The latest update on Pakistan’s economy presents a mixed picture. The government has met many of its IMF obligations but is struggling with the consequences of the ongoing conflict in the Middle East. The Update concedes that higher global oil prices remain the principal risk to the outlook through their impact on purchasing power, input costs and the import bill. For ordinary Pakistanis, that risk is already a daily reality.
On the achievement side is a narrower current account deficit. In July-August of the current fiscal year, it stood at $543 million, down from $853 million in the same two months a year earlier. Under the Extended Fund Facility, that counts as progress. The composition of the improvement matters more than the number, however. The trade deficit did not shrink. It widened from $5.16 billion to $6.16 billion, driven largely by the higher cost of petroleum and related imports. Exports to the Middle East rose by only $0.2 billion, nowhere near enough to offset the higher oil bill.
Two factors did the work instead. The first is remittances, which grew by 14.7 percent. Surveys suggest the conflict has actually helped here, as Pakistani workers in the Gulf have largely stayed put rather than returning home, as nationals of some other countries have done. The second is the slower pace of debt growth, 7.7 percent this year against 13 percent last year. Remittances are welcome but cannot be part of a long-term strategy. They depend on the fortunes of host economies and the continued stability of the region, and no country has built lasting prosperity on money sent home by its workers.
The Debt Management Office credits fiscal consolidation, a primary surplus and lower interest payments for the slowdown in debt growth. Independent economists point to something less flattering: tax collection has risen despite weaker sales and withholding tax revenue, mainly through tighter enforcement at the factory gate in sugar, cement and fertilizer.
These are indirect taxes, and their burden falls hardest on those least able to bear it. They have contributed to food inflation at a time when the World Bank puts poverty at 44 percent. The primary surplus is real, but it excludes interest payments, which absorb 46 percent of current expenditure and 43 percent of the total budget. That calculation also assumes the policy rate will not rise, an assumption now under pressure as inflation has climbed from 3.1 percent in August 2025 to 11.1 percent in August 2026. The government’s recent $3 billion dual-tranche Eurobond adds to the strain. It raised $1.75 billion for 5.5 years at 7.5 percent and $1.25 billion for ten years at 7.9 percent, making it dearer than money from multilateral and bilateral lenders. It almost certainly postdates the budget estimates, so its cost is not reflected in the figures.
Perhaps the most worrying signal is the slump in industry. Large-scale manufacturing growth, which stood at 8.93 percent in July 2025, fell to 3.03 percent in July 2026. Higher utility costs, partly the result of IMF-linked energy reforms, are one cause. Weak private-sector credit is another. The Update records the flow of credit to the private sector sliding further into negative territory between the two years. Needless to say, an economy cannot create jobs, widen its tax base or earn export revenue if its factories are starved of affordable energy and finance.
What should be done? First, narrow the trade gap. Pakistan cannot control global oil prices, but it can reduce its exposure to them. That means faster conversion of power generation to domestic and renewable sources, incentives for solar adoption, and better public transport and fuel efficiency to curb petroleum consumption. On the export side, policy must move beyond textiles towards higher-value goods and services, with predictable energy tariffs for exporters and swift refunds of their taxes. The gains in remittances should be channelled into formal banking and, where possible, into productive investment rather than consumption alone.
Energy tariffs must target inefficiency rather than pass it on. Line losses, theft and capacity payments to power producers are the real drivers of expensive electricity, and cutting them would lower costs without abandoning reform commitments. At the same time, the government’s appetite for domestic borrowing crowds out private credit. Reducing the fiscal deficit through better revenue collection rather than heavier borrowing would free bank lending for small and medium enterprises, the backbone of employment.
An inflation rate of 11.1 percent is eroding household budgets faster than any wage increase can compensate. Monetary policy must remain vigilant, but price pressures from the supply side, such as transport costs and food distribution, require attention too. Improving storage, reducing the number of intermediaries and curbing hoarding in staple commodities would help. Relief measures, as the Update itself says, should be temporary and targeted, but they must actually reach the vulnerable, ideally through existing income-support channels.
Emphasis must shift from indirect to direct taxation. This is the most important reform. Pakistan’s dependence on sales taxes, withholding taxes and levies on fuel means that a poor household pays a far greater share of its income than a wealthy one. The Update recommends accelerating revenue mobilisation and sustaining tax reform, but it stops short of saying where the additional revenue should come from. It should come from those with the ability to pay: large landowners, real estate speculators, retailers and wholesalers outside the tax net, and high-income professionals who pay a fraction of what their salaried counterparts do. Digitising transactions, enforcing documentation and broadening the income tax base is harder than raising a tax at the factory gate, but it is the only route to durable revenue without deepening poverty.
Reserves are now more stable, the currency is steadier and the IMF programme remains on track. But stability that rests on remittances, expensive borrowing and regressive taxes is fragile, and it will not survive another oil shock. The government’s priority should be to turn macroeconomic discipline into broad-based growth. That means cheaper energy for producers, credit for businesses, lower inflation for households and a tax system that asks more of those who can afford it.