Growth on Hold? Questioning the Logic of Prolonged Stabilisation

Balancing short-term macroeconomic control with the long-term need for structural investment

Zahid Asghar

School of Economics, Quaid-i-Azam University, Islamabad

2025-07-11

The Central Question

“Stabilization without growth is treating symptoms while the disease progresses.”

Three Critical Questions

•

What is Pakistan stabilising from?
Twin deficits, debt stress, inflation spiral

•

Who bears the cost of prolonged stabilisation?
Youth, SMEs, informal workers, provinces

•

Can we afford to delay growth?
Lost decade vs. managed transition

Opening Framework: - We’re witnessing a classic macroeconomic policy dilemma: the tension between immediate stabilization needs and longer-term growth imperatives - Pakistan has achieved remarkable macroeconomic stabilization in 2025, but the question remains: at what cost and for how long? - Today’s presentation challenges the conventional wisdom that stabilization must precede growth, arguing instead for a more nuanced, sequential approach

Key Context: - Pakistan entered 2024 with inflation above 29%, current account deficits, and debt sustainability concerns - By mid-2025, inflation has dropped to 3.2%, current account is in surplus, but growth remains anemic at 2.6% - This presents a policy crossroads: continue with orthodox stabilization or pivot toward growth-oriented policies

Pakistan’s Economic Transformation: The Numbers Tell a Story

Key Insights from the Data: 1. Inflation Success Story: From 29.2% in 2024 to 3.2% in 2025 - one of the most dramatic inflation reductions globally 2. Growth Challenge: Despite stabilization, growth remains below Pakistan’s potential (5-6% needed for demographic dividend) 3. Fiscal Improvement: Primary surplus achieved, but still running overall deficit 4. Employment Concerns: Unemployment stubbornly high, particularly affecting youth (not fully captured in official statistics due to informal sector)

Policy Implications: - Pakistan has proven it can achieve stabilization quickly when political will exists - The question now: can this stabilization platform be leveraged for sustainable growth? - Risk of stabilization becoming a permanent state rather than a transition phase

Budget 2025: Stabilization at What Cost?

The Budget’s Message

• What it emphasizes: IMF targets, fiscal discipline, debt management
• What it marginalizes: Development investment, job creation, productivity enhancement
• What it reveals: A budget for survival, not transformation

Budget Analysis Deep Dive: - Debt Servicing Dominance: 45.8% of budget goes to debt servicing - the highest in Pakistan’s history - Development Squeeze: PSDP allocation dropped from 8.1% to 6.8% - exactly when Pakistan needs counter-cyclical investment - Structural Implications: This allocation pattern locks Pakistan into a low-growth equilibrium

Critical Questions for Audience: 1. Is this resource allocation sustainable for a country with Pakistan’s demographic profile? 2. What does it signal to private investors about the state’s commitment to growth? 3. How long can we maintain macroeconomic stability without addressing structural bottlenecks?

International Context: - Compare with successful emerging economies: typically allocate 15-20% to development during transformation phases - Pakistan’s current allocation resembles crisis management rather than growth strategy

Kenneth Rogoff on Pakistan Debt Crisis

Pakistan’s Unique IMF Relationship

• Never been out of an IMF program in 75 years
• Currently on the 25th IMF program since independence
• Only country that has never made independent economic policy

The Geopolitical Reality

Kenneth Rogoff: “Pakistan is geopolitically very important… If you don’t sign off on bailout number 25, they’re going to default on bailout number 24”

Tax System & FBR Crisis

FBR

• Single-handedly shrunk formal sector over 15-20 years
• SUPER tax: Don’t grow
• Excessive discretionary powers scaring genuine investors
• Boosted informal economy which doesn’t contribute to productivity, revenues, or FDI

Tax Policy Contradictions

• Corporate tax rates too high (should be halved)
• Agriculture, Services, and Real Estate sectors under-taxed while all burden shared by Industrial sector and formal sector
• NFC distribution issues
• Last 3 years: collected more taxes than previous 14 years combined

The Primary Surplus Trap: When Math Meets Reality

Pakistan’s Debt Sustainability Crisis

The Numbers Don’t Add Up

• Real GDP Growth: 3%
• Real Interest Rate: 7%
• Required Primary Surplus: 2.3% of GDP annually
• Gap to Bridge: 4% per year through austerity

What is Primary Surplus?

Note

Primary Surplus = Government Revenue - Government Spending
(excluding debt service payments)

The money left over before paying interest on existing debt

Key Insight: When real interest rates (7%) exceed growth rates (3%), debt-to-GDP ratio deteriorates by 4% annually unless offset by fiscal surplus

The Mathematical Trap

7%

Real Interest Rate

3%

Real GDP Growth

2.3%

Required Primary Surplus

High Debt Burden

↓

Austerity Measures

↓

Investment Falls (8% vs 25%)

↓

Growth Falls Below 3%

↓

Cycle Repeats ⟲

Key Points:

• The Greece Model: Mandated primary surpluses until 2060 - same framework applied to Pakistan
• Policy Contradiction: Using growth-killing measures to solve a growth-dependent problem

The Krugman Insight: When Austerity Becomes a Trap

“Austerity in a depression is a trap — the more you cut, the weaker your economy becomes.” — Paul Krugman

The Austerity Paradox Applied to Pakistan

Traditional Logic: