Du Café: After the Handshake, Pakistan’s Fragile Fiscal Revival

November 2, 2025 (MLN): In 2023, Pakistan was on the verge of default, and the situation was tense. Rating agencies were downgrading Pakistan’s sovereign status, the IMF review was on hold, and a Dubai-based bank was betting against Pakistan’s currency swap.

The interim government had no choice but to raise gas and electricity tariffs. Citizens suddenly found themselves paying back the subsidies of the past, the cost of inefficiencies that had long been buried in the system.

Foreign exchange reserves had fallen to precarious levels. Afghan traders were distorting the market with dollar and gold payments under transit trade. Fiscal and current account deficits were both widening. Default was no longer a distant risk; it was on the horizon.

But that was only the visible part of the iceberg. Beneath it lay a deeper structural dilemma: Pakistan’s crisis was not of productivity, but of finance. Everything was expensive, and yet daily life somehow continued.

Then came a symbolic handshake in Paris. When Pakistan’s Prime Minister met the IMF’s Managing Director, the markets breathed a sigh of relief. The macros began to yield. The stock market surged, buoyed by investor confidence and a weaker rupee.

Exporters were happy as profits swelled. The current account turned into a surplus, yes, but only by curtailing imports. The State Bank accumulated dollars by keeping the rupee weak. But businesses gasped under the weight of high taxes, soaring utility prices, and punishing interest rates. Factories slowed. Jobs disappeared.

In a televised address, the Prime Minister spoke of the curse of debt. Soon after, the 26th Amendment was introduced, mandating Pakistan’s complete transition to an Islamic mode of finance by January 2028. A bold declaration, one that sought to rewrite the country’s financial DNA.

In March 2022, for instance, Pakistan’s total debt and liabilities had reached about Rs 59.7 trillion. By mid-2025, Pakistan’s gross public debt had climbed to about Rs 76 trillion.

The debt that brewed the crisis also became the cure, at least for now. The very instrument of distress was reused as the instrument of relief. Loans rolled over. Reserves patched. Confidence rebuilt. But “recovered” doesn’t mean “reformed.”

Meanwhile, the State Bank of Pakistan remains on monetary restraint, fearing that any policy loosening would invite another import-driven crisis. The relief came with caveats. The bail-out was built on borrowed confidence; the immediate crisis receded, but the foundations didn’t shift.

Businesses are arguing that this policy has stifled productivity, discouraged hiring, and left corporations and banks to thrive while the broader economy faltered. The macro numbers improved, yet lived reality deteriorated.

Banks have quietly emerged as the biggest beneficiaries of Pakistan’s tight-money era. They were angry about maintaining a 50% advance-deposit ratio or paying higher taxes. But since they have been provided with the biggest piece of the pie, they have taken over the foreign exchange business previously dominated and run by exchange companies. More recently, they have been given the Rs 1,250 billion circular debt portfolio with guaranteed payments from consumers. The question now looms large: will this not expand the money supply and reignite inflation?

What is unfolding in Pakistan mirrors the global economic debate. Economist Clara Mattei argues that austerity is not merely an economic tool but a political project, one designed to restore discipline, preserve capital, and prevent alternative economic models from emerging. Her view reframes austerity as an act of control, not correction.

Reports are that at least five banks have already been granted permission to operate beyond the constitutional cutoff, which reflects the practical challenges of remaking a deeply entrenched system.

At the same time, Mariana Mazzucato warns that our global financial system has become self-serving, where “finance is financing the finance.” In her view, wealth is now created not by producing goods or services, but by speculation on existing assets. She argues that the system has drifted away from its original purpose: to fund innovation, productivity, and social welfare.

In this global mirror, Pakistan’s situation looks both familiar and fragile. The push toward Islamic finance may promise moral clarity and shared risk, but unless it redefines the purpose of finance to serve production and people rather than profit and privilege, the model will change in form, not in function.

A friend once said, “When the party is on, no one wants to take away the punch bowl.” It seems Pakistan is brewing a new crisis just after surviving its last. The Prime Minister may be overlooking the old curse of debt, that every cycle of borrowing brings short-lived relief, followed by deeper dependency.

This road has always led to turbulence in the past. And if anyone believes it won’t this time, well, time will tell. After all, time has always been the most honest teacher.

Disclaimer: The views and analysis in this article are the opinions of the author and are for informational purposes only.