Pakistan is near the cusp of disaster

The vote of no confidence that broke the credit markets

The episode opens with Muzamil asking a deceptively simple question: what is actually happening to the ordinary Pakistani who doesn’t follow politics, who just watched the world collapse around him? Javed Hassan’s answer is immediate and personal. “Bari mushkil hai, bari mushkil hai,” he says — it is very difficult. He points to a household worker earning thirty to forty thousand rupees a month receiving an electricity bill of fifteen thousand. That, he says, is the ground-level reality of what macroeconomic failure looks like.

But the mechanism behind that failure, Hassan argues, is traceable to a specific political event. The vote of no confidence against Imran Khan created a discontinuity that spooked international markets in a way that the underlying economic difficulties alone had not. He walks through the numbers: Pakistan’s credit default swap — the market’s measure of default risk on international borrowing — was running at five to six percent before the political rupture. After the vote of no confidence, it jumped to fifteen percent, then twenty, then peaked at thirty percent. At the time of recording it was still sitting at twenty to twenty-five percent.

The consequence was that Pakistan was effectively locked out of international credit markets. Sukuk bonds and euro bonds that had been trading at eight to nine percent yields saw those yields explode. “Jo December maturity hai, jo ab teen mahine mein maturity hai, uski jo yield bhi chali thi — interest rate us par jo aapko profit mil raha hai — woh 84% hai aaj,” Hassan explains. An 84% yield on a bond maturing in three months is the market saying, in plain terms, that it does not expect repayment.

Hassan is careful to note that some positive developments occurred in parallel — Brent crude fell from a peak of $125 per barrel to around $85, commodity prices including wheat eased, and the monthly balance of payments deficit narrowed from $1.3 billion to $700 million. But none of that restored confidence, because the political uncertainty overwhelmed the economic signals.

Why a strong mandate is an economic variable, not just a political one

Muzamil pushes Hassan on a claim that Imran Khan himself had been making — that a two-thirds majority would allow him to deliver structural change. Hassan reframes the argument away from any particular politician and toward the underlying logic.

When a government has a strong mandate, he says, the public is willing to absorb pain. They will complain, they will protest, but they will endure because they can see a future. When a government lacks legitimacy, even small hardships become intolerable — and that intolerance has two compounding effects. First, the government itself becomes too afraid to implement structural changes. Second, the public mood turns against any sacrifice, and young people who were building lives start thinking about Canada instead.

“Young graduate jo hain woh soch rahe hain ke Canada judge life” — the brain drain restarts. And foreign investors, Hassan notes, will not commit capital to a country where the public is clearly aligned with a different political force than the one in power. “Woh usi ke saath invest karegi jahan public saath khadi hui hai.”

The international dimension is equally concrete. When Pakistan goes to Qatar, Saudi Arabia, or the UAE seeking investment or financing, the counterpart wants to know that whoever they are dealing with today will still be there in a year. Political uncertainty destroys that assurance. A five-year government — whoever leads it — gives every party, domestic and foreign, the certainty to plan.

The fiscal arithmetic of a broken state

Hassan lays out the numbers with unusual clarity. Pakistan’s tax-to-GDP ratio at the federal level is approximately ten percent. Of that, 56% flows to the provinces through the NFC award, leaving the federal government with roughly four to four-and-a-half percent of GDP. That four-and-a-half percent must cover debt servicing, the military, and the federal bureaucracy. It does not. The result is an annual fiscal deficit of around seven percent of GDP.

To fill that gap, the government has two options: print money, which accelerates inflation, or borrow externally, which is increasingly impossible given the credit market situation. “Toh aap kis tarah se borrow karenge yeh saat percent?” Hassan asks. The question is rhetorical.

He contrasts this with India, where the tax-to-GDP ratio is around 22-23% — more than double Pakistan’s. The comparison is not flattering, and Hassan does not soften it. He notes that even on an individual level, people like himself are paying less tax than their Indian equivalents. The problem is not that taxes are too high on those who pay — it is that vast swaths of the economy pay nothing at all. Agriculture, the retail sector, and large parts of the services economy operate largely outside the tax net. Professionals take cash. Retailers are effectively tax-free.

The solution, Hassan argues, is not to pile more GST onto those already paying, but to broaden the base. Provincial governments need to collect their own taxes. City councils need property tax regimes that actually function. He and Muzamil share a moment of dark comedy about the PTI government doubling property tax in Islamabad — from 0.001% to 0.002% — while WhatsApp groups of upper-class homeowners erupted in outrage.

The real estate trap and the import substitution illusion

Later in the discussion, Hassan identifies two structural distortions that he believes are quietly strangling Pakistan’s productive capacity.

The first is real estate. Capital that could be deployed in export-oriented businesses flows instead into property, because property offers tax-free capital gains, acts as a store of value against inflation, and is actively promoted through schemes like the overseas Pakistani block. “Koi bhi main bhi jab bahar rehta tha jab woh izdia ke ghar kharidne ka kabhi koi tax” — even Hassan himself, when living abroad, had no incentive to invest in anything other than property. The rational actor does what the incentive structure rewards.

The fix is not complicated: apply capital gains tax to real estate the way it is applied to shares. In the UK and the US, a second property held for twenty years still attracts capital gains tax. In Pakistan, ten houses can be held with no such obligation. Equalising the treatment would redirect capital toward productive sectors without any government picking winners.

The second distortion is import substitution. Pakistan has built protective barriers around domestic industries — most visibly in automobiles — that allow local producers to sell inferior products at three to four times the international price. The capital consumers spend on an overpriced car is capital they cannot deploy in a business. The businesses sheltered behind those walls have no incentive to become internationally competitive. “Hum toh bahar dekhne hi nahin chahte hain,” Hassan says — we simply do not want to look outward.

He contrasts this with rice and maize. Rice receives no subsidy in Pakistan. Yet rice exports have grown six to seven times, and Pakistan now exports hundreds of millions of dollars of rice to markets where it previously had no presence. Maize, similarly, has grown fourfold in a decade. The market, left to find its own level, found it.

Vietnam, Indonesia, and the case for creative destruction

Muzamil raises the question of silver linings, and Hassan does not dismiss it — but he is precise about what a silver lining actually requires. He draws on his experience as an analyst covering the East Asian financial crisis of the late 1990s.

Indonesia in 1998 was bankrupt. There were riots. People could not pay rent. Within two years, businesses were recovering because the government did the hard things. South Korea accepted IMF conditionalities that were, in Hassan’s telling, more severe than anything Pakistan has faced — citizens famously donated their gold to the government. India in 1991 faced a balance of payments crisis, a currency depreciation, and a vote of no confidence against Manmohan Singh simultaneously. Within a year, it was turning around.

The most striking comparison is Vietnam. In the early 1990s, Vietnam’s per capita GDP was around $150-200. Pakistan’s was around $400. Today Vietnam’s is close to $3,000; Pakistan’s is roughly $1,000. Vietnam achieved consistent GDP growth above 6% for three decades after winning its sovereignty. It signed free trade agreements, deregulated, reformed its bureaucracy, and integrated with global supply chains. Apple manufactures AirPods there. Its export-to-GDP ratio exceeds 100%.

“Change aa sakta hai,” Hassan says. The examples are not offered as comfort but as evidence that the path exists — and that it requires doing the hard things rather than waiting for them to become easier.

The floods: opportunity and warning

The 2022 floods enter the conversation as both a humanitarian catastrophe and an economic variable. Hassan estimates the damage at around $28 billion, though he notes that figures ranging from $8-9 billion to $28 billion have been cited, and he is concerned that imprecise accounting will damage Pakistan’s credibility with donors.

His deeper worry is about what happens after the immediate crisis passes. The 33 million people affected will return to their villages. Many will find their businesses destroyed — he cites the example of a man whose school-book business worth eighty to ninety lakh rupees was washed away, leaving him with no credit line and no way to restart. These people will fall into the hands of loan sharks and landlords who will extract punishing terms. “Yeh poori poori zindagiyan utaar denge isse wapas aane mein.”

Hassan argues that this is precisely the moment for land redistribution — something Pakistan has never managed to do — and for structured, project-specific aid rather than open-ended donations. He is blunt about the risk of sympathy rents replacing geopolitical rents: “Pakistan has for the longest time been seeking geopolitical rents… let’s not get into this business of sympathy rents.” The money, he warns, will not reach deserving people unless it is tied to specific, transparent, district-level projects with genuine accountability.

He also sees an opportunity for urban planners to redesign flood-affected villages and towns from scratch — to build something more structured and sustainable rather than simply reconstructing what was there before.

Technocratic government is a code word for dictatorship

One of the sharpest moments in the conversation comes when Muzamil raises the recurring Pakistani fantasy of a technocratic government. Hassan does not hedge.

“Technocratic is an, is a, is just a code word for dictatorship, to justify dictatorship.” He says it plainly and then elaborates. Pakistan has been experimenting with technocratic arrangements for most of its existence. Half the country was lost during one such period. Bureaucrats love technocratic governments because their own importance increases. But a technocrat cannot represent the interests of a poor person the way a politician who needs that person’s vote can.

“Mera jaisa banda, I can’t get even 10 votes. I have no right to be deciding what people should be doing.” The politician who wins a mandate from the electorate is the legitimate decision-maker. The technocrat’s role is to advise on implementation — like an engineer on a bridge project — not to substitute for democratic will.

Hassan extends this argument to local government. One of Imran Khan’s biggest failures, in his view, was not holding local government elections. Local governments are closest to the electorate, most responsive to its needs, and most capable of generating their own revenue through property taxes and service charges. London and Stockholm do not rely on the federal government to fix sewerage and lamp posts. Neither should Karachi.

The climate economy as Pakistan’s long-term play

By the end of the conversation, Muzamil steers toward what he calls the climate economy — deliberately avoiding the phrase “climate change” to focus on the financial opportunity rather than the political debate. Hassan engages with genuine enthusiasm.

Pakistan’s deforestation rate is around five percent of landmass, far below the thirty percent that many countries maintain. A serious reforestation programme generates carbon credits that are literally cashable on international markets. The billion-tree tsunami initiative, whatever its political associations, was recognised internationally — even the IMF produced a video about it. That credibility should be built on, not abandoned.

Beyond carbon credits, Hassan argues that Pakistan’s relatively low-carbon production base is a competitive advantage waiting to be monetised. Organic farming in the northern areas already exists at scale — it simply lacks certification. Certified organic produce sells at two to three times the price of conventional produce. Himalayan pink salt is sold in British supermarkets labelled as Indian because Pakistan has never bothered to brand it. Marble of world-class quality is imported from Italy while Pakistani marble sits unmarketed. Gemstones are sent to Thailand for cutting because there is no domestic gem-training institute.

“We need to actually look at this in a very serious manner,” Hassan says. China entered solar panels not out of environmental conviction but because it saw a massive business opportunity. Pakistan should apply the same logic to its natural advantages — and the post-flood moment, with Western media already focused on Pakistan as a climate victim, makes the story easier to tell than it has ever been.

The closing note is cautious but not despairing. “Let’s not waste this crisis,” Hassan says, echoing Churchill. Clarity of vision, a genuine democratic mandate, and the willingness to ask elites — not the poorest — to bear the cost of adjustment: these are the conditions under which Pakistan can turn around. The examples exist. The path is known. What has been missing is the political will to walk it.