The World Bank’s latest report on Pakistan’s economy paints a picture of cautious progress teetering on a fragile foundation. While inflation eases and private investment shows signs of life, a broken tax system—plagued by informality, exemptions, and weak financial structures—threatens to unravel even modest gains.

With Pakistan’s revenue gap among the worst in South Asia, the stakes are high. This is a pivotal moment: reform now, or slide back into a cycle of borrowing and stunted growth. The World Bank’s latest take on Pakistan’s economy strikes a cautious tone—neither alarmist nor rosy, but urgent in its call for change. The country is clawing its way out of last year’s economic rut, with GDP growth pegged at a modest 2.7% for FY2024-25. Falling inflation, easier credit, and renewed business optimism are helping, as is a rebound in agriculture, where smarter investments and policies are pushing farmers toward higher-value crops. But the Bank is clear: this flicker of progress could fizzle out without bold tax reforms.

The real issue isn’t just how much the economy is growing, but what’s fueling it. For years, Pakistan’s growth has leaned heavily on sectors that barely pay taxes—agriculture chief among them, taxed at a fraction of other industries. The service sector and informal markets, which make up a growing slice of the economy, also slip through the tax net. The result? Tax revenues are stuck in the slow lane, failing to match the pace of economic growth.

This isn’t about tax rates being too low. It’s about entire chunks of the economy skating by without contributing their share. The government’s vow to boost tax revenue by 4–5% of GDP sounds ambitious, but pulling it off means tackling tough reforms—like cracking down on personal and corporate tax evasion and bringing agriculture and retail into the fold. These are politically thorny moves, and history shows they’ve been sidestepped time and again.

Without fixing this, Pakistan’s recovery risks being a house of cards—growth that looks good on paper but lacks the foundation to last. Pakistan’s tax woes are deeply rooted in its economic structure. A sprawling informal sector, generous tax exemptions, and underdeveloped financial systems are starving the country of revenue—not just from income taxes, but from consumption taxes too. Compared to its South Asian peers, Pakistan’s revenue gap is among the widest, a stark reminder of how much potential is slipping through the cracks.

Inflation is cooling faster than anticipated, and private investment is picking up, fueled by imported capital goods and better access to credit. But storm clouds loom large. A global economic slowdown, rising trade barriers, geopolitical tensions, or supply chain disruptions could easily derail this fragile recovery, blowing fiscal deficits wide open again.

Even if everything goes right—IMF support holds, debt rollovers succeed, and reforms inch forward—growth is projected to limp along at 2.7 to 3.4% over the next three years. That’s too sluggish to dent poverty, especially with Pakistan’s booming population. Without a tax system that can keep up, even these modest gains will lean on borrowing, not self-sustaining progress.

Pakistan stands at a tipping point. The economy is steadying, but it’s far from secure. This fleeting moment of stability is a chance to tackle long-overdue tax reforms. Miss it, and the country risks sliding back into its old trap: growth that lifts a few but leaves most behind, and an economy that can’t pay its own way.

Growth is driven by recovering private consumption and investment, fueled by lower inflation, interest rates, and improving business confidence, yet remains weak due to tight monetary and fiscal policies. Agriculture faces limited growth from weather and pest issues, industry declines due to high input costs and taxes, and services see muted growth from weak sectoral spillovers. Growth is projected to rise to 3.1% in FY26 and 3.4% in FY27, but these rates are insufficient for significant poverty reduction given high population growth. Tight policies constrain activity, while uneven connectivity and high broadband costs hinder digital economy development, despite Digital Public Infrastructure progress. Risks include fragile recovery, high debt, policy uncertainties, global trade volatility, and climatic shocks. Delays in reforms or stabilization shifts could intensify external pressures, and Digital Public Infrastructure implementation needs strong federal-provincial coordination. Recommended reforms include an efficient, progressive tax system, market-determined exchange rate, lower import tariffs, improved business environment, and streamlined public sector to attract investment. These aim to signal credibility but require consistent execution. Pakistan’s stabilization shows progress, but structural reforms are critical to sustain growth, reduce poverty, and build resilience. If deeper analysis on reforms or risks is needed, I can search the web or X posts or provide a focused breakdown.

Pakistan’s economy is at a crossroads, stabilising but not yet secure. The window for bold tax reforms is narrow, and the risks—global slowdowns, trade barriers, or geopolitical shocks—are real. Without a tax system that captures the country’s economic potential, growth will remain too slow to lift millions out of poverty. The choice is clear: tackle the structural flaws head-on, or stay trapped in a cycle of fleeting recoveries that never truly deliver.