The World Bank’s latest assessment of Pakistan’s economy paints a mixed picture. While growth is stabilising and inflation declining, the economy lacks long-term resilience. The hopeful signs include a projected 2.7 percent GDP growth in FY2024-25,lower inflation, better credit access, and a recovery in private sector confidence. The revival of agricultural productivity is driven by investment flows back into farming and towards higher value-added crops.

But this growth story is incomplete as it is not financially sustainable unless it is accompanied by serious and long-overdue reforms. The State Bank of Pakistan’s latest Financial Stability Review once again makes it clear that beyond short-term adjustments and tactical recoveries, the country’s economic future depends on sustained and credible structural reforms.

Without them, growth will continue to be weak, and vulnerable to external shocks. The main problem is that Pakistan’s growth model is flawed – because it is consumption-led and import-dependent. This is the underlying weakness of the economy. This imbalance can be corrected by broadening the tax base, restructuring the energy sector, boosting exports through productivity rather than subsidies, and bringing informal sectors into the formal economy.

The problems are all well known but there is lack of implementation rooted in lack of political will. Whichever government is in power, there is no long-term reform plan on the anvil and instead the politics of patronage continues unabated. The top leadership at any given time is afraid of displeasing powerful lobbies and confronting entrenched interests. For example, the shenanigans of the sugar lobby are no secret but beyond verbal avowals no action has ever been taken against it.

Energy sector reform has been repeatedly promised, with tariff adjustments made here and there, but with little real success in addressing the fundamental issues –inefficiencies and circular debt. The IPPs scandal stinks to the high heavens but nobody dares to touch the vested interests. On the other hand, the authorities have persistently failed to collect  taxes from the most dynamic economic segments with the result that revenue generation remains low, undermining long term economic resilience. According to the Bank’s regional development update, Pakistan’s growth over the past decade has been driven mostly by under-taxed sectors, including agriculture and services. The informal segments also remain  outside the tax net, despite their growing weight in the overall GDP. All the burden of direct taxes is on the salaried class, while around 80 percent is collected from indirect taxation which hurts the poor sections of the population more.

Over the years tax revenues have not grown proportionately with GDP growth. This is because large segments of the economy are not within the tax net. There is an urgent need to bring the retail and wholesale trade within the formal tax system as well as stricter corporate income tax enforcement. Pakistan’s tax problem is structural. The major issues are widespread and excessive exemptions and limited financial development accountability for persistent revenue shortfall. Tax reform has been talked about for decades but with little follow-up action. As such the economy remains under-taxed and is dependent on a narrow, overburdened formal sector.

Successive governments in Pakistan, instead of mobilising indigenous resources, have relied on external bailouts, managed devaluations, consumption incentives and other short-term fixes. The result is that Pakistan remains highly exposed to any external or internal shock — global commodity price surges, interest rate hikes,  supply chain disruptions, natural disasters and  political crises. Credit growth, investment expansion, and financial deepening ultimately depend on an underlying economy that generates sustainable incomes and savings. Without that, even the best-regulated banks will find themselves operating in a volatile market.

The global economic landscape is under a shadow. External financing conditions are tightening, global competition is increasing. The old model of seeking periodic IMF programmes and ad hoc rollovers from friendly countries is no longer sustainable. Our traditional lenders and donors are showing signs of weariness and reluctance to continuously bail us out.

The way forward is wide ranging structural reforms all across the economy. The first step towards this should be a charter of economy designed with the concurrence of all political parties and the establishment. Agricultural tax should be at the top of the list of priorities followed by retail and wholesale tax. At the same time indirect taxes should be reduced to give some relief to the common man. In the energy sector, IPPs pose a serious problem. All their agreements should be renegotiated to reduce the burden of capacity payments. Similarly, all state run enterprises should be privatised because they are a big hole in the national exchequer. The ultimate solution lies in rapid industrialisation coupled with export diversification. To this end, the government must make it easy to do business by cutting red tape and bureaucratic hurdles which discourage entrepreneurship.