by Nimra Khalil
Within 2023, a significant part of the international discourse on Pakistan predicted downfall. The free fall currency drove inflation to 48 years high, interest rates were at a record of 22 percent and the foreign reserves were reduced to a meager one month coverage of imports. Default seemed inevitable. These multinationals started restructuring or leaving and analysts declared the Pakistan economy to be uninvestable.
However that story lacked the other side. The same shocks pushed Pakistan into a major economic rebound. The 2023-2025 reforms that the country resorted to , were painful but had to occur, including reduction of the current-account deficit, restructuring of the fiscal policy, and attracting new investments in technology, mining, and logistics. The result is a stronger economy which now should be credited with its recovery.
From Emergency to Disinflation
By mid-2023, inflation was soaring at over 38 percent that the central bank was forced to increase the policy rate to 22 percent, a highly emergency step that was meant to prevent a balance of payments crisis. These measures combined with fiscal prudence backed by IMF kept domestic demand under control and brought macroeconomic imbalances to a halt.
The strategy paid off two years later. By the middle of 2025, the inflation rate was down to 7.2 percent and the costs of food and fuel stabilized. The real interest rates once more in the positive zone, the State Bank of Pakistan reduced its benchmark rate to 11 percent, which saved the government an estimated to pay no less than 700 billion in the form of interest.
This disinflation was the new discipline: flexible exchange rate, rationalized subsidies, and stronger import restrictions that put necessities ahead of consumption.
External Accounts: From Deficit to Surplus
The foreign policy of Pakistan also became significantly better. During the first half of the FY2025, the current account was in surplus (US$ 1.2 billion or 0.3 percent of GDP) in contrast to a deficit of US 1.1 billion in the previous year.
The foreign reserves, at the bottom of 4.4 billion at the beginning of 2023, increased to 14.5 billion at June 2025, which offers about 2.5 months of import protection. The rupee became stabilized, settled the external debts, and settled pending foreign-exchange debts. The public debt was also elevated yet exhibited depression, and the ratio of debt to the GDP declined to 75 percent in FY2023 to 73 percent in FY2025.
Such gains are all signs of stabilization- however to maintain them will demand further fiscal restraint, increase in exports and less dependency on temporary external inflows.
Fiscal Consolidation and Reform
The turnaround of Pakistan was pegged on fiscal discipline. The budget deficit shrunk significantly, as it decreased by 2.8 percent in FY2025, which compares to 4.7 percent in the first half of FY2024, although the primary surplus increased to a record 6.6 percent of GDP.
The government justified the subsidies, increased taxes on retail and real estate and increased petroleum levies, which boosted revenue. Although total investment decreased slightly to 13.1 percent of GDP in FY2024, Islamabad shifted to the mobilization of a private investment by means of public-private partnerships and pro-investor reforms.
One of the major impetuses was Special Investment Facilitation council (SIFC)- a combination of civilian-military platform that made it easier to provide project approvals, enhanced coordination across agencies and gave the investors an avenue to rely on. The council was a reflection of the re-entry of Pakistan into the consistency of the policies and long term development.
Restoring Creditworthiness
The credibility of Pakistan’s policy reset is evident in global risk metrics. Sovereign credit default swap (CDS) spreads fell sharply to around 505 basis points by late 2024. In 2025, all three major agencies improved Pakistan’s ratings:
- Fitch upgraded to B– (from CCC+) in April.
- S&P Global followed suit in July.
- Moody’s raised its rating from Caa2 to Caa1 in August, citing stronger reserves and reliable debt servicing.
These upgrades have lowered borrowing costs, revived access to syndicated credit, and underscored Pakistan’s re-emergence as a credible sovereign borrower.
Foreign Investment
Whereas a number of multinationals have redefined their operations, not many have exited. In 2023, Shell Pakistan sold its 77.4 percent interest, but Wafi Energy (a Saudi subsidiary of Asyad Group) purchased 87.8 percent and retained the Shell brand under a licensing agreement. Pfizer has transferred its plant in Karachi to Lucky Core Industries and Telenor Pakistan has been consolidating with PTCL (Ufone), which will sustain continuation of the company under local control.
The products of Procter and Gamble remain in the market even after its 2025 restructuring, which involved changing it to a distributor-led model.
In the meantime, there is an increased capital inflow. Between July 2024 and February 2025, net FDI, increased by 41 per cent per annum, was US 1.6 billion. The power industry received almost US 600 million, and the IT exports reached US 2.8 billion by March 2025. Another US 400 million of digital remittance came in through freelancers alone.
It is not capital flight, but capital evolution, as the investors will move to energy, infrastructure, and digital sectors and not leave Pakistan.
Pivot to Gulf and Asian Partners
The external relations of Pakistan have intensified. The UAE has committed to US 10 billion of investments in logistics, ports and technology in 2024. Saudi Arabia renewed a US 5billion pledge especially on mining and minerals.
In the most current case, Pakistan and Malaysia have signed six new agreements during the visit of Prime Minister Shehbaz Sharif to Kuala Lumpur, an agreement with a historic cap of US 200 million Halal meat export which is the largest agreement that Pakistan has signed so far. The agreement introduces the potential of the US $ 3 billion Malaysian Halal food market and larger ASEAN trade access.
The direct investment in Malaysia by Pakistan has also been US $397 million which is an indicator of increasing mutual confidence. Other education, SMEs, tourism and anti-corruption cooperation memorandums are further evidence of this shift in Pakistan toward sustainable and diversified partnerships in Asia.
Exporting Innovation Instead of Importing Crises
The economic model of Pakistan is changing consumption to production. The government has also given incentives to the exporters particularly in the area of IT, in that they can keep 50 percent of the foreign earnings in foreign currency. The bids on copper and rare-earth exploration are being made by one National Minerals Company, and food security and exports have been increased by good harvests of wheat and rice.
These reforms along with SIFC-funded projects in renewable energy, logistics, and defense production represent a structural shift to productivity and self-sufficiency.
Why the Narrative Must Change
Such factors that have been persistent in the country such as poor tax collection, poverty and political instability continue to be experienced in Pakistan although they no longer dictate the course of the economy. Interest rates decreased by 1,100 basis points between mid-2023 and 2025 after the inflation decreased, and investor confidence recovered.
The significant regional investors such as the UAE and Saudi Arabia cannot invest billions into a nation they perceive to be unstable. Their involvement is a sign of confidence in the reform path of Pakistan: restrained money policy, elimination of energy subsidies, growing tax base and the simplification of governance under the SIFC.
Through enabling the rupee to discover its own market value, removing the unsustainable subsidies and reorganizing loss making state enterprises, Islamabad regained macroeconomic credibility. The issue at hand is how to capitalise on these wins, intensifying reforms, widening tax base and strengthening the rule of law.
A more disciplined, self-confident Pakistan is taking shape- one that has acquired experience in crisis, not having been overcome by it. To investors who recognize that Pakistan is not experiencing a collapse, but a comeback, the country today has no old headlines to avoid, but a new story to tell.
