads, airspace) so that the United States can prosecute the war in neighboring Afghanistan, as well as certain Pakistani military counter-terrorism operations. The CSF for Pakistan has been as high as $1.2 billion per year, and, in recent years, $900 million per year. With nearly $1 billion in CSF distributed every year, along with $335 million in humanitarian assistance, it will be difficult to convince Congress to appropriate more funds for a Pakistan bailout yet. However, due to inaction on the part of Pakistan to expel or arrest Taliban insurgents operating from Pakistani territory, the United States has recently cut another $300 million from the CSF, bringing the total to $850 million in U.S. assistance withheld from Pakistan this year. In fact, all security assistance to Pakistan, whether it is international military education and training, foreign military financing, or the CSF, has been suspended for this year according to one State Department official.

An IMF program for Pakistan faces resistance from some members of Congress. A group of 16 senators has already signed a letter to President Trump that outlines their opposition to bailing out Pakistan because the IMF package would, in effect, be bailing out Chinese banks.

The Trump administration has also taken a hardline stance towards assisting Pakistan with its financial crisis. Secretary of State Pompeo stated this past July that he would not support an IMF bailout that went towards paying off Chinese loans. In September, Secretary Pompeo visited Pakistan, and there were indications that the United States would not block an IMF program. If an IMF program is enacted, there is no doubt that it would have stronger conditionality and a greater insistence on full transparency of Pakistan’s debt obligations.

Q4: Would an IMF package be a bailout of the Chinese?

A4: The terms of Pakistan’s loans with China are currently unclear and multiple news outlets have reported that Pakistan has refused to share CPEC information with the IMF. However, it is not unreasonable to presume that the terms in those contracts would be more demanding than terms typically asked by the IMF. Unless the terms between Pakistan and China and its state-owned enterprises (SOEs) are disclosed and made clear to the IMF, then it is unwise for the IMF to proceed with a bailout package.

The IMF’s focus is not in projecting power and influence; rather it seeks to help struggling nations get back on their feet. The same cannot be said for China. China appears to be most interested in spreading its influence and gaining valuable assets for its military and expanding economy, while at the same time exporting its surplus capacity for infrastructure building. In its annual report to Congress, the Department of Defense reiterated this concern, “countries participating in BRI [such as Pakistan] could develop economic dependence on Chinese capital, which China could leverage to achieve its interests.”

Of Pakistan’s nearly $30 billion trade deficit, 30 percent is directly attributable to China . If China were concerned about the economic crisis in Pakistan, it would make immediate concessions which Pakistan Finance Minister Asad Umar says China is working on . To help with the crisis, China could readjust its trade surplus with Pakistan in different ways. For example, China could buy Pakistani cement and other purchases in the short term to illustrate that they are aware of and swiftly responding to the economic turmoil in Pakistan. Other nations have struggled with debt obligations to China. For instance, in July 2017, Sri Lanka signed over a 99-year lease for Hambantota Port to a Chinese SOE because of Sri Lanka’s inability to pay for BRI costs. Malaysia took a different path and decided to cancel major infrastructure projects with China in August 2018 due to worries that they would increase its debt burden .

Q5: What are the consequences if there is no IMF package?

A5: It is likely that China will provide even more assistance to broaden Pakistan’s dependency. Chinese banks and SOEs have already invested heavily into Pakistan, so much so that state bank loans have not been fully disclosed to the global community. In fact, Pakistan’s Status Report for July 2017 through June 2018 shows that Chinese commercial banks hold 53 percent of Pakistan’s outstanding commercial debt. However, that percentage may be even higher than the report depicts. While China and Pakistan have agreed to make all CPEC projects readily available to the public, the information is scattered and often left blank on essential financial reports (see July-June 2017 document ), and so it is difficult to obtain a full sense of the degree of Pakistan’s indebtedness to China. Again, much of the loan information provided by the Pakistani government, especially concerning China, is not entirely transparent.

If China chooses to follow through and become the “point person” for an assistance package, the pressure will be taken off the IMF. But, if the United States does not support an IMF package, it will forego major geopolitical potential in the region to its main competitor, China.

Pakistan represents a litmus test of all future cases in which the IMF, United States, China, and any emerging market country are all involved. Depending on how Beijing chooses to navigate Pakistan’s financial crisis, China may soon find itself responsible for rectifying the debt burdens of Zambia and many other BRI countries.

Q6: What are U.S. geopolitical “equities” in Pakistan?

A6:  The United States is invested in Pakistan because of its significant geopolitical importance.

  • Pakistan is an important component of the balance of power in South Asia. Both India and Pakistan have nuclear weapons capabilities. Moreover, China, India, and Pakistan have been in dispute over the Kashmir region since 1947. Regional stability is in the interest of the United States.
  • Despite its ambiguous stance on militant groups, Pakistan is ostensibly an ally of the United States because of its proximity to Afghanistan. Since the War on Terror began in 2001, Pakistan has been an active partner in the elimination of core al Qaeda within Pakistan and has facilitated aspects of the U.S. military campaign in Afghanistan.
  • The United States now seeks a negotiated settlement to the conflict in Afghanistan. To accomplish this, perhaps the United States will come to Pakistan with a simple offer: “deliver the Taliban, and we will give you the IMF.”
  • Whereas previous administrations may have tried to “play nice” with Pakistan, under the Trump administration, there is a chance that the U.S. government will push the IMF to adopt stricter terms for a Pakistan bailout, citing the Pakistani government’s failures of the last two programs.
  • Other than strategic military importance, one of the most important national security challenges to the United States is Pakistan’s demographic trends. Currently, over 64 percent of Pakistanis are under the age of 30—the largest percentage of youth in the country’s history. Over the next 30 years, Pakistan’s population will increase by over 100 million, jumping from 190 million to 300 million by 2050 . The spike in youth population presents an opportunity for the U.S. government and private sector to increase investment in Pakistan. Pakistan’s economy must generate 1 million jobs annually for the next three decades and GDP growth rates must equal 7 percent or more per year to keep up with the population boom. Were Pakistan’s economy to collapse, the world would see the first instance of a failed state with a substantial arsenal of nuclear weapons.
  • An economically healthy Pakistan could be a large market for U.S. goods and services. If the U.S.-Pakistan relationship is strained as a result of this financial crisis, it will not only harm the United States militarily but will also harm U.S. businesses and Pakistani consumers.

Q7: Should the U.S. support an IMF package to Pakistan?

A7: Given the geostrategic importance of Pakistan for the United States, we should support a package but with stronger conditionality than in 2013 along with full transparency and disclosure of its debt obligations.

Daniel F. Runde is senior vice president, director of the Project on Prosperity and Development, and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Richard Olson is a non-resident senior associate at CSIS. He is the former U.S. ambassador to the United Arab Emirates and Pakistan; most recently he served as the U.S. special representative for Afghanistan and Pakistan during the Obama administration. Special thanks to CSIS Project on Prosperity and Development program coordinator Owen Murphy and intern Austin Lucas for their contributions to this analysis.

Critical Questions   is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Daniel F. Runde

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An Economic Impact of Political Instability: An Evidence from Pakistan

Profile image of Usama Anwar

Article history Received: April 04, 2021 Revised: April 22, 2021 Accepted: April 26, 2021 The economy of Pakistan has been badly damaged by the political instability in the country. Despite its enormous economic resources, Pakistan’s economy remained under dark shadows during most of its historical discourse. The economic indicators describe a significant relationship between politics and the economy of Pakistan. The following study, by reviewing previous studies, concludes that there is a negative relationship between political instability and economic growth in Pakistan from 2000 to 2019. Political instability flourished corruption and reduced the economic growth of the country. Moreover, a weak political system and government institutions could not resist the political tension in the country. The study finally concludes that political instability reduces economic growth in the country and economic growth reinforces political stability in the country.

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In case of Pakistan, only economic variables are observed as causes to high economic volatility while political variables are completely ignored. Although, it is apparent that the development pattern in Pakistan is highly volatile during the years of political instability that spans almost over the half history of the country. By taking the sample of 1971 to 2008 and using simple OLS technique, we observe how far political instability hampers the economic development of Pakistan. For the political instability measurement, ignoring all traditional measures of political instability, we construct political instability index by using seven different variables for Pakistan by employing Principal Component Technique; while for economic development measurement frequently economic development variables are used. Through analysis, the negative relationship is found between political instability and economic development in Pakistan.

The purpose of this paper is to empirically determine the effects of political instability in Pakistan within compared with India and China. We discussed GDP per capita and their impact on economic growth. By using the standard deviation and co- variance on a sample of 3 countries, and 5-year periods from 1988 to 2014, this study demonstrates that a significant negative relationship exists between political instability and economic growth we find that higher degrees of political instability are associated with lower growth rates of GDP Per capita. While democracy may have a small negative effect.

Prof.Dr.Abdul Ghafoor Awan

The objective of this paper was to investigate the relationship between economic growth and political instability. For this purpose, we selected three variables such as political instability, inflation rate and public debt to measure their impact on Gross Domestic Product (GDP). We used panel data and analyzed it through SPSS software to draw the results. We applied Multiple Regression, ANOVA and Correlation techniques for analysis of data. Our results show that there is a negative correlation between public debt and economic growth. Similarly, there is also a negative correlation between public debt and political instability. Our study suggests that Pakistan must reduce level of public debt and political instability and inflation in order to achieve high level of economic growth.

The political instability is condition for the nation building and nation building is process compulsory for the development of a nation. In most of developing countries the governments are not stable. A new government comes into the power overnight; either through coup data or army takes over. The new government introduces a new system of rules for the operation of business which cause frustration and anger among the people. Political instability now becomes a serious problem especially in developing countries. It is creating enormous difficulties and delaying the development of these countries. Political stability plays an important role in keeping society united and in maintaining legitimacy within the state. It is an essential for the economic development, social integration, and supremacy of law in a state. The stability of political system has direct effects on the procedures of nation and state building. These both require stable political systems for their growth and successful. The development of nation and state without firm and organized system of politics is not possible. So Political instability can be defined at least three ways, first approach is as, the propensity for regime or government change, second is to focus on the incidence of political disorder or violence in a society, such as killings, third approach focuses on economic growth affect by instability. PAKISTAN has spent 34 out of its 68 years, or half its life, in internal political instability as regime instability, political emergencies and constitutional deadlocks. Long-term instability in Pakistan has been significantly higher than in East Asia and post-Partition India. Lack of mature leadership, confrontation between the main organs of the state, poor relations between the center and the provinces, extensive corruption, distrust among the politicians, strong bureaucracy and crisis of governance are the immediate threats to democracy in Pakistan The political instability is directly affected economic growth. How does it affect economic growth and why this is important in developing countries like Pakistan is discussed in brief below? When there is lack of political instability in the county, it directly effects the economic growth. It closes off sources of internal and external investments. The eternal investors does not invest in the countries where there is civil war coups, army take over etc. is either small or zero. The lack of interest by the foreign investors for foreign direct investment, and giving Pakistan access to the productive markets are making economy low and more likely to rely on foreign aid. The improper use of aid on the huge disasters like earth quake in 2005 and on the wake of flood in 2010 has lost the trust of donors to support Pakistan sufficiently even in most difficult times. So that investment remains shy the Growth will remain the dream which leads the high unemployment and poverty. Political instability also limits internal investment. The wealthy classes in under developed countries have enough income to replacement. They can invest their saving in profitable projects. Generally they avoid investing

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The purpose of the study is to determine the impact of political instability on economic growth. For this purpose, we measured political instability by means of three proxies: terrorism, govt. type and election year whereas economic growth is determined with GDP annual growth rate. We used data from 1988 to 2016 and applied ARCH model as our dependent variable (economic growth) is subject to heteroscedasticy and ARCH effect. The results showed that political instability measured with terrorism and election year has negative effect on economic growth. However, govt. type is also found to be negative though insignificant. The study adds to the literature of Pakistan and is helpful for policymakers and investors

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The Geopolitical Framing of Pakistan’s Economic Crisis

Pakistan is at the critical juncture of a localized poly-crisis. The country is experiencing political turmoil, environmental havoc, rising terrorism, and a burgeoning economic crisis. On the economic front, the country faces backbreaking inflation, a depreciating currency, and precariously low foreign exchange reserves. Moody’s Investor Service has spilled the trumpet of default in its latest  report . Pakistan’s economic woes have triggered a tense debate over the cause of the crisis, as well as whether external partners could bail out cash-strapped Pakistan yet again.

As Pakistan struggles to address its deepening economic crisis, great power competition between the United States and China provides a geopolitical framing to the metastasizing economic situation in Islamabad. While U.S.-China competition has been a complicated challenge for Pakistan, the geopolitical use of the current economic crisis extends their competing efforts to influence Islamabad. As Beijing and Washington blame each other for the crisis, Pakistan finds itself in the crosshairs of their geopolitical competition to the detriment of a worsening economic crisis.

Pakistan: In the Crosshairs of U.S.-China Competition

Despite its strained relations with Pakistan, Washington is wary of Beijing’s  growing influence  in Islamabad. Although the Pakistani elite and public are seemingly optimistic about China’s greater role and investment, Western concerns nudge Pakistan into adopting a balanced approach between China and the United States.

While the U.S.-China competition has been a complicated challenge for Pakistan, the geopolitical use of the current economic crisis extends their competing efforts to influence Islamabad.

On his visit to Islamabad, U.S. State Department Counselor Chollet Derek  expressed  Washington’s concerns over Chinese debt to Pakistan and the “perils” of their bilateral relationship. The Chinese Foreign Ministry responded that the financial policies of the “western-dominated financial creditors” and a  “certain developed country”  are behind the economic difficulties of developing countries, including Pakistan – a veiled slight toward the United States.

This is not the first time Pakistan has been mired in a diplomatic spat between the United States and China. Last year, U.S. Secretary of State Antony Blinken sought Chinese  debt restructuring  for Pakistan amid the devastating floods. The Chinese Foreign Ministry  warned  Washington against “unwarranted criticism” of China-Pakistan cooperation, calling for the United States to do something “real and beneficial” for the Pakistani people. Previously, the United States  warned  Pakistan against using the IMF money to pay Chinese debt, broadly stemming from Washington’s  criticism  of the China-Pakistan Economic Corridor (CPEC).

China has announced  additional loans  to Pakistan amidst a deadlock with the IMF. However, Beijing is unlikely to consider debt restructuring during the ongoing political uncertainty in Islamabad. On a  question  about whether China will roll over Pakistan’s $7 billion debt due by June, the Chinese Foreign Ministry repeated the clichés of an  “all-weather strategic and cooperative”  partnership between the two “iron brothers,” leaving specifics about debt roll-over to the “competent Chinese authorities.” In fact, China has already expressed its  reservations  about the overdue payment of $1.5 billion to the CPEC-installed independent power plants (IPPs).

The China Factor in Pakistan’s Economic Crisis

China has been Pakistan’s key economic partner by providing multi-billion inflows through CPEC as its flagship Belt and Road Initiative (BRI) project. While CPEC is celebrated as the economic “game changer” in Islamabad, Washington has  criticized  the project for leaving unsustainable debt to Pakistan. Currently, as Pakistan’s economic crisis worsens, critics, especially in the Western capitals, blame the Chinese debt in Pakistan. According to an IMF  report , Islamabad owes 30 percent of its total $100 billion external debt to Beijing.

economic crisis in pakistan research paper

While Pakistan’s economic crisis is not a direct function of China, the rising debt around Chinese projects without generating foreign exchange has added to the country’s economic woes. The fact is that a crippling economic crisis besets Pakistan even after almost a decade since CPEC was launched. A domestic  debate  has surged over whether the China factor is a reality behind Pakistan’s economic woes. Maleeha Lodhi, who served twice as Pakistan’s ambassador to the United States,  argues  that many of the country’s problems are of its own making, as the privileged elite has overlooked public interest and pushed the country to the brink. Miftah Ismail, Pakistan’s former finance minister,  dismissed  the notion of blaming China or the IMF for the crisis and called for domestic structural reforms.

U.S.-China Competition as the External Agency in Pakistan’s Economic Crisis

As the U.S.-China competition intensifies, relations with great powers have become a greater bone in Pakistan’s domestic politics. Over the last few years, progress over CPEC has slowed down, while relations with the United States—which turned frosty under the previous Imran Khan’s government—have gained  momentum  with frequent bilateral interactions. Last year in June, as has been the  case  in the current economic crisis, Pakistan sought Washington’s help for a bailout package from the IMF after China  refused  to provide additional financial support.

While relations with the United States are accounted generally for security convergences in Afghanistan, Washington remains Pakistan’s primary trade partner. In March 2022, the two countries relaunched the  Trade and Investment Framework Agreement (TIFA)  to expand bilateral economic cooperation. Despite China becoming the most active investor in Pakistan in recent years, the United States is Pakistan’s  largest export destination,  with a trade surplus of $2.1 billion. However, despite criticism of Chinese investment, Washington has lagged in incentivizing private investment in Pakistan or offering an alternative to Chinese infrastructure development.

The enduring costs of more than  $150 billion  incurred by Pakistan in partnering with the U.S. war on terror dominate the debate about Washington’s role in Pakistan’s economy. Apart from the direct financial costs of counter-terrorism operations, it has  slowed down  economic activity in Pakistan by creating a non-conducive business environment and blocking Foreign Direct Investment (FDI). Economically vital projects under CPEC are at severe  security risk  from hostile groups due to Pakistan’s role as a front-line state against the War on Terror.

China has been celebrated as Pakistan’s most favorable economic partner and the  largest  source of foreign direct investment. However, while China may be extending financial loans to Pakistan in difficult times, its support has less been “all-weather” when it comes to the question of debt restructuring or the burgeoning trade deficit – resulting from the Free Trade Agreements (FTAs) that  benefit  China more than they add value to Pakistani exports. Notwithstanding its “all-weather” friendship, China did not oppose India’s move to  exclude  Pakistan from the BRICS Summit, which included other emerging economies.

Looking Ahead

While Pakistan’s economic crisis is caused primarily by its domestic inability to enact structural economic reforms, China and the United States also share part of the burden. While China can be blamed for a huge trade imbalance and rising debt, the U.S.-led war-on-terror in Afghanistan, and the resulting instability rendered havoc for Pakistan’s economy. That said, Beijing and Washington have shared interests in helping Islamabad offset destabilizing impacts of the ongoing economic, security, environmental, and political crises.

Although progress over CPEC may be slow, there is little reason to doubt the resilience of China-Pakistan relations in the long run relative to an otherwise historically transactional relationship with the United States.

The geopolitical spat between China and the United States over Pakistan’s economic crisis is motivated by their competition to drive out each other’s influence from third countries. Although progress over CPEC may be slow, there is little reason to doubt the resilience of China-Pakistan relations in the long run relative to an otherwise historically transactional relationship with the United States.

As Pakistan grapples with the worsening economic crisis, it is imperative for Islamabad to navigate through the intensifying U.S.-China competition without having to evoke unbearable economic or security risks.

Note: This article appeared in SAV , dated 22 March 2023. Disclaimer: The views expressed in the article are of the author and do not necessarily represent Institute’s policy.

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Home Article The economic crisis of Pakistan | By Dr Muhammad Khan

The economic crisis of Pakistan | By Dr Muhammad Khan

economic crisis in pakistan research paper

The economic crisis of Pakistan

ASSESSING the economic indicators of Pakistan, the country is ranked 34th among 39 countries in the Asia–Pacific region.

Indeed, this positioning is very low and the overall economic score of Pakistan is below the regional and world averages.

Economy of Pakistan started slowing down in 2019 and reached its lowest ebb in July 2022. The economic freedom score of Pakistan is 48.8, grading its economy as 153rd freest in the 2022 Index.

Pakistan is facing extreme economic crisis of its history and the incumbent coalition Government is clueless to overcome the financial issues of the state.

The external debt of Pakistan has increased manifolds and its currency is trading at its lowest rate against the US dollar (1USD=225 PKR).

IMF and other financial institutions are imposing very tough conditions for the loan facility, agreed with the previous Government of Imran Khan.

In a way the economic crisis of Pakistan is getting deeper and deeper with each passing day.

The significance of economy can be imagined from a famous quote, “Economy is the start and end of everything” for every sovereign state.

Indeed, the strong economy is the source of national strength and forms the basis for a knowledgeable and resilient work-force of a nation.

In a highly globalised world, significance of the economy has further enhanced since it impacts the international relations among the nation states from the perspective of foreign policy, trade and security cooperation.

Unfortunately, despite heavy taxes and exceptionally high levies on all goods and utilities in Pakistan, there have been downward trends in the economy of Pakistan since last few years.

Despite being an agrarian economy, the essential food items are rapidly getting out of reach for over 70% Pakistani masses.

Inflation is record high and developmental sector is found wanting in all areas of socio-economic development of the state.

Budget of all developmental sectors of Pakistan has been reduced to minimum whereas non-developmental expenditure is increasing with each passing day.

Indeed, not the resources but the poor economic management is considered to be the real cause of deteriorating economy of Pakistan and downward trends in the living standards of 122 million Pakistanis.

In fact, the basic responsibility of the government of Pakistan is to identify and prioritize the problems facing the state and society of Pakistan.

Identifying the problem areas at an early time-frame and focusing to resolve them by all possible means and through better economic management could have saved the state of Pakistan from the ongoing economic crisis.

But, neither the problems identified nor any serious efforts were made to overcome the economic crisis, hurting the state and society alike.

Resultantly, once confronted by financial challenges, they resorted to rush to IMF for a possible rescue.

The IMF has imposed its own pre-conditions for revision and extension of loan to Pakistan. This includes imposition of heavy taxes and levies over the poor masses while there is no cut on the luxuries of the government officials and bureaucracy of the country.

Earlier in 2019, IMF provided 39-month loan to Pakistan under the Extended Fund Facility (EFF).

It was a total of $6 billion loan provided to support economic reform programme of Pakistan.

Despite this loan facility of IMF and other loans from many friendly countries, the incumbent and previous governments could neither reform the national economy nor did provide relief to Pakistani masses.

The government and its economic managers responsible to manage state’s economy could neither appreciate the looming financial crisis nor took timely measures to avoid the financial meltdown of Pakistan.

Resultantly, the country is heading towards an economic disaster which means a lot for a nuclear state like Pakistan.

While the national economy of Pakistan is sliding downwards, there has been unprecedented growth of the various cartels in Pakistan.

These cartels are controlling the prices and supply of all most all critical food items and petroleum products with or without consent of the government.

Indeed, government has become hostage to these internal and external cartels. In most of the cases these cartels are part of the government with sitting Ministers, MPs and advisors.

This was a case with PTI Government and there is no change in spite of regime change.

Despite investigations and proofs against their deliberate kick-backs and corruption, causing heavy losses to national economy and undesired short supply of items in the market, they stand unaccountable and scot-free.

Currently, the economic management of the state is being run through heavy and agonizing taxation system on poor masses which cannot be sustained long-term.

In fact, the economic management of nuclear Pakistan with rivalries all around and multiple fault-lines within cannot be run like a corporate company nor can it be left at the mercy of inept and non-serious economic managers whose inclination is more to ruin Pakistan than profiting it.

The way forward is: a massive restructuring of the economic management of Pakistan through serious, innovative and revolutionary steps where foreign economic dependence is reduced to minimum.

The non-developmental expenditure must be reduced substantially while imposing a ban on the luxuries of government officials, elite class and bureaucracy.

The political crisis is adding fuel to the existing economic crisis. Therefore, there is a need that political leadership sit together and take decisions in the national interest of Pakistan, rather than fighting for their petty political and personal gains.

— The writer is Professor of Politics and IR at International Islamic University, Islamabad.

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