Pakistan has been dealing with an economic crisis in which inflation is high, the current account deficit is rising, and debt is increasing. Political instability and the energy crisis are the primary drivers of the economic crisis, but there are a number of other problems that are impeding Pakistan’s economic stability.
The economic crisis in Pakistan is having a negative impact on the population due to widespread poverty and unemployment. In this post, we will attempt to determine the genesis of the crisis, its implications, how the issue progressed over time, and what are the solutions to the economic dilemma.
Causes of Crises:
1) External debt
Pakistan’s present economic problem is mostly driven by its external debt of $126.3 billion. The country owes this debt to a variety of creditors, including multilateral institutions, Paris Club states, private and commercial lenders, and China. Excessive borrowing, poor growth, weak exports, and currency depreciation have all contributed to the rise in debt. Pakistan’s foreign exchange reserves are at around $4 billion, insufficient to cover even one month’s imports. As a result, there is a high risk that the nation will be unable to pay its debts in full.
2- Energy crises.
Pakistan is currently suffering with a protracted energy crisis, which has severely limited its ability to produce commodities and build its economy. The country is primarily reliant on imported gasoline and oil, which are expensive and subject to price fluctuations. Unfortunately, bad management, corruption, and a failure to invest in renewable energy sources have resulted in insufficient and inefficient domestic energy production. As a result, Pakistan faces frequent load shedding and power outages, which have a severe impact on millions of households and businesses. The country’s GDP has recently fallen by up to 4% due to energy constraints.
3 – Political instability.
Pakistan’s financial instability is exacerbated by its political instability. Frequent changes in government, governance, and political upheaval have eroded foreign and domestic investor confidence. This has resulted in a drop in foreign direct investment (FDI), triggering capital flight and reducing the possibility of economic growth. Political upheaval causes exchange rate volatility, which affects firms that rely on stable currency rates to conduct international trade. Inconsistent economic strategies and financial limits result in budget deficits and increased borrowing, raising the likelihood of a sovereign debt crisis. Political insecurity challenges, including as terrorism and civil unrest, disrupt economic activity, discourage foreign investment, and destroy infrastructure, all of which contribute to Pakistan’s economic and financial instability.
Consequences of the Crisis:
1-Currency Devaluation
Pakistan has experienced substantial currency depreciation during the current crisis as well as previous balance of payments crises. The rupee plummeted by more than 30% against the US dollar in 2022 alone, indicating a vulnerable external position. Currency devaluations contribute to inflation and rising import costs. However, they are required to address external imbalances. Since 2019, the State Bank of Pakistan has been operating under a market-determined exchange rate framework. This led in the rupee weakening cumulatively by more than 50% against the dollar over the last four years, as opposed to a relatively constant nominal value prior.
2- High inflation
Pakistan is undergoing an inflation problem, with the consumer price index soaring to 27.3% year on year in August 2022, the highest level in nearly 50 years. High inflation has significantly lowered the typical Pakistani’s purchasing power, putting millions deeper below the poverty line. This sudden increase in inflation can be attributed to a variety of things. Currency depreciation of more than 30% in 2022 has made imports more expensive, resulting in higher local prices. Global commodity price shocks, particularly in energy and food, have fueled inflation. Although inflation is reduced in current fiscal year as inflation clocks at 2.4 percent in january 2025 this recent decline is mainly due to the deal which was secured by Pakistan government with the IMF
3- Unemployment
Pakistan’s economic crisis has resulted in increased unemployment as economic growth has slowed, firms have collapsed, and new job creation has been limited. Unemployment in Pakistan has historically been significant, but it has deteriorated in recent years. This has significant socioeconomic consequences, including poverty, inequality, social discontent, and lost productivity. According to the most recent labor force survey statistics, the unemployment rate increased to 6.9% in 2021-22, from less than 6% before to the crisis.
Besides of improvement in the economic indicators the unemployment rate is still high in Pakistan . According to the recent report Pakistan unemployment rate is standing at 6.50 percent which is still highest in Pakistan.
Evolution of the economic crisis of PakistanÂ
It is easy to understand the crisis after shedding light on the causes of the economic crisis but i think things will be more evident when we delve into the evolution of this economic crisis
Pakistan’s economy has been in a constant state of flux since independence. When viewed from an economic standpoint, the country’s historical history appears to be far more satisfactory than its current state. Despite the fact that the country experienced numerous challenges during the early years of division. However, between 1958 and 1969, the country experienced an average growth rate of 5.82% under Gen. Ayyub Khan’s leadership.
However, after setting a huge historical precedent, this time was followed by a disastrous decade of Bhutto’s government and Gen. Zia’s liberal government. The time following Zia’s death was fraught with political turbulence, which led to Gen. Musharraf’s military dictatorship.
Soon after partition, Pakistan began to construct its foundations. Meanwhile, the country did not receive proper resource distribution; assets were divided 17 to India and 5 to Pakistan, the majority of irrigated land was in Pakistan, as was the major canal system, and the military division was 65 to 35 percent in favor of India.
During that period, Pakistan was a dominant underdeveloped agrarian nation with a small share of services, manufacturing, and infrastructure, bolstered by millions of refugees. As a result, it was impossible to achieve greater growth during that time period.
Meanwhile, beginning in 1958/68, Pakistan established a significant milestone in its development history. During this time, General Ayyub ruled the country.
The economy grew three times faster than other South Asian countries. Annual growth rates approached 20%, and the agricultural and industrial sectors expanded dramatically. The industrial and agricultural sectors enjoyed enormous growth for the first time following division.
Manufacturing expanded by 17%, while agriculture grew by 6%. This decade of development was characterized by bureaucratic capitalism.
Zulifqar Ali Bhutto rose to power in the 1970s under the phrase “Rotti, Kapra, and Makaan”. This decade is frequently referred to as the decade of bad luck, owing mostly to the global slump in exports, the partition of East Pakistan, the 1974 floods, and locust attacks. Furthermore, Bhutto was primarily concerned with the communist economy, and his failure during this period is widely criticized.
During his tenure, he nationalized financial institutions such as banks and insurance companies, as well as several essential industries. His nationalization measures contributed significantly to the loss of industrial units and investor confidence in Pakistan.
General Zia gained control of the country in 1977. During that time, the United States was attempting to draw the Soviet Union out of Afghanistan. Pakistan had played a role in this, which resulted in Zia becoming Islamized in order to gain political support.
At the same time, the majority of international aid was received by standing on the front lines against the Soviet Union. Furthermore, increasing tendencies of industrial growth can be noted throughout his time, which were the outcome of investment under Bhutto’s reign. During General Zia’s tenure, GDP expanded at an average annual rate of 6.6%.
Furthermore, in 1998, Pakistan conducted its first successful nuclear test. Soon, the G-8 slapped several restrictions on it, such as many countries cutting foreign aid, slowing remittances, and terminating weapons purchases. This had a terrible effect on the economy. Later, on September 9, 2001, two planes struck the World Trade Centre. Because Pakistan was the best conceivable strategic location in South Asia, and the US saw a critical need for it in the war on terrorism.
Without a question, 9/11 paved the way for post-9/11 events. Musharraf’s regime saw some notable changes following 9/11. From 2001 to 2007, investment increased by 17.2% of GDP to 23.0%, domestic debt reduced from 17.8% to 16.1% of GDP, or over 30% of total GDP, and Pakistan received a significant amount of bilateral and unilateral international aid, totaling $11 billion in 2002. In 2003-4, it was claimed that Pakistan had finally emerged from the disastrous decade of the 1990s. However, under Musharraf’s tenure, Pakistan experienced great growth.
Economic outlook in 2025
The International Monetary Fund (IMF) has downgraded Pakistan’s economic outlook, reducing its predicted GDP growth to 3% in 2025, down from 3.2% just three months ago.
The adjustment is part of a broader global economic assessment published in the IMF’s “World Economic Outlook Update: Global Growth – Divergent and Uncertain.”
The IMF’s revised predictions also show that Pakistan’s GDP growth rate will continue at 4% in 2026. However, the latest downgrading indicates the country’s persistent economic troubles, albeit the IMF did not identify specific explanations for the change.
This recent change is consistent with the Asian Development Bank’s (ADB) prediction from last month, which raised Pakistan’s fiscal year 2024-25 growth forecast to 3% from 2.8%.
After reading about the evolution of the economic crisis, you may realize that short-term solutions and policies will never be effective in resolving the situation. Long-term solutions, including political stability and a calm environment, are vital to attract investors to the state. So political and security solutions are the only way to the nation’s economic stability.
