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On the edge: Cyclical, immediate challenges Pakistan faces amid deteriorating economic situation

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3 years ago

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I cannot count the number of times in the past month I have heard the term “Pakistan is at a crossroads”. While — like almost every other Pakistani — I may have my opinions on the various conspiracy theories doing the rounds, that is not my topic today.

As an investor in the global emerging market space for close to 30 years, I just want to draw some attention to the seriousness and immediacy of the dire economic issues that Pakistan is facing. Some of these are structural, like water/climate change and population growth etc., and while these are critical to the long-term survival of the country, today I want to talk more about the cyclical and more immediate challenges that the country faces.

I am not looking to ascribe blame to anyone. The fact is that Pakistan has pursued a seriously flawed and failed economic policy for decades and this has now brought it to within a hair’s breadth of collapse. 

The unique economic environment created by the coronavirus pandemic and the global economic reaction that followed only exacerbates the challenge.
In fact, in my 30 years, I don’t think I have seen as hostile an environment for weak emerging economies as I do today. Sri Lanka has been the first domino to fall, but Pakistan, Egypt, Turkey, and several others are not too far behind. These weak economies face a perfect storm, brought about by rising commodity and energy prices, a strong dollar, declining central bank liquidity and an increasingly polarised and less “global” world economic order.

In such a hostile environment one would expect that if a regime is to be replaced it would be done by one that understood the challenges, had a ready and devised plan, and had the political will to execute that plan. Unfortunately, it has not been the case.

In fact, it is quite apparent that there has been a serious miscalculation as to the challenges the country finds itself in. It appears that the assumption was that “bad governance” and economic missteps of the previous government were the main reason that Pakistan found itself in the predicament that it was in. 

So, now we find ourselves in a situation where severe economic difficulty and distress have been amplified by unnecessary political uncertainty. 

While the PTI government did nothing to reverse the economic slide that was perpetuated by previous regimes, the fact is that Pakistan’s current economic mess is primarily a combination of the structural weaknesses that have always existed together with a unique global environment that is causing havoc in most weak emerging economies.

The talk today is about raising energy prices or not, as if this one decision will resolve all the issues. This will only kick the can down the road, and that too only if the IMF and the GCC countries come through with the required support that is expected once the energy subsidies are withdrawn. 

But that is like putting a band-aid when surgery is required. Pakistan has lived well beyond its means for most of its independent life, but this has never been more true than in the last 20 years. 

Credit rating agencies like S&P Global and Moody’s have a concept called a “sovereign ceiling” this essentially means that at the end of the day your credit rating is only as good as the country where you are based. The biggest example is the current environment in Ukraine. 

Ukraine is home to some of the globally strongest and most profitable companies in areas like steel, poultry, and grain production, if these companies were based in countries like Germany or the US, they would be rated high investment grade. 

However, their ratings are constrained by the fact that Ukraine has a low “junk” rating, so is the case with many companies in Turkey, and in other countries in the Emerging markets. At the micro-level, this concept applies not only to corporations and banks but also to individuals. 

Just because you are an affluent individual living in Pakistan, does not mean that you can afford the same lifestyle that you could in the US or the UK, and if you try to do that, the country pays the price.

My goal as a Pakistani is to live for the day when we don’t “celebrate” IMF and GCC aid packages. But that can only happen if we start living within our means, and try to extricate ourselves from the debt spiral we are in. This will take very hard decisions, let me give you a few examples.

  • A ban on most luxury items, including large engine cars and SUVS, in fact, given the current energy environment there should be an immediate ban on even the current use of these vehicles in Pakistan. 
  •  At least while energy prices are up here, closing all consumer-related commercial establishments by 7pm on weekdays in order to limit energy usage. 
  • Taxing land and agriculture.
  •  Working on renewable energy and many more.

Some of the above measures can be taken immediately, some will require legislation, but all will require political will. A seriously miscalculated (in my view) political experiment has brought Pakistan close to the edge of an economic cliff, the next few weeks/months will decide if we are going to fall off or not. 

— The author is a Pakistani American who is the Chief Investment Officer and Managing Director for Arqaam Capital’s Fixed income asset management business, based in Dubai.

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Barrick CEO: Reko Diq mine will provide $74 billion in free cash flow over 37 years.

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Based on consensus long-term prices, the Reko Diq copper and gold project in Pakistan is anticipated to produce almost $74 billion in free cash flow over the next 37 years, according to the CEO of joint owner Barrick Gold, who made this statement in a media interview.

Half of the Reko Diq mine is owned by Barrick Gold, with the remaining 50% being owned by the province of Balochistan and the Pakistani government.

The development of the mine is anticipated to have a major impact on Pakistan’s faltering economy, and Barrick views it as one of the greatest untapped copper-gold zones in the world.

A protracted conflict that ended in 2022 caused the project to be delayed, although it is anticipated that production will begin by the end of 2028. In its initial phase, it will cost an estimated $5.5 billion and generate 200,000 tons of copper annually.

In an interview with the media, Barrick CEO Mark Bristow stated that the first phase should be finished by 2029.

He said that production will increase in a second phase, which is expected to cost $3.5 billion.

Although the mine’s reserves are estimated to last 37 years, Bristow stated that with improvements and additions, the mine’s useful life may be significantly extended.

Pakistan, which now has just about $11 billion in foreign reserves, could receive substantial dividends, royalties, and taxes from a free cash flow of $74 billion.

Additionally, Barrick is negotiating with infrastructure providers and railway authorities to renovate the coal terminal in Port Qasim, which is located outside of Karachi, Pakistan, in order to provide infrastructure for the domestic and international transportation of copper.

The project is on schedule, according to Bristow, with surveys, fencing, and lodging already finished.

In the next two quarters, the Saudi mining corporation Manara Minerals may make an investment in Pakistan’s Reko Diq mine, Pakistani Petroleum Minister Musadik Malik stated last week.

Manara executives traveled to Pakistan in May of last year to discuss purchasing a share in the project. Additionally, Pakistan is discussing mining prospects with other Gulf nations, according to Malik.

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According to projections made by the World Bank, Pakistan’s gross domestic product will expand by 2.8% during the fiscal year 2024-25.

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A significant gain of 0.5% from its previous estimate of 2.3% in June 2024, the World Bank has updated its forecast for the growth of Pakistan’s gross domestic product for the fiscal year 2024-25 to 2.8%.

The International Monetary Fund (IMF) has projected a growth rate of 3%, and our prediction falls short of that projection. Additionally, the government’s goal growth rate of 3.6% is lower than this prediction.

Pakistan’s growth is still relatively slow in comparison to that of its neighbors in the region, as stated in the World Bank’s World Economic Prospects Report 2025.

With a growth rate of 6.7%, India is anticipated to top the South Asian region. Bhutan, with a growth rate of 7.2%, Maldives, with a growth rate of 4.7%, Nepal, with a growth rate of 5.1%, Bangladesh, with a growth rate of 4.1%, and Sri Lanka, with a growth rate of 3.5% should follow.

The findings of the analysis reveal that although Pakistan’s economy is showing signs of minor improvement, it is still confronted with substantial obstacles. The nation’s foreign exchange reserves have been strengthened as a result of the fact that inflation, which had reached double digits in previous years, has now fallen to single digits for the first time since 2021.

Following the elections that took place in February 2024, the administration has implemented stringent fiscal and monetary policies, which have contributed to a reduction in uncertainty. This improvement can be linked to these policies.

It is anticipated that Pakistan’s per capita income will continue to be low until the year 2026, according to the World Bank, despite the fact that some favorable improvements have occurred. Not only does this reflect broader regional patterns, but it also underscores the fact that Bangladesh and Sri Lanka are also facing comparable issues.

The rising weight of debt was another topic that was brought up in the report. It is anticipated that interest payments will increase in both Pakistan and Bangladesh.

The ratio of Pakistan’s debt to its gross domestic product is expected to steadily decrease, assuming that the government continues to uphold its commitment to the existing loan arrangement with the International Monetary Fund. A warning was issued by the World Bank, stating that any deviation from the program might have a significant impact on the economic operations of the country. The World Bank emphasized the significance of complying to the requirements of the International Monetary Fund (IMF).

Despite the fact that the country’s inflation rate has been moderated and its reserves have been strengthened, experts have pointed out that the implementation of structural reforms and the management of external debt are the most important factors in determining the country’s long-term economic stability.

According to a report published by the World Bank, Pakistan needs to provide consistent policies and a stable macroeconomic environment in order to maintain investor confidence.

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SIFC and UNICEF Collaborate on Youth Training: $1.5 Million Girls’ Education Agreement

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A deal between UNICEF and the Muslim World League has been signed to start the “Green Skills Training Program,” which would equip young people with digital and sustainable development skills.
With the help of the Special Investment Facilitation Council, the program will provide educational and employment opportunities to economically disadvantaged youth, particularly girls.
One and a half million dollars have been committed by the Muslim World League to support Pakistani girls’ education and training. The program’s goal is to give young people the tools they need to have a sustainable future.
This program is a component of a 14-year partnership between UNICEF and the Muslim World League, which has aimed to enhance the lives of children in numerous nations. The program will improve vocational training and provide Pakistani youth with economic opportunities through SIFC’s assistance.

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