According to Bloomberg, Pakistan has recorded the fastest decline in sovereign default risk, second only to Türkiye. This is encouraging news, signaling that Pakistan’s economy is moving in a positive direction, though critical challenges persist. The economy was stabilized through emergency measures rather than long-overdue structural reforms. These short-term measures included import restrictions to bolster the balance of payments and stringent exchange rate management. IMF loans also provided crucial support.

However, experts warn that this stabilization offers only temporary relief, and sustainable progress requires a different set of carefully crafted policies. Pakistan’s fiscal structure, public debt profile, and investment base continue to suffer from deep-rooted weaknesses. Domestic tax mobilization remains a persistent challenge, while development expenditure has contracted, and private credit growth is stagnant. On the external front, Pakistan’s goods trade deficit widened in the first quarter of the current fiscal year. A USD 9.4 billion trade deficit in just three months, coupled with a USD 2.9 billion monthly goods gap and a mere USD 156 million in monthly investment inflows, paints a concerning picture. Net foreign direct investment (FDI) remains negligible, averaging under a billion dollars annually over the past five years, constituting less than one percent of GDP. In FY25, net FDI reached only USD 2.4 billion, compared to India’s USD 80 billion, meaning investment financed just five percent of Pakistan’s external gap.

Equally troubling is the recent exodus of major multinationals, including Procter & Gamble, Yamaha, Shell, Siemens, and Uber. These corporate exits signal a lack of confidence in Pakistan’s economic future and lead to the closure of manufacturing facilities and job losses.

Recent data shows consumer prices rose to 5.6 percent in September, nearly double the previous month’s rate and the highest in 10 months. This spike follows devastating floods that disrupted the livelihoods of thousands of households. The inflation surge is driven primarily by food costs, which reversed last month’s decline and rose over 5 percent year-on-year. Prices for tomatoes surged by 65 percent, wheat by 38 percent, flour by 34 percent, and onions by 29 percent. Flood damage has constrained farm supplies, while energy prices increased again last week, with petrol now exceeding Rs268 per liter and diesel nearing Rs277 per liter. Diesel, in particular, fuels food inflation by powering transport and agricultural machinery. With core inflation at 7 percent, the State Bank is unlikely to ease monetary policy further, meaning high borrowing costs will continue to deter investment and limit fiscal space.

While Pakistan’s macroeconomic indicators have improved significantly, this stabilization has not translated into better living conditions for the masses. Inflation has eased, but poverty levels continue to rise. Economic growth is essential to combat poverty, but without external financial inflows, such growth remains elusive. Floods have further slowed economic momentum, potentially leading to reduced GDP growth, tax revenue losses, and increased spending. These fiscal pressures may necessitate new tax measures. Meanwhile, the IMF is pushing for higher tax rates to address revenue shortfalls. Petroleum levies of nearly Rs80 per liter, combined with customs duties, underscore how fiscal reliance on fuel taxation continues to exacerbate inflation.

Pakistan urgently needs a new growth model, one that moves away from dependence on foreign loans and prioritizes agricultural and industrial productivity and exports. Innovative strategies to attract foreign investment are also critical. The current economic model creates an illusion of prosperity, benefiting the elite while leaving the poor behind. A bottom-up approach focused on broad-based, sustainable growth is essential.

To achieve this, fiscal targets must remain realistic, revenue collection should be strengthened through structural reforms, and spending discipline must be maintained. Growth has yet to generate sufficient employment opportunities. Unless improvements in financial indicators translate into tangible benefits for the population, the perception of stability will quickly fade. Pakistan must move away from ad-hoc policies and institutionalize structural reforms. Greater transparency in policymaking is also essential.

Administrative expenditure should be reduced, and unnecessary perks for the bureaucracy eliminated. The economy’s heavy reliance on domestic and external borrowing is unsustainable. Instead, productivity gains should serve as the foundation for growth. Vietnam and Taiwan offer valuable examples, with their robust export sectors driving prosperity. Pakistan must follow a similar path to achieve lasting economic stability.