Pakistan's 'macroeconomic miracle' draws global investors' attention: Report

Pakistan has stunned global investors with what's being called a "macroeconomic miracle," as the country rebounds from near-default to fiscal stability, according to a report by US financial publication Barron's.

Over the past two years, Pakistan has made dramatic progress: inflation has plummeted from 40% to nearly zero, its Eurobonds maturing in 2031 have doubled in value — from 40 cents to 80 cents on the dollar — and the KSE-100 index has tripled.

These developments have caught the eye of foreign investors, despite ongoing geopolitical tensions with neighbouring India, reports DAWN.

The turnaround began after Pakistan reached a crucial $7 billion Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF) in September last year. Over $2 billion has already been disbursed under the deal.

"Pakistan is a good story," said Genna Lozovsky, chief investment officer at Sandglass Capital Management. "So good it's not risky enough for us anymore."

However, while the ongoing India-Pakistan conflict has not yet derailed the economic recovery, Barron's cautions that Pakistan's historically fragile economic structure still poses risks.

"Pakistan has been known for boom-and-bust cycles throughout its history," said Khaled Sellami, sovereign debt manager at Barings. Still, he noted signs that the current cycle could be different.

The country was on the brink of default in 2022-23 following political turmoil after former Prime Minister Imran Khan's ouster. But aggressive policy measures — including a dramatic interest rate hike by the State Bank of Pakistan from 10% to 22% — helped tame runaway inflation, albeit pushing the economy into recession.

Despite the contraction, Pakistan received significant financial support from allies including China, Saudi Arabia, and the UAE. GDP has since bounced back, posting 2.5% growth, with the current account balance now positive and a rare primary fiscal surplus (excluding interest payments) reported — a fiscal achievement not seen in years.

Yet, long-term concerns remain. Pakistan's exports remain concentrated in low-value sectors like cotton, apparel, and cereals — a stark contrast to India's booming IT and pharmaceutical industries. Although Pakistan is beginning to tap into the IT outsourcing market, reaching $3 billion in foreign sales annually, it still lags far behind India's $200 billion.

"Without a value-added ladder to climb, Pakistan remains vulnerable to political cycles and external shocks," said Alison Graham, chief investment officer at Voltan Capital Management. "Pakistan is still extremely fragile. When there is a rally, you need to be in early."

However, there is growing optimism in financial circles. Sellami, who is "constructive" on Pakistan's Eurobonds, emphasised that external partners have made it clear there will be no blank checks. "The government knows if they deviate from the tightrope they are walking, they won't have external finance," he warned.

Reflecting investor confidence, the Pakistan Stock Exchange (PSX) surged 9% on Monday, marking a record high.

The rally followed a ceasefire agreement between Pakistan and India, restoring calm in the region. "The market has reacted jubilantly to the ceasefire announcement after Pakistan established effective deterrence against India," said Yousuf M Farooq, research director at Chase Securities.