Pakistan’s recent economic gains face fresh headwinds as flash floods, persistent inflation, and structural imbalances continue to weigh heavily on the country’s fragile recovery. Despite narrowing deficits and improved reserves, rising food prices, weak tax mobilization, and overreliance on short-term revenue sources cast doubt on the government’s ability to meet its ambitious fiscal targets and sustain growth.
The Institute of International Finance (IIF) has sounded a cautionary note on Pakistan’s fragile revival, observing that although the economy has registered encouraging signs of life, the voyage toward enduring prosperity remains precarious in the absence of audacious reforms.
In its most recent dossier, the IIF acknowledged that Pakistan’s rebound surpassed earlier forecasts, yet entrenched maladies—particularly the stagnant tax regime, hesitant privatisation drive, and a persistently fragile energy matrix—remain unresolved. The institution warned that unless Islamabad confronts its structural dilemmas head-on, including the ever-ballooning circular debt, the present uptick could wither away like rain on parched soil.
Inflationary pressures have eased markedly, granting the State Bank of Pakistan (SBP) leeway to slash its policy rate to 11% since June 2024. Alongside this, Pakistan celebrated its first current account surplus since fiscal year 2011. Likewise, the nation registered a primary balance surplus of 2.4% of GDP in FY25—the most robust in over twenty years. These milestones have bolstered credit assessments and ensured the flow of multilateral assistance. Yet, despite such favorable markers, the IIF underscored that the horizon is clouded with vulnerability.
Lingering geopolitical friction—both in South Asia’s combustible theatre and across the wider global arena—casts shadows over economic stability. Simultaneously, domestic tumult simmers, with relations between Pakistan’s military echelons and the PTI opposition locked in tension, perpetuating an air of political fragility.
While fiscal cushions and external buffers have temporarily softened the strain, the IIF warned they remain meager in scope. Pakistan’s foreign reserves have indeed climbed by $5 billion, sufficient to cover only 2.4 months of imports, while public debt continues to loom large at nearly 67% of GDP—an onerous burden for a nation seeking durable growth.
The IIF also reflected upon the recently inked trade pact with Washington, suggesting it may offer a modest lifeline to Pakistan’s textile exports. Nonetheless, the country’s agrarian backbone—contributing close to a quarter of GDP and sustaining nearly two-fifths of its labor force—faces persistent afflictions. The kharif season, vital for staples such as rice, sugarcane, and cotton, has been unsettled by erratic water shortages and punishing monsoon deluges, threatening yields and jeopardizing rural livelihoods.
In essence, the report frames Pakistan’s trajectory as a delicate balancing act: incremental advances offset by lurking structural weaknesses, fleeting stability overshadowed by political discord, and momentary relief constrained by enduring vulnerabilities.
Adding to Pakistan’s frailties, the nation has endured flash floods that have not only battered livelihoods but also compounded the already fragile economic architecture. The calamity has strained growth prospects and unsettled both fiscal and external balances. Although inflationary trends had previously improved, the floods triggered a surge in food costs, driving headline inflation upward by 2.9% month-on-month in July. Core inflation, however, has proven obstinate—anchored at nearly 7% in metropolitan districts and 8% across rural landscapes. With looming energy price recalibrations and fresh taxation measures, the inflationary tide is expected to remain elevated in the immediate horizon.
Externally, the IIF anticipates that Pakistan’s current account deficit will stay contained—hovering near 0.5% of GDP—as imports gradually normalize. Export momentum, however, is tethered to the uncertain trajectory of the US-Pakistan trade accord. The IIF cautioned against overestimating its influence, suggesting that tangible export expansion may remain muted.
On the fiscal front, even with signs of improvement, vulnerabilities persist. The fiscal deficit compressed to 5.4% of GDP in FY25, while revenues registered a formidable 35.6% ascent. Yet, much of this windfall stemmed from ephemeral sources—chiefly record earnings of the State Bank of Pakistan. Meanwhile, the Federal Board of Revenue (FBR) missed its collection benchmark by a margin equal to 1% of GDP, leaving the nation’s tax-to-GDP ratio stagnating around 10%—an anemic figure when weighed against global peers.
The IIF raised alarm that Pakistan’s lofty fiscal ambitions for FY26—a 3.9% deficit target and a 2.4% primary surplus—may prove aspirational rather than attainable. The excessive reliance on the narrow formal sector for taxation, coupled with the persistent exclusion of the vast retail economy from the tax lattice, undermines credibility. Dependence on domestic financing further compounds these pressures. The IIF concluded that fiscal stewardship will serve as the fulcrum for the continuity and credibility of Pakistan’s IMF programme, with any slippages carrying profound consequences.
In its assessment, the report cautioned that Pakistan’s path ahead is fraught with vulnerabilities. From flood-induced inflationary shocks to an overburdened formal tax sector and mounting debt dependence, the country’s fiscal performance will remain the linchpin of its IMF-backed reform agenda. Without broadening the tax base and confronting structural weaknesses head-on, Pakistan’s recent economic progress risks slipping into yet another cycle of instability.