Political instability, global unrest threaten Pakistan’s economic gains

Pakistan’s economy is finally showing promising signs of recovery, but the challenge lies in sustaining and building on this momentum. Numerous internal and external factors, many beyond the government’s control, must align to maintain this upward economic trajectory. 

Political stability, improved internal security, and a definitive timeline for resolving the costly wars in Ukraine and the Middle East, or at least containing their limits and impact, are considered crucial prerequisites for driving sustained economic growth in Pakistan. 

“These are big asks. Realistically, a political settlement seems unlikely in the near term. Both the government and the opposition remain entrenched in their positions, showing little willingness to compromise or reach a workable understanding to end the disruptive street violence.

“Additionally, we’ve learned the hard way that terrorist attacks can’t simply be wished away, as terror networks have withstood multiple security operations. Expecting armed rogue elements to voluntarily surrender or be completely eliminated in the immediate future is unrealistic.

“Regarding simultaneous conflicts in Ukraine and the Middle East, Pakistan has little control over their trajectory. The best course of action is to prepare for the worst while hoping for the best”, noted a keen observer.

A former diplomat who held key positions, warned, “Regional tensions in the Middle East are not easing; in fact, they could escalate, with the real danger of war involving Iran, Pakistan’s immediate neighbour. Pakistan has yet to recover from the crippling effects of decades of bloody conflict in Afghanistan and has little chance of escaping the potential fallout of a war in Iran, both on its economy and its political landscape”.

Hyperinflation, which peaked last year, has eased in Pakistan. Official data shows that lower commodity prices, a stable currency and high base effects have brought annual inflation down to a 44-mionth low of 6.9 per cent in September 2024, compared to 31.4 per cent in the same month last year. Independent economists partly attribute this decline to demand contraction, driven by IMF-guided stabilisation policies, including higher tax rates and energy prices.

State Bank of Pakistan confirmed last week that it received one billion dollars from $7bn, 37-month IMF’s bailout package. This infusion raised the central bank’s liquid foreign exchange reserves to $10.7 billion, sufficient to cover two months of imports, though still short of globally accepted minimum requirement of reserves equivalent to three months imports.  

Additionally, the rise in exports and the inflow of remittances from overseas Pakistanis have helped stabilize the external sector. During the first quarter of the current fiscal year (July-September 2024), exports increased by 14.1 per cent compared to same period last year, reaching $7.8bn. Meanwhile, remittances grew by 44pc in the first two months of this fiscal year, according to the official data.

Excitement about the transforming economic environment has been evident in Pakistan’s capital market of Pakistan, where the KSE 100 index has been breaking records and reaching historic all-time highs. At the time of this report, the main stock market index surged above the 86,000 level, setting a new record.

“All this investor optimism could come to an abrupt halt if there’s a political breakdown, a deterioration in internal security or if Isreal directly attacks Iran”, a security analyst noted.

Experts and business leaders warn that a more pressing threat to Pakistan and its economy lies in escalating tensions in the Middle East, which could disrupt key trade routes, hamper cross-border commerce, jeopardise energy imports and further exacerbate security concerns, further discouraging vital investment. Pakistan’s proximity to Iran and shared borders also heightens its vulnerability to the unpredictable fallout of any potential conflict.

Dr Manzoor Ahmed, former ambassador and permanent representative of Pakistan to the World Trade Organization, voiced his concerns cautiously: “The escalating conflict in the Middle East is likely to have a direct negative impact on Pakistan. Rising oil prices could further strain the country’s balance of trade, while supply chain disruptions would hinder trade. Additionally, inflation could begin to climb again.”

“If Iran seeks assistance from Pakistan, we could face a serious dilemma because of our trade and economic relations with the US and several EU countries,” he cautioned.

Global markets are already reacting to the looming threat, with oil prices surging 11 per cent in a week amid concerns that an expanding regional conflict could disrupt global crude supplies. For Pakistan’s fragile, imports-dependent economy, this already poses a major setback.

Babar Badat, former president and current board member of the International Federation of Freight Forwarders Association and a recognized logistics expert, shared his perspective. “Pakistan should have focused on developing a strong regional infrastructure, ensuring connectivity from its southern ports to the markets of Central Asia. This would have enabled commerce and transport to flourish, promoting deeper integration along this ‘great vertical corridor’,” he remarked.