Ceasefire and economic surge in Pakistan

As the two nuclear-armed nations agreed to a ceasefire on May 11, following four days of war (May 7-10), a collective sigh of relief was felt across both countries and around the world. While the risk of renewed escalation between Islamabad and Delhi persists, markets in Pakistan responded with a sharp rebound, as encouraging indicators, previously overshadowed by border hostilities, began to lift investors sentiments.

“The country’s economy, slowly recovering from a two-year crisis, now awaits clearer policy signals in the upcoming budget, expected in the first week of June, to make adjustment before pursuing a path to sustained growth. India’s kinetic attack on Pakistan may well have been a calculated move to derail its economic momentum at a time when Delhi seeks to capitalize on Western shift away from China”, remarked a business leader with widespread investments across multiple sectors.

Earlier on May 5, the State Bank of Pakistan cut the policy rate by 100 basis points, bringing it down from 12 per cent to 11pc. Then, on May 15, in a move that pleasantly surprised the nation, the IMF approved the transfer of $2.4 billion to Pakistan, reinforcing positive economic momentum.

In its statement justifying the decision, the State Bank’s Monetary Policy Committee cited a significant decline in inflation during March and April, along with an improved outlook for price stability.

The IMF cleared the immediate disbursement of a second $1bn tranche under the $7bn bailout agreement, bringing total payments under the 37-month Extended Fund Facility — signed in September 2024 — to approximately $2.1bn. In addition, the IMF granted access to $1.4bn under the Resilience and Sustainability Facility. Under these programmes, Pakistan is expected to focus on maintaining consistency in macroeconomic policies, building foreign exchange reserve buffers, broadening the tax base, enhancing competition, productivity and competitiveness, reforming state-owned enterprises, improving public services and energy sector viability, and strengthening climate resilience.

The downward revision of interest rate, coupled with the news of a US-mediated ceasefire and a favourable stance from the IMF, sparked investor enthusiasm. On May 12, the KSE-100 index surged so sharply at the start of the week that upper circuit breakers were triggered, temporarily halting trading to restore order in the capital market. The market still bullish closed today, May 15, at 119,728 points.

The benchmark KSE-100 Index rose by 10,123 points on May 12, marking the largest single-day gain in Pakistan’s stock market history. By the end of the trading session on that day, the benchmark index closed at 117,297 — over 9pc higher than the previous close of 107,174. On April 22, prior to the outbreak of hostilities between India and Pakistan, the index stood at 117,226 points. Between April 23 and May 9, the market fluctuated sharply, shedding 6,500 points on May 8 alone — its biggest single-day drop — following Pakistan’s retaliation to Indian attack. A partial recovery followed the next day. Over the two-week period of rising tensions and war, the KSE-100 index lost 10,123 points. However, in four days following the ceasefire, the market not only recouped all those losses but ended 24231 points higher than May 22 level.

Speaking over the phone, a mutual fund executive sounded upbeat: “The numbers speak louder than words — the KSE-100 index is shouting ‘positive’. Echoing this sentiment, a prominent business leader lobbying for a reduction in the super tax in the upcoming budget added, “Pakistan has a proven record of resilience; we’ve never backed down in face of daunting challenges. If PM Shahbaz Sharif’s government wants to assert its leadership, it must now prioritise growth-enabling measures”.

“Easing pressure on households and manufacturers is essential. The government cannot meaningfully address poverty or inequity unless its policies are designed to foster job creation, skilling the workforce and promoting healthy competition, and move away from a culture of patronage”, remarked an executive who is only permitted to comment with prior approval from company’s hierarchy.

Nigel Clarke, Deputy Managing Director, IMF, reported to have acknowledged Pakistan’s progress in restoring macroeconomic stability despite difficult environment. Since the approval of the EFF, the economy has shown signs of recovery, with inflation dropping sharply and external buffers improving. However, he cautioned that risks persist due to global uncertainties, border tensions and domestic vulnerabilities. He emphasised the need for sound macroeconomic management and accelerated reforms to protect recent gains and support sustainable, private sector-led growth.

Clarke highlighted the importance of implementing the FY2025 budget and passing key fiscal reforms—particularly the Agricultural Income Tax—to restore policy credibility. “Enhancing revenue collection from undertaxed sectors and enforcing compliance will improve equity and efficiency in the tax system”, he noted. Fiscal discipline at both federal and provincial levels is essential to reduce reliance on public borrowing and expand room for private credit.

He also underlined the need to reduce climate vulnerability through reforms under the Resilience and Sustainability Facility, which focus on better public investment, water management, disaster response, climate data, and meeting international climate commitments.