Pakistan’s economy has achieved a modicum of stability under the watchful eyes of the IMF but there is no room for misplaced optimism. The latest Financial Stability Review of the State Bank of Pakistan has described the country’s financial system as healthy and resilient, citing stronger reserves, improved capital buffers and an improved macroeconomic environment during CY25. But a deeper analysis shows a different picture.
According to the SBP in the last calendar year inflation had eased, reserves recovered, and the banking sector remained solvent and profitable. The completion of IMF reviews and arrangements under the Extended Fund Facility and Resilience and Sustainability Facility also raised business confidence. But the overall economy remained fragile as we can see that it has hardly withstood the shock of the Middle East war.
Inflation has again begun to climb in the wake of a sharp rise in oil prices. The petrol and diesel price hikes have jolted the economy and the State Bank itself has warned that inflationary pressures may intensify. Monetary tightening has also resumed because inflation expectations are turning upward again.
A new cycle of fuel-driven price hike will increase pressures on transport, food, manufacturing and borrowing costs. As we have seen over the past few weeks, electricity shortages and load-shedding have affected industrial output and household consumption. Energy costs are too high, depleting disposable incomes. Businesses now face additional uncertainty regarding power availability and input prices. Food inflation is intensifying due to higher transport and energy costs. This is particularly important in a country where food carries a substantial weight in household expenditure.
The government is facing a worsening fiscal crisis. Revenue collection targets are being missed as growth slows. The state’s reliance on indirect taxation and petroleum levies to shore up revenues has further intensified inflationary pressures at a time when consumer purchasing power is under severe strain.
The SBP has acknowledged that a prolonged Middle East conflict could keep oil prices elevated, strain the external account and weaken growth momentum. Independent experts have also identified geopolitical risk as the single greatest threat to financial stability over the coming months.
For the current year the GDP projection by the SBP has been set at 4.75 percent which seems to be optimistic, given the fact that our industries are unable to compete internationally due to much higher input costs than regional competitors. Recently, according to knowledgeable sources, as many as 150 textile units have closed down affecting our export potential.
What is a matter of serious alarm is that the volume of domestic borrowing continues to rise unabated. The government has borrowed 1.25 trillion rupees to clear the circular debt whose interest payments are passed onto the consumers. On the other hand, the targets set by the International Monetary Fund (IMF) were achieved by slashing the Public Sector Development Programme.
Sales tax has remained the major source of revenue for the federal government – 3.1 trillion rupees against 2.8 trillion rupees collected last year in the same period of July-March 2025. It is relevant to note here that the bulk of direct taxes collected is from the levy of withholding taxes in the sales tax mode whose incidence on the poor is greater than on the rich, which explains why the poverty levels in the country are on the rise.
In March this year remittance inflows rose by a healthy 33.2 percent to 28 billion dollars — a major boost for the balance of payments position — though reports suggest that Pakistani expatriates in the United Arab Emirates (UAE) may face some challenges in renewing their work visas, subsequent to their 3.45 billion dollar loan recall that was cleared last month with Saudi Arabia extending an additional 3 billion-dollar roll-over to Pakistan.
The analysis shows that notwithstanding financial stability reported by the SBP, the downside risks remain which call for advance planning and a rigorous implementation strategy. A prime need is to strengthen the country’s industrial sector through a new package of incentives, especially to boost the small and medium enterprises which can create thousands of new jobs.
There is a consensus of opinion among experts that it is time we adopted a new economic paradigm shifting the focus from consumption to production. As a nation we import more than we export and we consume more than we produce. The result is a never-ending mountain of debt which has crushed our growth potential. The rot starts at the top, with the government mindlessly increasing its administrative expenditure on the back of borrowed money from IMF and other sources. The government must show the way to the nation and set an example by drastically cutting its expenditure, much of which is spent on wasteful frills and a luxurious lifestyle.