The economy of Pakistan has been trying to stabilise for many years to overcome the problems related to pressure on finance and balance of payments. Though there has been a change in recent times which helped in reducing the problems, still the country is very far from reaching the stage where it will have sustained growth to improve people’s living standards, create jobs and overcome poverty.
The last World Bank report titled Pakistan Development Update talks about the great potential that is available in the economy and the reforms that need to be carried out in order to make it happen. According to the World Bank, the annual growth of economy of Pakistan can range from 6.2pc to 6.9pc if the policies and institutions become like those of other middle income countries. With the help of this achievement, Pakistan would be able to reach the income level of Vietnam and triple the incomes till 2050.
The economy appears to be recovering. The real GDP rose by 3.65pc in FY26, and the primary fiscal surplus was achieved at the level of 2.9pc of GDP. This clearly shows that the government has taken some steps towards the restoration of fiscal discipline and control of economic imbalances. Nevertheless, the impact of the positive changes on the lives of ordinary people is rather limited since the growth of per capita income stands at the level of only 1.6pc.
The difference between stabilisation and sustainability is crucial in the analysis of the economic situation in Pakistan. The international financial organisations and credit-rating agencies have already appreciated the efforts made by the country to restore macroeconomic stability. However, improved financial stability does not necessarily mean increased investments, exports, jobs, and personal incomes.
Most of the stability witnessed recently has been possible through economic policies that are quite restrictive in nature. The high interest rates, fiscal contraction and high costs of energy have resulted in a suppression of domestic demand, limited borrowing and decreased imports. While such policies may help alleviate the problems of foreign exchange reserves and the balance of payments, they have increased the cost of conducting business activities. The policies may be a necessity during a period of crisis, they cannot be used as the basis of economic growth in the long run. It is not possible for an economy to depend on restricted demand and limited imports while at the same time encouraging companies to increase their production, adopt advanced technology and compete in the international market.
Worker’s remittances from abroad have constituted yet another important channel of assistance. The money earned by Pakistani expatriates has been used to finance imports and enhance consumption and economic strength abroad. External borrowing has served to ease some of the financial constraints faced by the country by meeting its financing needs and managing its short-term problems. However, these channels of assistance cannot be used as substitutes for an efficient domestic economy. Remittances earn foreign exchange, but they do not necessarily increase the capacity of industry or exports. While borrowing provides funds for the present, it creates future obligations for repayments. Likewise, while curbing imports may help the current account of balance of payments in the short run, it does not make the domestic economy stronger in the process.
This presents a familiar scenario for Pakistan in which every time there is an increase in economic activities, the demand for machinery, fuels, raw materials, and equipment imports increases. In case there is not a similar increase in exports, then the trade gap becomes wider, foreign exchange reserves become strained, and the government resorts to yet another round of restrictive policies. The ensuing slowdown again adversely affects investment and employment, leading to the same cycle being repeated.
A way out of this cycle lies in the reformation of the economic structure, whereby Pakistan is expected to achieve higher levels of efficiency, diversification of exports and reduction of costs which keep local firms non-competitive. Growth in this situation will have to come from increased productivity and production capacity. These difficulties are neither new nor hard to pinpoint. Costly energy makes production more expensive in farming, industry and services. A limited tax base imposes the cost of taxation more heavily on compliant firms and people, whereas much economic activity is lightly taxed. Complex rules, lack of competitiveness and policy uncertainty keep investors away from making the investments that require time to pay off.
Poor human capital is another major deficiency. Lack of skills among workers constrains the ability of firms to use advanced technology and improve their methods of production to shift to high value-added products and services. Without better schooling, training and health care, Pakistan cannot expect to make sufficient improvements in productivity to support growth. Meeting these challenges calls for a sustained and thoughtful approach to change. Taxation policies will need to widen the tax base by taxing those sectors that have been under-taxed, rather than imposing more tax on the same old taxpayers. A rational taxation policy will be better at collecting taxes and providing the government with more steady revenues.
The energy sector will need to address the problems of high costs of production of electricity and fuel. Simply shifting costs from consumers to the government will not solve the problem. The availability of cheaper and more efficient energy is vital for the development of industries, making exports more competitive and creating jobs.
Finally, the export policy should not depend on short-term incentives and subsidies. The country should invest in technology, product improvement, exploration of new markets and developing stronger linkages between local producers and international supply chains. Value addition in agriculture and manufacturing along with a more competitive services sector may help the country in earning foreign exchange.
Just as crucial is the credibility of the public institutions. Changes in policies, lack of enforcement, and uncertainty about the regulations are disincentives to long-term investments. The business community needs assurance that economic laws and regulations will continue to be predictable and that contracts, property rights, and regulations will be honored. As such, institutional credibility is more of an absolute necessity and not just another thing.
It must be remembered that the World Bank’s estimates should be considered a measure of success of the reforms and not necessarily an automatic route to prosperity. For Vietnam to achieve its current level of income, investment in education, healthcare, infrastructure, and technology by way of institutions that can deliver on their promises is vital. Growth that leads to job creation must also be achieved.
It is fortunate for Pakistan to have been provided with some breathing room owing to its recent attempts at stabilizing the country. This precious time can be rendered fruitless if the government goes back to its old practices. The crucial aspect is that of the ability of the government to transform good financial indicators into a sustainable economy. In the absence of tax and energy reforms, competitiveness in exports, productivity, and consistency in policies, any rapid growth can result in international pressure leading to the need for another adjustment.