Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s economy is showing signs of cautious recovery after years of instability, with several key indicators pointing toward gradual improvement. The GDP growth rate for fiscal year (FY) 2025 reached 2.68%, marking a modest but important rebound from previous predictions. Inflation, which has reached unbearable levels for ordinary citizens, has sharply declined to 4.5%, providing much-needed relief to households and businesses across the country.
The positive developments have stemmed from a combination of fiscal tightening, monetary discipline, and relative exchange rate stability that the government has worked hard to maintain. Apart from these economic improvements, Pakistan’s foreign policy has also become more dynamic and nuanced, with the country successfully engaging multiple global powers without becoming overly reliant on any single ally.
The country’s strategic partnership with China remains strong, particularly through the China-Pakistan Economic Corridor (CPEC) which continues to be a cornerstone of infrastructure development. At the same time, relations with the United States have stabilized following periods of strain. Similarly, ties with Russia have deepened through energy cooperation agreements.
Pakistan has also maintained its traditional alliance with Saudi Arabia while carefully managing its relationship with Iran. This balanced, multi-aligned approach has allowed Pakistan to secure economic concessions, attract investment, and gain diplomatic support from various power centers in today’s complex geopolitical environment. The ability to materialize these relationships successfully will be critical for Pakistan’s economic future as it seeks to maximize benefits from these partnerships.
A critical test of Pakistan’s economic management lies in its ability to maintain foreign investor confidence, particularly for large-scale infrastructure projects. The recent dispute between the Power Division and State Bank of Pakistan (SBP) over Rs. 431 billion in unpaid dues to Chinese power companies highlights the challenges in this regard. The SBP maintains that only US$26.5 million in payments remain outstanding, but the Power Division insists billions are stuck in commercial banks due to procedural delays. Such discrepancies underline the urgent need for greater transparency and efficiency in financial repatriation processes to maintain Pakistan’s credibility as an investment destination.
The Board of Investment (BoI) has identified six Special Economic Zones as priority destinations for Chinese investment, with land allocations and infrastructure development already underway at sites including Rashakai and Dhabeji. To ensure timely execution of projects, the government has proposed implementing Service Level Agreements that would bind authorities to clear investor-related bottlenecks within defined timeframes. These measures represent positive steps, but their effectiveness will depend on consistent implementation and follow-through. Pakistan’s ability to honour its commitments to foreign investors will be closely watched by the international business community and could determine the flow of future investment into the country.
Bureaucratic red tape has long been a major obstacle for both foreign and domestic investors in Pakistan. Recognizing this persistent problem, the government has initiated what it calls a “regulatory guillotine” to eliminate unnecessary business hurdles. The Business Facilitation Centers aim to integrate federal and provincial departments under a single-window system, potentially reducing approval times for permits and licenses significantly. Early estimates suggest these reforms could cut the cost of doing business by Rs. 250 billion annually, which would provide a substantial boost to economic activity. However, the true test will be whether these reforms translate into tangible improvements on the ground for businesses operating in Pakistan.
Tax reforms have become a centerpiece of the government’s economic agenda, with Prime Minister Shehbaz Sharif personally pushing for greater documentation and digitization within the Federal Board of Revenue (FBR). The introduction of a simplified Urdu-language tax return form represents a practical step toward broadening the tax net, making compliance easier for small businesses and individual taxpayers. Digital enforcement units and faceless customs assessments are being rolled out to reduce opportunities for corruption and enhance transparency in revenue collection. These technological improvements could significantly strengthen Pakistan’s tax administration if properly implemented and maintained.
Despite these positive steps, Pakistan’s tax system remains overly reliant on indirect taxes that disproportionately burden lower-income citizens. The narrow tax base continues to constrain revenue generation, with major sectors like real estate and wholesale trade largely remaining outside the formal tax net. Achieving sustainable revenue growth will require difficult political decisions to bring these untaxed or undertaxed sectors into the system.
Pakistan’s fiscal position has shown some improvement, with the deficit narrowing to 5.4% of GDP in FY 2025 from 6.8% the previous year. The primary surplus has increased substantially, reaching Rs. 2.7 trillion and providing the government with some fiscal breathing room. Provincial governments have contributed to this improvement by collectively posting a surplus of Rs. 921 billion, demonstrating better fiscal management at subnational levels. These developments suggest that fiscal consolidation efforts are beginning to yield results, though much work remains to be done to achieve long-term stability.
The country’s debt situation remains a significant challenge, with debt servicing consuming a substantial portion of government revenue. This heavy debt burden leaves limited fiscal space for critical development spending on infrastructure, education, and healthcare – investments that are essential for long-term growth. The government must carefully balance necessary austerity measures with strategic investments that can stimulate economic activity and generate future revenue. Finding this balance will require difficult choices and disciplined execution of fiscal policies over an extended period.
One of the most encouraging economic developments has been Pakistan’s current account surplus of US$2.1 billion – the first in 14 years. This turnaround has been driven largely by a remarkable 26% increase in remittances, which reached US$38.3 billion in FY 2025. However, the persistent trade deficit in goods and services remains a vulnerability that could undermine external sector stability. Reducing this deficit will require concerted efforts to boost exports through policies that encourage value addition in key sectors like textiles, IT, and agriculture.
The sharp decline in inflation to 4.5% represents a major achievement, providing relief to consumers and businesses alike. Maintaining this price stability will require continued vigilance from the SBP in managing prudent monetary policy. Careful calibration of interest rates will be necessary to prevent inflationary pressures from reemerging while ensuring adequate credit availability to support business growth and investment. Exchange rate stability will also play a crucial role in keeping imported inflation in check, given Pakistan’s dependence on imported energy and other essential commodities.
Looking ahead, Pakistan faces several critical challenges that could affect its economic achievements. Political instability remains a persistent risk that could lead to policy reversals or implementation gaps. External shocks such as oil price spikes or climate-related disasters could derail economic progress. The government must develop robust contingency plans to mitigate these risks while staying focused on long-term structural reforms.
Pakistan must prioritize several key areas. Strengthening institutions should be at the top of the agenda, ensuring policy continuity and reducing political interference in economic decision-making. Broadening the tax base remains essential for fiscal sustainability, requiring the government to bring untaxed sectors into the formal economy while making the system more equitable.
Export growth must be stimulated through targeted incentives and support for value-added industries. Foreign direct investment should be encouraged through consistent policies and reliable dispute resolution mechanisms. Investments in human capital through education and vocational training will enhance productivity and competitiveness. Finally, social protection programmes must be strengthened to shield vulnerable populations from economic shocks.
The existing economic stabilization provides a foundation for inclusive and equitable growth. By maintaining fiscal discipline, deepening beneficial foreign partnerships, and pursuing inclusive economic policies, Pakistan can transition from crisis management to sustainable development. The challenges are significant, but with prudent governance and consistent policy execution, the country can secure a more stable and prosperous future for its citizens. The coming years will be crucial in determining whether Pakistan can break free from its boom-bust economic cycles and achieve lasting progress.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.