If the Pakistan Stock Exchange is anything to go by, confidence in the economy remains cautious. The recent dip by 2,000 points of the KSE-100 came fast on the heels of concerns raised by the IMF regarding Pakistan’s electricity tariffs. To hear the government talk about it and to look at all the indicators such as interest rates, the economy is recovering.
Inflation has fallen significantly, there is price stability in the markets, major commodities are stable without any subsidies, and the dollar exchange rate has also settled. However, the pulse of the streets tells us that most people, whether they are salaried individuals or business owners, are worried about how soon the next crash will come. Pakistan has been stuck in a vicious boom-and-bust cycle for decades now, and with each subsequent turn, the bust period grows longer and the boom period shorter. This time around, we do not have a ‘boom’ per se—just stability. Even here, people lack confidence that it will last. That is perhaps why we are seeing such volatility in the stock market, which has otherwise seen historic highs in the past year.
The sudden drop in the KSE-100 index underscores the extent to which Pakistan’s economic trajectory remains tethered to its agreement with the IMF. The market reacted swiftly to the Fund’s concerns over electricity tariffs and tax adjustments, highlighting the fragile nature of investor sentiment. The government had reportedly been preparing to announce a major cut in electricity tariffs—one that ultimately did not materialize, presumably due to IMF reservations. This reinforces the notion that the country’s economic decision-making remains constrained by external creditors, leaving little room for maneuvering without their approval.
Market participants had been banking on a swift conclusion to the ongoing review of the $7 billion Extended Fund Facility, with optimism fueled by the progress made on a draft Memorandum of Economic and Financial Policies. However, delays in finalizing the staff-level agreement have kept uncertainty alive. Additionally, while the IMF has given some leeway on revenue collection targets, the broader issue of structural economic weaknesses remains unresolved. Large-scale manufacturing continues to contract, indicating that the industrial sector is still struggling to regain momentum, even with a significant reduction in interest rates.
The broader economic landscape remains precarious. While headline inflation has eased, foreign direct investment has plunged by 45 percent year-on-year, reflecting eroding investor confidence. The recent spate of terrorist attacks in Khyber Pakhtunkhwa and Balochistan has further dampened sentiment, reinforcing fears about the country’s overall stability. Political uncertainty, coupled with security risks, makes it difficult for Pakistan to attract long-term capital—something that remains vital for sustainable economic recovery.
Pakistan’s economy is, in many ways, at a crossroads. The market turbulence following the IMF’s comments serves as a stark reminder of the country’s deep economic vulnerabilities. While short-term stability has been achieved through stringent fiscal management and IMF-backed policies, the lack of investor confidence suggests that deeper structural reforms are necessary. The real challenge for policymakers is not just to keep the economy afloat but to break the cycle of dependence on external bailouts. Without meaningful reform in taxation, energy pricing, and industrial policy, Pakistan will continue to see fleeting moments of optimism punctuated by abrupt downturns—an unsustainable pattern that does little to inspire long-term confidence.
