Pakistan’s economic landscape remains precarious despite narrowly avoiding a sovereign default, thanks largely to IMF support and assistance from friendly nations. However, growth remains weak, and the burden of stabilisation continues to fall on the most vulnerable segments of society. With mounting pressure to implement structural reforms, policymakers face a critical choice: pursue genuine transformation or continue with short-term fixes that risk worsening poverty and inequality.
Pakistan’s journey toward meaningful economic recovery and reducing poverty hinges on implementing far-reaching reforms that go beyond temporary fixes. These reforms must focus on enhancing human capital, ensuring macroeconomic stability, promoting climate resilience, developing sustainable energy solutions, and unlocking private sector potential.
For over two decades, international financial institutions have echoed these priorities. However, many in Pakistan now view these externally crafted programs as misaligned with the country’s unique challenges. Critics argue that applying standard policy prescriptions—such as raising interest rates to control inflation—often ignores Pakistan’s structural realities. Worse still, some of the agreed policies have deepened public hardship. A stark example is how the cost of inefficiencies in the energy and taxation systems has been shifted onto ordinary citizens, contributing to rising poverty. According to the latest World Bank report, poverty in Pakistan has surged to 42.4pc.
One particularly painful policy highlighted by the World Bank is the general sales tax (GST), which has become a significant burden on households. GST alone accounts for about 7pc of pre-tax household expenditures, disproportionately affecting the poor and pushing many closer to the edge.
In its last economic outlook, the World Bank revised Pakistan’s projected growth rate slightly downward to 2.7pc for the current fiscal year—citing ongoing efforts at stabilisation but also the drag from tight fiscal and monetary policies. This is a small drop from the 2.8pc projection made in its October update. Still, the Bank offers cautious optimism, forecasting modest growth of 3.1pc in FY26 and 3.4pc in FY27. This improvement is expected to be driven by a recovery in private consumption and investment, aided by falling inflation, lower interest rates, and improved business confidence.
Despite some stabilisation in inflation, financial markets, and fiscal indicators, Pakistan’s economic performance remains fragile. Growth in agriculture has been hampered by climate events and pest outbreaks. Industry continues to struggle due to rising costs, heavy taxation, and reduced public spending. The services sector, too, remains subdued, weighed down by the lackluster performance in agriculture and industry.
In essence, while the macroeconomic picture may be slowly improving, the broader economy remains sluggish. This sluggishness, coupled with a growing population, makes job creation and poverty alleviation increasingly difficult. Without policies that account for local realities and protect the most vulnerable, Pakistan’s recovery risks leaving too many behind.
The World Bank has cautioned that Pakistan’s economic recovery remains on shaky ground. Growth, it noted, is likely to stay subdued due to tight monetary and fiscal policies aimed at rebuilding fiscal buffers and avoiding external imbalances. Yet despite these measures, the risks remain high. Any delays in implementing structural reforms—or sudden shifts in the stabilisation path—could derail the fragile recovery and heighten economic vulnerabilities.
The Bank emphasized the urgent need for deep reforms, particularly to attract private investment. It specifically pointed to upgrading Pakistan’s digital infrastructure and improving the ecosystem for a thriving digital economy as key areas where progress could unlock new growth potential.
A critical factor in maintaining economic stability this year has been Pakistan’s continued engagement with the International Monetary Fund (IMF). Without an active IMF programme, the country risked default—not only because the programme reassures other multilateral institutions, but also because friendly nations like China, Saudi Arabia, and the UAE had made it clear that their $16 billion in financial rollovers were conditional on Pakistan remaining under the IMF’s supervision.
Despite some positive signals—such as rollovers exceeding expectations by $2 billion—the economy is far from stable. Net inflows remain negative, and local economists remain skeptical. Still, one thing is clear: the immediate threat of default has been successfully pushed back.
Yet challenges persist. In its first review, the IMF flagged a critical concern regarding Pakistan’s Debt Service Surcharge (DSS). The Fund insisted that the government must remove the cap on the DSS by June 2025, arguing that this flexibility is vital in case additional payments need to be covered from within the current fiscal envelope.
On the domestic front, spending pressures are expected to rise—particularly on defence—following increased regional tensions. However, tensions with the IMF continue to bubble under the surface, particularly regarding the government’s intention to ease taxes on salaried individuals, adjust electricity tariffs based on lower cost projections, and its growing reliance on sales tax, which disproportionately impacts the poor. Compounding the problem is the low growth and rising unemployment driven by Pakistan’s higher-than-average input costs compared to regional peers.
There’s a growing concern among analysts that instead of implementing real reforms, policymakers may once again choose the easier route—passing the burden onto everyday consumers. This trend has long empowered vested interests, allowing elite capture to dominate budget decisions, both in revenue collection and expenditure priorities.
If Pakistan is to turn the corner, it must not only commit to structural reforms in name but execute them in practice. Real change demands a break from past habits—and a serious effort to protect the most vulnerable instead of shielding the most powerful. The road ahead for Pakistan is narrow and steep. While the worst-case scenario of default has been averted for now, the underlying issues—weak growth, elite-driven policymaking, and regressive taxation—remain unaddressed. Structural reforms can no longer be delayed or watered down. What the country needs is a bold, inclusive reform agenda that prioritises the welfare of its citizens over political expediency and entrenched interests. Only then can Pakistan hope to build a resilient, equitable, and sustainable economic future.