Should you invest in Pakistan – the Vietnam of South Asia?

A dominant military, political instability and a reliance on foreign aid and bailouts are hardly hallmarks of successful economies. Yet Pakistan’s stock market is booming. The Karachi Stock Exchange KSE-100 index has returned nearly 90% in the past 12 months, compared with the FTSE 100’s 10%, dipping slightly in May when tensions escalated with India. Meanwhile, the Pakistani rupee has been relatively stable by past standards, down 4% over the year.

Market sentiment towards Pakistan improved after it secured a new $7 billion loan from the International Monetary Fund (IMF) last September and promised sweeping reforms, including raising gas and energy prices and expanding the tax base. The IMF deal has “significantly reduced the risk of any kind of near-term balance of payments crisis or debt default”, says Gareth Leather from Capital Economics.

“And by and large, the economy’s actually done quite well since then. So, foreign exchange reserves have recovered [and] exports are doing okay. The economy is broadly on the right track... I think [the equity market’s rise] reflects an easing of concerns that the worst-case scenarios are no longer likely.”

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But the rally could also foreshadow a long-term bull market based on a sea change in economic management and potential. Thomas Hugger from Asia Frontier Capital believes Pakistan could become the “Vietnam of South Asia” owing to its large population, low salaries, and abundant natural resources such as gold and copper. “If the current government is really serious about it [reform], I think they could have the chance to become a mini-Vietnam, create a lot of jobs and… create a middle class, and that would be huge.”

Still, Pakistan is navigating a rocky route to recovery, having narrowly escaped a sovereign debt default in 2023 with a temporary IMF deal and funding from Saudi Arabia, the United Arab Emirates and China. Pakistan owes China about $29 billion, roughly 22% of its external debt. Some reforms, such as reducing import restrictions and removing energy subsidies, have increased inflation, which hit 38% in June thanks to high food and petrol prices. Inflation eased to 28.3% in July and 27.4% in August, according to official data.

Roller-coaster ride for Pakistan's economy

Pakistan has a chequered history of boom-and-bust cycles, anaemic growth, poor income-tax collection and a large informal economy. “Debt accumulation has been overwhelmingly used to continue fostering a consumption-focused, import-addicted economy without investment in productive sectors or industry,” say Ammar Habib Khan and Zeeshan Salahuddin in a report for Tabadlab, a Pakistani think tank. “Consumption [via] imports continues to grow, while exports and remittances remain stagnant, thus shortening the boom cycle, leading to another bust and more inflation. This cycle repeats ad infinitum.”

Furthermore, the military has enormous sway over the economy and politics. Any leader who falls foul of the military does not stay in the job very long. Former prime minister Imran Khan has been imprisoned since August 2023 on what he claims are trumped-up corruption charges. “The wild card is the army,” said Hugger. “They have their own interests, and that’s not normal and sometimes not in sync with the economy.

They want to continue to live their great life… these army generals make a lot of money, and it costs a lot of money [for] the state, and that’s the issue here.”

Leather says the army is responsible for Pakistan’s political uncertainty and military coups, which have dragged on the “broader business environment and sentiment that foreigners have towards the country”. That is one of the reasons why the economy has performed so badly over the past few decades. However, nuclear-armed Pakistan may be too strategically important to the US and China to fail, which is a disincentive to reform for the government.

Pakistan’s relations with both have warmed recently. Islamabad secured a 19% tariff on US goods, lower than India’s 25% (and now 50%), and an agreement to develop oil reserves with the Trump administration. Textiles are Pakistan’s biggest export, and the US is Pakistan’s largest export market, with exports of more than $5 billion as of 2024, and imports of roughly $2.1 billion.

Pakistan is not, however, an “especially trade-dependent open economy” compared with other “dynamic” Asian economies, says Leather. “Tariffs aren’t the end of the world in the same way they would be for, say, Vietnam. Having said that, they’re certainly not going to help… if it’s harder to export to the world’s biggest economy.”

Meanwhile, officials recently held talks about deepening ties with China, and the second phase of the China-Pakistan Economic Corridor, part of the Belt and Road Initiative.

What now? Doubts remain as to whether Pakistan can stick to the IMF reforms. “What’s happened in the past in Pakistan is that they’ve made all these promises, they’ve agreed a deal with the IMF, the… worst-case default has been avoided, but then a couple of years later, when the economy’s past the worst, they renege on these deals. They go back to their old ways, and I think that’s the danger with Pakistan, that things are looking okay at the moment. But that is typically the time when they start to renege on their promises,” says Leather. “It’s whether they can… stick with the [IMF] programme for the lifetime of it.”

But Hugger is more optimistic. “You can trade [on a] couple of weeks’ or months’ outlook, but… if you really want to make a lot of money, then you need to be a long-term investor and get it right.”

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