Pakistan isn’t that risky anymore. Its economy is a mini-miracle.

The country of 255 million has pulled off a macroeconomic miracle of sorts over the past two years. Inflation has nosedived from near 40% annually to near zero. Eurobonds maturing in 2031 have soared from 40 cents on the dollar to 80 cents. The Karachi Stock Exchange index has tripled. Prime Minister Shehbaz Sharif’s government reached a $7 billion stabilization agreement with the International Monetary Fund last September. More than $2 billion has already been disbursed.

“Pakistan is a good story," says Genna Lozovsky, chief investment officer at Sandglass Capital Management, which buys distressed emerging markets debt. “So good it’s not risky enough for us anymore."

The latest armed conflict with India, in a tenuous state of truce at press time, won’t likely knock Pakistan’s recovery off course. The country’s own shaky underpinnings might. The latest IMF bailout is its 24th since joining the Fund in 1950. “Pakistan has been known for boom-and-bust cycles throughout its history," notes Khaled Sellami, an emerging markets sovereign debt manager at Barings.

He sees some signs that this time could be different. Pakistan’s current bout of stabilization started with a near-default experience in 2022-23. Catastrophic flooding and a spike in oil prices following Russia’s invasion of Ukraine coincided with domestic political turmoil, as Sharif engineered a no-confidence motion against his predecessor Imran Khan, who was subsequently locked up on corruption charges.

“Everyone thought Pakistan would default along with Sri Lanka in 2023," says Alison Graham, chief investment officer at frontier markets specialist Voltan Capital Management.

Instead, the State Bank of Pakistan hiked interest rates from 10% to 22%, pitching the country into recession but wringing out inflation. Sharif won a (disputed) election in February 2024, and improved Khan’s rocky relations with Islamabad’s meddlesome military, hopefully securing political stability until the next required poll in 2029.

Pakistan’s sovereign creditors—China, Saudi Arabia and the United Arab Emirates—rolled over their loans without extending new credit. Gross domestic product growth bounced back to 2.5% last year, and the country’s books are uncustomarily balanced. “The current account balance is positive, and they have a primary fiscal surplus [excluding interest payments]," Sellami observes. “That’s something we haven’t seen in many years."

Stabilization is one thing, though, development another. Pakistan’s IMF program, like all IMF programs, calls for reforms that will be unpopular with powerful interests or the population at large. Islamabad is supposed to increase its tax take by half and slash electricity subsidies, among other uphill battles.

India’s leap forward in advanced industries like IT and pharmaceuticals points up its neighbor’s relative stagnation. Cotton, apparel and cereals account for two-thirds of Pakistan’s exports. It is belatedly moving into IT outsourcing, foreign sales rising from near nothing to $3 billion annually over the past few years, Sellami says. India is in the $200 billion range.

Without a value-added ladder to climb, fate and free-spending election cycles may continue driving Pakistan’s boom and bust, Graham thinks. “Pakistan remains extremely fragile to external shocks," she says. “When there is a rally, you need to be in early."

Sellami is more optimistic, remaining “constructive" on Pakistani Eurobonds.

Circumstances may have handed Sharif and his military partners one of the best incentives in economics and life: having no choice. Pakistan’s strategic importance to the U.S. during the Cold War and War on Terror is long gone. Its current foreign friends, China and the Gulf states, made clear in 2022 that they are writing no blank checks, Sellami says. “The government knows if they deviate from the tightrope they are walking, they won’t have external finance," he says.

Meanwhile, Sharif and his colleagues deserve some credit.

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