Recent data show a marked improvement in key macroeconomic indicators, reinforcing the government’s claim that stabilisation has been achieved. Yet behind the encouraging headlines, the structural weaknesses that have repeatedly pushed the country to the brink remain largely untouched.
According to the latest reports, the current account deficit narrowed by a striking 34 percent in the first two months of the current fiscal year. Remittances were the main driver, and they rose despite projections to the contrary given the ongoing Middle East conflict. Reports suggest the increase is partly explained by emigrants from other countries leaving the Gulf states because of the war, while Pakistanis continue to work there. A growing shift towards official channels for sending money home has also helped.
The government also raised $3 billion through a dual-tranche Eurobond issuance, which strengthened foreign exchange reserves and the external account. The offering consisted of a $1.75 billion bond with a 5.5-year maturity at a 7.5 percent coupon and a $1.25 billion bond with a 10-year maturity at 7.9 percent. Both rates are lower than what the government pays on domestic borrowing. The bonds are repayable in dollars, while the rupee typically loses 3 to 4 percent of its value a year, so the true cost to the taxpayer will be higher than the coupon suggests.
Foreign direct investment (FDI) for July-August 2026 rose 24 percent year-on-year, with stronger inflows in August. According to the State Bank of Pakistan, the two-month total stood at $495 million. Minor discrepancies between the central bank and Finance Division figures on monthly numbers are a reminder that even data reporting needs tightening. More importantly, the amount remains extremely low compared with regional peers. The upward trend is welcome, but there is little room for complacency. Large-scale manufacturing (LSM) grew 3.03 percent year-on-year and 9.51 percent month-on-month, a positive sign for GDP growth and job creation. Automobiles led with growth of 57 percent, followed by garments at 22 percent.
Each of these gains comes with a caveat. The remittance windfall is unlikely to survive the end of the Gulf conflict. Some political commentators expect the turmoil to last until the end of the Trump term, but nobody can build a budget on the assumption that a war will keep going. A current account that improves because of someone else’s misfortune is not a durable achievement.
The manufacturing picture is also contested. The textile sector, the backbone of Pakistan’s exports, says more than 100 units have shut down because of a sharp rise in input costs, which it attributes to administrative measures adopted under International Monetary Fund conditions. The claim finds some support in official figures. The Finance Division’s monthly update shows private-sector credit flows remaining negative, and the contraction deepened between July-August 2025 and the same period this year. Strong numbers in autos and garments cannot hide the fact that businesses are struggling under high costs and tight credit. Headline growth that does not translate into broad-based investment and employment will feel like stagnation to ordinary citizens.
The global economy is suffering major supply disruptions, driven not only by the Middle East but also by the war between Russia and Ukraine. Neither conflict looks likely to end soon. Pakistan, a net importer of energy, is exposed to every tremor in fuel markets. When fuel is available at all, it comes at a very high price. This calls for strategic planning rather than fire-fighting. Too often policymakers respond to each shock by extending subsidies, drawing on a kitty whose fiscal space narrows with every such decision. That approach is unsustainable. It trades short-term relief for long-term vulnerability and leaves the country just as exposed at the next shock.
Nowhere is the need for reform more urgent than in the energy sector. Households are already coping with an almost daily rise in the cost of fuel. Unless mitigating measures are put in place, the situation will only worsen. The government needs a coherent energy plan that reduces demand for petrol and for the fuel used in power generation. That means shifting the generation mix away from expensive imported fuels, improving efficiency, curbing losses and building resilience against global shortages. A country that cannot insulate itself from fuel-price spikes will remain hostage to events far beyond its control.
The tax system presents an equally stubborn problem. Pakistan’s revenue effort has long relied on squeezing those already in the net, whether through higher rates or a wider ambit of existing taxes, while large segments of the economy remain lightly taxed or undocumented. Every rupee of avoidable spending increases pressure to raise taxes, and it is the salaried and compliant taxpayers who bear the brunt.
That is why curtailing government expenditure across the board is not merely an austerity slogan but a precondition for fair and workable tax policy. The state’s spending on itself has ballooned, and the privileges enjoyed by government functionaries are particularly hard to defend. Lavish perks such as fleets of official vehicles, fuel entitlements, housing and large retinues of staff belong to another era. It is difficult to ask a struggling public to endure rising fuel prices and taxes while those who administer the economy live in near-royal comfort. Cutting these privileges would free real resources and would also signal that the burden of adjustment is being shared.
Pakistan has a breathing space, but breathing space is not a strategy. Remittance surges, Eurobond proceeds and a rebound in a few manufacturing sectors are not substitutes for an efficient energy sector, a broad and equitable tax base and a leaner state. If the authorities treat the current improvement as proof that the work is done, they risk squandering the opportunity and repeating the boom-and-bust cycle that has defined the country’s economic history.