A reality check

The government has been patting itself on the back for what it claims to be remarkable achievements: inflation falling from 40 per cent to around 2.0 per cent, interest rates dropping from 22 per cent to 12 per cent, a strong current account balance, and the stock market’s impressive 79 per cent growth in dollar terms in 2024. On the surface, these numbers sound like a turnaround story. But let’s dissect these so-called achievements and separate reality from rhetoric.

The government proudly claims that inflation has fallen to 2.0 per cent. But let’s be clear: inflation touching 40 per cent was a monumental policy failure. The correction of a failure is not an achievement but damage control. When inflation skyrocketed due to economic mismanagement, political instability and external shocks, the economy suffered massively. People lost their purchasing power, businesses faced uncertainty, and investment dried up.

Now that inflation is down, the government wants applause for merely returning things to normal. You don’t get credit for fixing what you broke in the first place. Inflation in Pakistan was never demand-pull, it was cost-push (zero correlation with interest rates). Not to mention that out of a Rs13 trillion tax target, Rs9 trillion goes into debt servicing (high-interest payments that the government has borrowed from banks).

Similarly, bringing down interest rates from 22 per cent to 12 per cent is not an achievement -- it’s simply undoing another failure. High interest rates were a consequence of reckless policies, fiscal mismanagement, and a currency crisis that forced the State Bank to take extreme measures. The fact remains that even at 12 per cent, Pakistan’s real interest rate is 10 per cent (inflation is 2.0 per cent, and interest rates are 12 per cent), one of the highest in the region.

The reason interest rates remain high? The economic managers fear that lowering rates further could lead to an import surge. But there are better ways to manage imports than keeping businesses crippled with expensive credit. Just as the currency crisis was tackled by controlling smuggling and hoarding, imports too can be managed through prioritization -- allowing essential imports for exports while curbing non-essential goods.

Yes, Pakistan’s current account balance looks good on paper. But let’s be honest: this is because the State Bank bought $9 billion in the last four months of 2024. If this intervention hadn’t happened, the rupee would have slipped to 250 per dollar or beyond. The so-called ‘improvement’ isn’t a result of sustainable economic growth -- it’s a short-term adjustment.

A healthy current account balance should come from rising exports and industrial output, not from artificial interventions that give a temporary sense of stability.

Pakistan’s stock market was the second-best performing market in 2024, rising 79 per cent in dollar terms. But before celebrating, let’s ask: why did it rise so much? Because it was stuck at 40,000 points for five years. From 2018 to 2023, the stock market went nowhere. This means the recent growth is not a boom, but merely an adjustment.

More importantly, let’s look at market capitalisation. In 2017, the total market cap of the PSX was $100 billion. Today, it stands at just around $55 billion. That means even after the so-called rally, the market is still far below where it was in 2017. This tells us that while the numbers may look good on paper, Pakistan’s capital markets have actually shrunk in real terms.

The real health of an economy isn’t measured by short-term inflation fixes or stock market rebounds. It is measured by production, exports and employment. And here’s where the real problem lies: Large-scale manufacturing (LSM) has not grown. It declined in 2022; it declined in 2023; in 2024 it remained stagnant -- no meaningful growth; even the last two months of data show no improvement.

LSM is what drives GDP growth, industrial output, exports, and employment. If this sector remains weak, no amount of economic ‘adjustments’ will create long-term prosperity.

Why hasn’t large-scale manufacturing grown? The biggest reason? High energy costs and high interest rates. Energy tariffs were exceptionally high, forcing industries to either reduce output or shut down entirely. Credit was too expensive, making expansion nearly impossible. Lack of long-term industrial policy meant businesses faced uncertainty.

To be fair, the establishment deserves credit for abolishing the capacity payment model of IPPs, which was bleeding the economy. But interest rates remain artificially high, and economic managers fear reducing them further due to a potential import surge.

If the government truly wants sustainable economic growth, it must reduce interest rates to realistic levels. High real interest rates discourage industrial investment. It must also prioritise export-led imports. Allow necessary imports for production while curbing non-essential luxury items. Domestic investment must be encouraged. Capital is stuck in unproductive sectors like real-estate speculation (plots) and vehicle flipping (own money on cars). This money needs to flow into factories, innovation, and production.

The government should also strengthen industrial credit. The focus should be on providing low-cost financing for LSM, not just controlling short-term inflation. It also needs to ensure energy stability. The government must keep energy prices competitive and avoid the past mistakes of excessive tariffs.

The economic team’s claims to ‘fix the economy’ are misleading. What we are witnessing is a correction of previous failures, not new achievements. Pakistan’s economy will only truly improve when exports grow sustainably; large-scale manufacturing expands; and employment rises, driven by industrial output.

Until then, inflation figures, interest rate cuts and temporary current account fixes remain meaningless distractions from the real issue: Pakistan’s industrial stagnation.

The real measure of economic success is not how well the economy recovers from a disaster, but how we ensure the disaster never happens in the first place.

The writer is a consultant at various large companies, and teaches financial markets in Pakistan. He can be reached at: hissan3@gmail.com