Dr. Ikramul Haq & Abdul Rauf Shakoori
Prime Minister Muhammad Shehbaz Sharif’s remarks on Pakistan’s economic direction and bilateral relations with Turkiye highlight a commitment to resilience and strategic partnerships. His vision of expanding trade with Turkiye to $5 billion aligns with Pakistan’s broader economic objectives and ongoing reforms. The country’s economic progress, as detailed in the State of Pakistan Economy 2025 half-yearly review, reflects a steady recovery from past downturns and offers insights into the feasibility of such ambitious trade targets.
Pakistan’s economic environment has shown incredible improvement following stabilization efforts in fiscal year (FY) 2024. After experiencing a contraction of 0.2% in FY2023, GDP growth rebounded to 2.5% in FY2024, setting the foundation for continued momentum. In the first quarter of FY2025, GDP growth stood at 0.92%, indicating gradual progress despite a slower pace compared to the previous year. The key sectors, particularly agriculture and services, have played a key role in this recovery. While the industrial sector remains a concern, with contractions slowing down from -4.43% in FY2024 to -1.03%, these figures suggest an overall path toward stabilization.
The external sector has seen significant improvement, creating a favorable backdrop for expanding trade with Turkiye. The current account balance recorded a surplus of US$1.21 billion in the first half of FY2025, a stark contrast to the US$1.39 billion deficit in the same period last year. This positive shift was driven by a 32.8% surge in remittances, reaching $17.8 billion, and a resilient export performance. The textile exports, which contribute 53% of total export earnings, increased by 5.2% to $8.6 billion, supported by strong demand for knitwear and garments. Additionally, strengthening trade ties with Turkiye could further boost Pakistan’s exports and diversify its trade portfolio.
The foreign direct investment (FDI) has also played a key role in Pakistan’s economic path. In the first half of FY2025, FDI inflows grew by 20%, reaching US$1.329 billion. The major contributions came from China, Hong Kong, and the United Kingdom, with the power and financial sectors attracting the most investment. This increasing investor confidence emphasizes the positive impact of ongoing economic reforms.
However, achieving the ambitious US$5 billion trade target will require addressing key structural challenges. The industrial sector remains a critical area for intervention, particularly sub-sectors such as mining, quarrying, and construction. The construction sector contracted 14.91% in the first quarter of FY2025, reflecting weak domestic demand and rising input costs. These challenges can be addressed by necessitating targeted reforms, infrastructure investments, and measures to improve the ease of doing business.
The Uraan Pakistan initiative, a five-year economic transformation plan, aligns with these objectives by emphasizing export growth, digital transformation, and climate resilience. The initiative aims to elevate exports to US$60 billion, focusing on IT, engineering, and agro-products, while increasing the share of renewable energy to 10% of the total energy mix. These targets reflect Pakistan’s broader shift towards a diversified and sustainable economic model. The growth of the services sector, particularly the information and communication industry, has been instrumental in this transition, with service exports rising by 6.8% to $4.05 billion in the first half of FY2025.
Additionally, economic stability is further supported by improvements in inflation and monetary policy. Inflation, which peaked at 29.2% in FY2023, declined significantly to 7.2% in the first half of FY2025, aided by stable exchange rates, easing global commodity prices, and targeted government policies. The State Bank of Pakistan has responded by reducing the policy rate to 12% as of January 2025, a move expected to enhance business confidence and support economic activity. This accommodative monetary stance aligns with the government’s broader economic agenda, creating an environment conducive to sustainable growth.
Fiscal discipline has also been a cornerstone of Pakistan’s economic recovery. The fiscal deficit was reduced to 0.04% of GDP in the first half of FY2025, a significant improvement from the 1.3% deficit recorded in the same period last year. The strong revenue growth, supported by tax and non-tax revenues, has sustained fiscal stability. Additionally, public debt management reforms have led to a decline in the debt-to-GDP ratio to 67.5%, the lowest level in five years. These developments reinforce the government’s commitment to long-term fiscal consolidation and economic resilience.
Despite these positive indicators, challenges remain and to sustain economic momentum will require continued structural reforms, investment in key industries, and efforts to enhance export competitiveness. The government must also focus on improving infrastructure, streamlining regulations, and fostering innovation to drive economic growth. The government aim of strengthening economic partnerships, such as the one envisioned with Turkiye, can serve as a catalyst for expanding trade and attracting further investments.
However, to ensure sustainable progress, the government must adopt a multi-faceted approach to economic policy. Industrial growth should be prioritized through incentives for manufacturers, particularly in high-value industries such as technology, automotive, and pharmaceuticals. Furthermore, improvements in education and vocational training will be necessary to equip the workforce with the skills required for a modern economy. The banking sector should also be leveraged to provide easier access to credit for small and medium enterprises (SMEs), which are essential drivers of economic growth.
A key challenge that must be addressed is energy security. Pakistan has long struggled with an unstable energy supply, which hampers industrial productivity and deters foreign investment. Expanding the renewable energy sector, as highlighted in the Uraan Pakistan initiative, will help reduce dependency on fossil fuels and create a more sustainable power infrastructure. Additionally, public-private partnerships should be encouraged to fund major energy projects, ensuring steady progress toward energy self-sufficiency.
In addition, strengthening governance and tackling corruption will be essential in maintaining investor confidence. Transparent regulations and efficient processes will create an environment where businesses can thrive. The digitalization of government services and tax collection systems can further improve efficiency and reduce leakages in public revenue.
Pakistan’s geographical location provides it with an opportunity to become a key trade hub in the region. By capitalizing on the China-Pakistan Economic Corridor (CPEC) and other trade initiatives, the country can enhance connectivity and economic cooperation with neighboring countries. Developing modern infrastructure, including ports, highways, and logistics networks, will be essential in facilitating international trade and attracting global businesses.
Pakistan’s economic outlook reflects a mix of progress and challenges. While key sectors show resilience, achieving sustainable growth will require strategic reforms and continued investment in industrial and technological advancements. The Uraan Pakistan initiative and targeted policy measures provide a roadmap for economic transformation. By fostering strategic partnerships, enhancing export competitiveness, and ensuring macroeconomic stability, Pakistan can steer the complexities of the global economy and achieve long-term prosperity.
The government’s commitment to addressing structural ineptitudes, investing in key industries, and maintaining fiscal discipline will be imperative in ensuring that economic growth remains inclusive and sustainable. With a clear vision and consistent implementation of reforms, Pakistan is well-positioned to strengthen its economic standing and secure a prosperous future.
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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.