Pakistan goes crisis to crisis because it keeps printing money

The morning the ceasefire broke

The episode opens at 8AM Pakistan time, hours after news of a US-Iran ceasefire began circulating. Markets in Karachi are not open yet, but Tokyo and Seoul already are — both up sharply — Dow futures are up 900 points, Bitcoin has added three to four thousand dollars, and US crude has fallen 14.3 percent to $96.83, finally below a hundred. Muzamil frames the moment with characteristic restraint. The early read is that the US has accepted Iran’s ten counter-points after rejecting Iran’s first response to its own fifteen, and the global mood is one of relief rather than triumph. The world, he notes, had been walking toward a mutually assured destruction pathway.

For Pakistan, the moment is strange in a way Muzamil names directly. World leaders are publicly thanking Islamabad. A US-Iran negotiation is reportedly heading to Pakistan on Friday — the deal, if it survives, will be called the Islamabad Accord. “As a Pakistani it does make you feel a little bit weird,” Muzamil says, “why are we being so respected considering the history that we’ve had.” He sets aside the politics — both PTI supporters claiming this is vindication and government supporters claiming it as their win — and lands on the only frame that matters for the rest of the conversation: “I would love to now know where this is going in terms of the economy.”

To answer that, he brings on Yusuf M Farooq, Director of Research at Chase Securities and a returning guest.

Why the relief is real, and what it cost to get there

Yusuf’s first move is to ground the relief in fundamentals. Pakistan, he reminds Muzamil, does not have the buffers other economies have. The fiscal account does not have room — which is why petrol prices had to be raised and why some of the levies that were removed from diesel had to stay on petrol. The current account is similarly exposed: pass on global oil prices and you protect the external account; absorb them and the deficit comes back. In that context, a war next door is not a geopolitical abstraction. It is a balance-of-payments crisis waiting to happen.

“Pakistan has, I think, done this more for Pakistan than for anyone else,” Yusuf says, of the diplomatic role Islamabad played. The line is worth sitting with. The Islamabad Accord, in his framing, is not primarily a foreign-policy flex. It is the country protecting itself from an oil-price shock it could not have absorbed.

The market at 150,000, and why short-term news barely matters

Muzamil presses on the two narratives circulating among investors. One is euphoric — peace, recovery, normalisation. The other is more cautious — destroyed infrastructure, suspended contracts, machinery that takes time to restart, and a lagged drag on supply even after the politics resolve.

Yusuf’s response is the conceptual spine of the episode. The day he joined the market, the KSE-100 was at 11,500 points. It is now at 150,000. “Stock market returns have got a lot more to do with how efficiently capital is allocated and less to do with the economy,” he says. Pakistan has, in that time, lived through COVID, an India conflict, a US-Iran conflict, floods, and repeated currency collapses, and still compounded at roughly 20 percent a year. The number that matters, he tells Muzamil, is not next month’s GDP print. It is what return on capital the listed corporate sector is actually earning.

He walks through the arithmetic plainly. If one company is listed, invests 200 billion rupees, makes 40 billion a year, and pays it all out as dividends, the holder earns 20 percent annually — even if the economy itself does not grow. Growth becomes interesting only when there are companies that can redeploy capital at high rates, the way some Indian firms have compounded at 30 to 40 percent for very long stretches.

The tactical translation: in January, Pakistani stocks traded at nine times earnings. They are now closer to six and a half. Investors should be more aggressive than they were in January, less aggressive than they were two and a half years ago at four to five times. And short-term cash should never sit in a long-term instrument.

The rupee, the dollar buying, and what artificially weak really means

Muzamil tugs at a thread that has been confusing him. The Indian rupee, the Turkish lira, and other regional currencies have weakened against a falling US dollar over the past stretch. The Pakistani rupee has been notably stable. He has heard people claim Pakistan is burning reserves to defend the currency. Yusuf corrects the picture.

“The central bank has been buying dollars each month to keep the currency at one level,” he says. The rupee, in other words, would have been stronger if the State Bank had not been on the bid. The choice is deliberate — accumulate reserves quietly rather than let the currency appreciate into a future shock. Yusuf is candid that he would have preferred the rupee even weaker to build more cushion.

He then puts a useful long-run number on the rupee question. The fifteen-year average depreciation is around 8 percent a year. Stretched to twenty-five years, the figure is somewhere in the 6 to 7 percent range. The problem has never been the long-run drift. The problem has been compressing six or seven years of drift into twelve months — which is what 2008, 2017, and 2022-23 all looked like. Each of those crises, in his telling, traced back to the same root: the government printed too much money too quickly, financed a fiscal deficit, watched the current account blow out, burned reserves to defend the parity, and then was forced into a step devaluation.

The structural ceiling: 70 million workers and a defence budget

About a third of the way in, Muzamil widens the lens to the structural economy. Yusuf accepts the invitation and is unsparing.

The first structural drag is demographic. Out of 240 million people, 116 million are of working age. But because female labour force participation is so low, only 60 to 70 million people are actually in the workforce. Pakistan’s GDP gets divided by the full 240 million, which flatters the per-capita picture and hides how thin the productive base really is.

The second is defence. With a neighbour Yusuf calls “very aggressive,” and a relationship that has rarely been workable, defence has had to take a high share of GDP for a very long time. “Every few years,” he says, “we are reminded of how important keeping that expenditure is.” The recent conflict only sharpened that point.

The third is education. Yusuf invokes Vietnam, which has spent 6 percent of GDP on education for decades. Vietnamese grade-five students, he notes, now outperform European grade-five students in science and maths. Pakistan has not spent at anything close to that level. The result is a small workforce that is also under-trained — 240 million people, 25 percent of women working, and the human capital problem compounding rather than resolving.

The fourth is capital allocation. After the 1970s nationalisation episode, every wealthy household decided to keep some money outside the country. Each new crisis reinforces the instinct. On top of that, the state itself has signalled badly. Yusuf points to the power sector: every business in Pakistan ended up building its own captive power plant — first furnace oil, then gas, then coal, now solar — because the grid was unreliable. Capital that should have gone into machinery and product went into duplicate generation.

Karachi is the main artery, and somebody has to fix it

The most pointed stretch of the episode is on Karachi. Yusuf says the line plainly: “If you want the economy to grow and if you want Pakistan to do well, you have to fix the main artery.” All goods come in through Karachi. All goods go out through Karachi. Any export-led manufacturing base has to sit near the port. And yet the city has been allowed to decay.

He pulls a small, telling comparison from his own week. In Lahore, he can take meetings in four corners of the city in a single day. In Karachi, he cannot take one meeting in SITE — one of the country’s largest industrial zones — and another in Korangi on the same day. The traffic and the road network make it impossible.

The Hyderabad-Sukkur motorway is the case study he keeps returning to. A motorway grid was built across the North. The one missing segment in the South wastes fuel on every container moving from the port to the upcountry market, and pushes prices up for consumers in the North.

Muzamil raises the political reading directly — that the party running the province for decades has not built the infrastructure because the rents from collection on non-motorway routes flow somewhere convenient. Yusuf declines to make it about a single party. “I really don’t want this to turn into a political conversation,” he says. But he is willing to make the systemic point. Pakistan now has, in his view, the disadvantages of democracy and the disadvantages of autocracy at the same time. Politicians build where they get votes. The current system does not particularly require votes. The result is that nobody has both the incentive and the authority to fix the one city that decides whether the country exports anything.

“Somebody has to fix this,” he says. “You need to pick a system and then you need to run with it. And you then need to run with it for twenty, thirty years.”

Dubai, transshipment, and a window that just opened

Muzamil pushes into a more speculative thread. The Strait of Hormuz episode, the Iranian toll regime that looks like it is being formalised, and the rising risk premium on Dubai together change the regional map. Gwadar and Karachi are the nearest large ports. There is a window, he argues, where Pakistan could capture transshipment volume that previously defaulted to Dubai — if the country can offer rule of law, ease of doing business, and functional infrastructure.

Yusuf separates the two flows. The capital flight to Dubai, he says, is a symptom of repeated economic crises at home. If Pakistan stops having those crises, Dubai stops being necessary. The transshipment opportunity is different and, in his read, already starting. Volumes can stay elevated, especially if Iran does impose a toll. Pakistan will likely need port expansion. “I think Pakistan, Karachi is going to get additional transshipment business,” he says. “Businesses at the port are going to do well.”

The fuel subsidy that paid him ten times more than a bike rider

The conversation turns to the politics of energy pricing, and Yusuf delivers what may be the cleanest line of the episode. During the two weeks the government carried a hundred-rupee subsidy on petrol, he calculated his own benefit. He put sixty litres in his car. He received six thousand rupees in subsidy. A bike rider, using five or six litres, received six hundred. “It did not make sense,” he says.

Then he widens it. There are roughly 6 million cars registered in Pakistan and somewhere between 25 and 30 million bikes. That leaves 70 to 80 million people with neither. The subsidy regime, by design, transferred public money to the people who already had vehicles, in proportion to how much they drove. “Those are the people that you need to protect” — pointing at the bottom 70 million. “You don’t need to protect the people that already have a bike, especially not the ones that have a car.”

His policy recommendation, citing Miftah Ismail, is straightforward. Deregulate. The government should not be in the business of setting petrol prices. The petroleum development levy and tax tools remain available for fine adjustment, but the price itself should clear in the market.

Deregulation is happening — just slowly, and painfully

Muzamil widens the deregulation argument to agriculture, the dollar, and the broader complex-economy question. A country of 250 million people, he argues, cannot be priced from the centre the way a city-state can. The agricultural supply chain is messed up at the tail end because the farmer is being made to subsidise food for the city.

Yusuf agrees and is realistic about the cost. Chile, New Zealand, Russia — every economy that deregulated agriculture went through a painful few years of bankruptcies. Pakistani farmers carry less formal debt, so the bankruptcy shape may not look identical, but the income shock will be real. He points to the wheat crop as a preview of what that adjustment feels like.

Then he ticks through what has actually moved. The wheat support price is gone — possibly under IMF pressure, but gone. Sugarcane support price is gone. Non-essential medicines have been deregulated. There is a plan to deregulate further. PIA is off the government’s books, which means the new owners now wear the politics of any future fare increase. “There is an improvement from ten years ago,” he says. “But a lot more needs to be done.”

His closing observation on the policymaker question is the one that sticks. “I don’t think that the policymakers don’t understand this. They all understand this. The politics of this is very difficult.”

Energy, Iran, and cautious optimism

The final stretch is on energy. Muzamil notes that the Balochistan government has, for the first time, set an official price for Iranian petrol — moving the grey market into the open. The petroleum minister has talked about reviving the Iran-Pakistan pipeline. Almost nineteen gigawatts of solar were deployed in Pakistan last year, the third largest deployment in the world, driven not by policy but by economics.

Yusuf’s framework is two-track. On the distribution side, the DISCOs need to be privatised, and that work is starting. K-Electric is his reference point for what happens when losses are owned by a private balance sheet. On the supply side, industrial tariffs have already been cut, which he treats as the right move — residential losses should not be loaded onto manufacturing.

On Iran specifically, he is measured. Sanctions relief is not guaranteed to be permanent, the Pakistan-side pipeline still needs financing, and the country needs to be ready for the alternative scenario. But if Iran does come back online, and if global exploration accelerates after this scare, oil prices a few years out could sit below where they were before the conflict — and that lower price would partially offset the demand destruction from electrification.

Muzamil names the mood directly. “There is cause for optimism, but cautious optimism.” Yusuf agrees. “I think it’s good to be cautiously optimistic.”

By the end of the conversation, the Islamabad Accord has been reframed from a diplomatic headline into something more sober: a window. The rupee has room to stabilise. The market is reasonably priced. Transshipment volume is moving. Deregulation is slowly progressing. But the structural problems — the small workforce, the underbuilt artery through Karachi, the printing reflex that keeps producing crises — are still sitting exactly where they were before the ceasefire broke.