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Pakistan recession: Deepening debt crisis, global market turmoil portends tough times for Islamabad policy makers

By Fitri Wulandari

Edited by Georgy Istigechev

17:21, 25 October 2022

A man exchanges money at exchange office
Rising public debt, soaring inflation and a high interest rate all act as a drag on Pakistan’s economy. – Photo: Muhammed Semih Ugurlu/Anadolu Agency via Getty Images

After growth of nearly 6% in two fiscal years, Pakistan’s economy began to show signs of decelerating.

Devastating floods, high inflation, ballooning public debt, and weakening of the Pakistani rupee is dragging down the country’s economic growth in this current fiscal year 2022/2023 (July-June). 

Will a Pakistan recession materialise this year and beyond? Let’s look at the numbers and what the analysts have to say.

What is recession?

Recession is generally defined as a time when economic activity is down. Analysts agree that a recession occurs when a country's gross domestic product (GDP) falls significantly for two consecutive quarters.

While each recession is unique, the International Monetary Fund (IMF) provides several common characteristics:

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  1. A recession lasts about a year and causes significant output costs.

  2. It is identified by a 2% decline in GDP growth. During severe recessions, the output cost is close to 5%.

  3. The unemployment rate almost always rises, while inflation falls slightly as overall demand for goods and services falls.

  4. International trade shrinks as both exports and imports fall.

  5.  Industrial production and investment fall much faster than GDP, while consumption declines just slightly.

Is a Pakistan recession happening now?

Despite political turmoil, natural disasters and a high poverty rate, Pakistan has maintained a slow but stable economic growth before the pandemic. Based on data from the Pakistan Bureau of Statistics (PBS), the country’s economy recorded growth in the 3.6% to 5.5% range between 2010 to 2019. 

Pakistan’s recession history showed the country’s economy contracted by -0.97% in fiscal year 2020 (July 2019/June 2020) during the Covid-19 pandemic. Like many other countries world-wide, the pandemic restrictions took a toll on the country with the third highest extreme poverty number in South Asia, according to the Asian Development Bank (ADB).

Data compiled by Macrotrends suggested Pakistan recession happened in 2019 and 2020 when the country’s GDP growth recorded an annual decline of more than 3%.

The economy rebounded strongly in FY2021 with GDP growth rate at 5.74% and 5.97% in FY2022, according to Pakistan’s Finance Ministry data. 

The various fiscal and monetary policy measures, including stimulus packages, were successful in reviving economic activity and private investment. Pakistan’s central bank monetary policy in FY2021 which aimed to revive the construction industry and mandatory housing finance targets, fuelled stronger growth momentum in FY2022, according to the ministry. 

However, the high economy began to show overheating due to higher imports of consumer goods, energy, and non-energy, widening the budget deficit.

According to a June 2022 report by global audit, tax and advisory firm KPMG in June 2022:

“Pakistan’s economy continued to demonstrate cycles of boom and bust. An impressive GDP growth rate of almost 6% was overshadowed by ballooning twin fiscal and current account deficits.

Political instability, high international fuel & commodity prices and bludgeoning trade deficit exerted immense pressure on foreign exchange reserves resulting in significant depreciation of PKR (Pakistan Rupee) against USD (PKR/USD) which in turn contributed towards high inflation.”

A devastating flood in the middle of 2022, weakening rupee, growing debt, and tightening monetary policy to combat soaring inflation also further pressured Pakistan’s economy. 

Floods to pose long-term threat to economy

In recent Pakistan recession news, the country has suffered from one of its worst floods in history caused by a combination of torrential monsoon rains and melting glaciers.

As of 23 October, the floods have killed 1,731 people and 1.16 million livestock since they began in mid-June, according to data from Pakistan's National Disaster Management Authority (NDMA). The natural disaster has affected 33 million people in six South Asian states or 14.7% of its total population of 224.78 million. 

Based on a Food and Agriculture (FAO) geospatial assessment done by the country’s Finance Ministry, the floods damaged 9.461 million acres (MA) of cultivated crops in four states, increasing the risk of food insecurity.

“Besides the cost in terms of lost lives and capital, these events will certainly affect the creation of gross value added and hence economic growth,” said the Ministry in its September’s economic update. It added:

“The economic outlook for Pakistan in the current fiscal year has become uncertain and will likely remain below the target. Macroeconomic imbalances may ease with the expected slowdown in economic growth.”

However, the ministry did not forecast a Pakistan economy recession for 2022.

Key factors impacting Pakistan’s economy

Let’s take a look at some of the factors that have influenced Pakistan’s economy throughout the year.

Inflation to remain elevated on subsidy cuts

Damage on farmland had inflated food prices in the domestic market, contributing to increasing inflation.

Inflation in Pakistan peaked at above 27% in August, according to the PBS, before easing to 23.2% in September.

In September’s economic update, Pakistan’s Finance Ministry said that while the effects of floods on inflation was being alleviated by government measures, risks of second-round effects of recent inflationary shocks have persisted. 

The ADB recently revised its forecast for Pakistan’s headline inflation in FY 2023 up to 18% from an earlier projection of 8.5% on potential blows from the rupee’s depreciation and fuel and energy price adjustments.

“Inflation is expected to accelerate in FY2023 as a new tax measures announced in the budget, together with an increase in the wheat support price and planned upward adjustments to electricity tariffs, are expected to keep inflationary pressures high,” the Asian Development Bank (ADB) said. 


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Weakening rupee

Since the country switched from a managed exchange rate to a free-floating exchange rate in 2018, the Pakistani rupee (PKR) has been depreciating against the US dollar.

The PKR's depreciation has accelerated as aggressive monetary tightening initiated by the US Federal Reserve (Fed) has strengthened the USD against other currencies.

The US Dollar Index (DXY), which measures the value of USD relative to a basket of foreign currencies, was up over 15% year-to-date (YTD), trading at around the 110 level as of 25 October 2022, according to data from

In July, the PKR fell to a record low against the US dollar, coming in at 240.375.

usd/pkr exchange rate 2017-2022

The USD/PKR currency pair has gained more than 24.7% YTD, reflecting the stronger greenback, data from showed.

A stronger USD means it takes more rupees to import crude oil, rice, wheat and other commodities, making them more expensive in Pakistan’s national currency. 

Tightening cycle to continue at slower rate

On 10 October, the State Bank of Pakistan (SBP), the country’s central bank, decided to maintain its policy rate unchanged at 15% from its August meeting.

“Based on currently available information, the MPC was of the view that the existing monetary policy stance strikes an appropriate balance between managing inflation and maintaining growth in the wake of the floods,” the bank said in its statement.

To fight inflation and cool the nation’s overheating economy, the SBP increased its policy rate by a total of 800 basis points (bps) from September 2021 to 15% in August 2022.

Fitch Solutions on 11 October expected that the SBP will resume its tightening cycle due to elevated inflation and to reduce the country’s import bill to slow the decline in forex reserves.

“Our forecast underscores our expectation for future rate hikes to be less aggressive as inflation is likely to peak soon, while a worsening growth outlook prompts the central bank to dial back the pace of tightening,” the firm said.

It lowered its projection for SBP’s policy rate to 16.25% by end of FY 2022/2023, from previous forecast of 18%

Growing debts

Data from the country’s central bank showed Pakistan’s public debt had increased to PKR 49.5trn ($226.33bn) at the end of August 2022 – a nearly 25% jump from PKR 39.7trn from end of August 2021. Despite its elevated level, Pakistan’s public debt figure for August fell slightly from PKR 50trn in July 2022.

The depreciation of the Pakistani rupee against the US dollar and increased government’s borrowing to plug the deficit has contributed to the ballooning public debt. 

According to the World Bank, the country financed almost 60% of the fiscal deficit through domestic banks. Public and publicly guaranteed debt stood at 78% to GDP and expected to fall to 71.9% in FY2024.

Pakistan economic forecasts

The World Bank’s Pakistan economy forecast expected the country’s GDP growth to slow to 2% in the current FY2023 (July 2022/June 2023), as the flood deteriorated its economic outlook. 

The country’s economy was expected to recover to 3.2% in FY2024 aided by a rebound in agricultural production, reconstruction efforts, projected lower global inflationary pressures, and improved confidence from the macroeconomic stabilisation measures, according to the Bank’s October Pakistan Development Update.

“However, flooding is expected to impose a lingering drag on output in the medium term through the loss of livelihoods and human capital, disruption to crop cycles, infrastructure damage, and possible financial sector impacts,” the bank added. 

In September, the ADB cut its Pakistan economy projections for FY2023 – the institution predicted GDP growth of 3.5% next year, down from the 4.5% forecast in April, as the ongoing stabilisation efforts to address significant fiscal and external imbalances were likely to curb economic activity.

Fitch Solutions’ Pakistan economic forecast expected the country’s real GDP growth to grow by a mere 0.2% Year-over-Year (YoY) in the current fiscal year FY2022/23, a significant deceleration from 6% growth in the previous year.

Trading Economics projected Pakistan’s GDP to grow at an annual rate of 4% by the end of 2022. The economy was expected to accelerate to 4.5% in 2023 and 5% in 2024.

The bottom line

Analysts mentioned in this article forecast the economy to slow down significantly in the near term, but they did not forecast an economic recession in Pakistan.

Keep in mind that analysts’ predictions can be wrong. You should always do your own research before trading or investing. Remember that past performance is not a reliable indicator of future results. And never trade with funds that you cannot afford to lose.


Is Pakistan in a recession?

According to analysts and institutions mentioned in this article, Pakistan’s economy was expected to slow but analysts or the government have not forecast a Pakistan recession.

However, analysts’ predictions are often inaccurate or wrong. Remember to always do your own research before making an investment decision.

Why is Pakistan's economy struggling?

A combination of soaring inflation – partly due to massive floods that damaged food crops – along with a weakened Pakistani rupee, bloating public debts to finance the deficit and high interest rates have all caused Pakistan’s economy to struggle. 

What is the future of Pakistan's economy?

The World Bank, IMF, and Fitch Solutions expected Pakistan’s economy to slow significantly in 2022/2023. However, TradingEconomics projected Pakistan’s economy to grow 5% in 2024, from 4% in 2022.

Remember that analysts and algorithm-based prediction websites can be wrong in their projections. Always do your research before coming to an investment decision. And never invest or trade more than you can afford to lose.

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