Although the economy seems to be in a recovery mode, the macroeconomic signals remain mixed. There are many positives in the situation which give hope for the future such as a rise in exports and a steep decline in inflation. But the overall outlook remains clouded.

No doubt, there has been a significant decline in inflation from 28.8% in 1HFY24 to 7.2% in 1HFY25 but core inflation remains high at 9.5%, suggesting underlying cost pressures. The claim that urban food inflation dropped to 2.7% from 33.2% has to be weighed against persistent supply chain disruptions and high energy costs. Additionally, the government’s reliance on administrative price controls may only provide temporary relief rather than ensure long-term stability.

According to a report, a record number of 3,442 companies were registered in a single month by the Securities Exchange Commission of Pakistan in January, reflecting a 39 per cent increase compared to the previous year’s monthly average. Information technology and e-commerce sectors led the growth by registering 652 companies. Also, the Sindh Assembly unanimously passed the agricultural income tax bill 2025, with all four provinces deciding to adopt the income tax law as required by the International Monetary Fund.

The recently published “State of Pakistan’s Economy Report 2025” has asserted  that sound macroeconomic management, inflation control, and fiscal discipline have set the stage for sustainable growth. However, a deeper analysis reveals that much of this stability is fragile because it is based on temporary factors such as the International Monetary Fund’s (IMF) support, higher remittance inflows, and managed price controls. No doubt, the factors of GDP recovery and external account improvement are important, one cannot ignore the underlying vulnerabilities such as stagnant industrial growth, unsustainable debt levels and structural trade imbalances.

The problem is the government’s overemphasis on short-term gains and its tendency to turn a blind eye to deeper economic weaknesses that demand urgent reforms. For example, the State Bank report claims a 1.15% growth in the agriculture sector in the first quarter of FY2025, and attributes it to favourable policies and investments. However, this growth is significantly lower than the previous year’s 8.09%, primarily due to declining crop production (-11.19% for major crops). Cotton (-29.6%), rice (-1.2%), sugarcane (-2.2%), and maize (-15.6%) recorded declines, raising concerns about sustainability. While prompt credit disbursement and farm modernisation proved helpful, climate vagaries and lack of long-term planning remain unaddressed.

On the negative side, the industrial sector contracted by 1.03% in 1QFY25. The contraction in the labour-intensive construction (-14.91%) and mining & quarrying (-6.49%) sectors shows that the large-scale manufacturing (LSM) sector faces serious challenges. The services sector grew by 1.43% in 1QFY25, a decline from 2.16% in the previous year. The slowdown in wholesale and retail trade (0.51% growth) and transport (-0.07%) indicate weak consumer demand. The government is optimistic about digital services and financial sector growth but the clamp down and restriction on internet services will continue to retard expansion and growth.

The government claims a current account surplus of $1.21 billion in 1HFY25, compared to a $1.39 billion deficit last year. But this improvement is largely due to record high remittances ($17.8 billion, a 32.8% increase), and does not indicate a fundamental shift in policy reorientation and economic competitiveness. Despite an increase in exports (7.2%), imports surged by 9.3%, widening the trade deficit to $11.5 billion. This means that Pakistan’s external stability remains fragile. The textile sector, which constitutes 53% of total exports, saw only a 5.2% increase, while imports of textile machinery and raw materials surged, raising concerns about overreliance on external inputs.

Foreign direct investment (FDI) increased by 20% ($1.32 billion), largely due to Chinese and Middle Eastern investments in power and financial sectors but foreign private portfolio investment saw a net outflow of $0.22 billion, reflecting investor scepticism about long-term economic prospects. The report downplays these risks, ignoring Pakistan’s reliance on short-term financial inflows rather than sustainable industrial growth. The rupee appreciated by 1.9%, and forex reserves rose to $16.4 billion, which covers just over two months of imports. While this is an improvement, it is still far from the sustainable benchmark of six-month coverage.

The State Bank report emphasises a reduction in the fiscal deficit to 0.04% of GDP in Jul-Nov FY25 as compared to 1.3% last year but this has nothing to do with any genuine fiscal reforms and is attributable to one-time surplus profit of Rs2,500 billion from the State Bank of Pakistan (SBP). The FBR’s tax collection grew by 25.9% to Rs5,624.9 billion, primarily driven by indirect taxes, sales tax and customs duty, denoting a reliance on regressive taxation which affects the lower income groups.

On the negative side, public debt reached Rs72.1 trillion, a 1.3% increase from June 2024, with a debt-to-GDP ratio of 67.5%. As a result, the cost of servicing remains high, consuming more than half of government revenue.

All in all, the economy cannot be put on a sustainable growth path without long overdue structural reforms. Short-term fixes and tinkering are no answer to the problem.