Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s economy in 2025 reached a delicate inflection point. Crisis management gradually gave way to a measure of stability. Yet deep structural flaws continued to shape the macroeconomic environment. Release of the second review and tranche under the 37-month, US$7 billion International Monetary Fund Extended Fund Facility (EFF) programme provided short-term confidence to markets and policymakers. At the same time, it reinforced Pakistan’s continuing dependence on external financing and programme commitments.
The continuous engagement with IMF reflects weakness rather than strength. Persistent fiscal challenges, dwindling export capacity and external-sector fragility have compromised Pakistan’s policy autonomy. The economic outlook for Pakistan in 2025 therefore remained shaped by adjustment-driven stability rather than reform-driven growth.
The ‘Statistical Bulletin December 2025’ [“the Bulletin”] issued by the State Bank of Pakistan (SBP) presents a comprehensive and data-driven assessment of this claimed stability. It also exposes its inherent limitations. The selected monetary indicators reported in the Bulletin confirm that macroeconomic balance has been achieved primarily through demand compression. There is little evidence of productivity enhancement or export expansion. Data reveals an economy operating below potential. It shows ‘stability’ (sic) secured by absorbing the social and investment costs of tight fiscal and monetary policies.
According to the Bulletin, broad monetary aggregates reflect this reality. The broad money supply (M2) increased to Rs. 40,567,988 million in November 2025 compared with Rs. 35,881,830 million in June 2024. Currency in circulation rose to Rs. 10,790,707 million in November 2025 from Rs. 9,153,099 million in June 2024. This sharp rise reflects continuing inflationary pressures and the persistence of cash-based economic behaviour.
Other components of the monetary base confirm limited structural change. Other deposits with SBP stood at Rs. 45,667 million in November 2025. Private and public sector enterprise deposits reached Rs. 29,731,634 million in November 2025. Resident foreign-currency deposits amounted to Rs. 1,708,972 million in the same month. These figures highlight persistent dollarization pressures within the banking system.
Factors affecting money supply demonstrate the institutional dominance of government borrowing. Net foreign assets of the banking system improved to Rs. 623,779 million in November 2025 from negative Rs. 1,137,968 million in June 2024. This turnaround largely reflects external inflows linked to IMF support and allied adjustment measures. The net domestic assets reached Rs. 39,944,209 million in November 2025. Meanwhile, net government-sector borrowing expanded to Rs. 34,404,283 million, underlining continuing fiscal reliance on the banking system.
Borrowings for budgetary support alone reached Rs. 33,342,144 million in November 2025. This clearly signals the crowding out of private-sector credit. Reserve money increased to Rs. 13,513,977 million in November 2025 from Rs. 11,612,829 million in June 2024. The data confirms tight monetary management combined with unrelenting fiscal dominance.
Currency behaviour offers further insight. Total currency in circulation reached Rs. 11,412,829 million in November 2025. Currency held in the tills of scheduled banks stood at Rs. 621,633 million, indicating only routine operational liquidity.
The depository-corporations survey reveals a similar pattern. Net foreign assets of depository corporations stood at Rs. 703,185 million in October 2025. Claims on non-residents amounted to Rs. 8,482,741 million. Liabilities to non-residents reached Rs. 7,779,555 million, indicating continuing exposure to external obligations. Domestic claims rose to Rs. 50,368,752 million, reinforcing the dominance of deficit financing over productive credit expansion.
The SBP’s Bulletin portrays a banking sector that is financially profitable but economically detached. Scheduled banks remain heavily invested in government securities rather than private sector lending. Deposit growth has not translated into productive advances. The structural preference for sovereign exposure represents an institutional failure that undermines growth and employment.
External-sector data highlights the fragility of the stabilization achieved in 2025. Improvements in external balances are largely driven by import compression. Exports remain stagnant in composition and competitiveness. Workers’ remittances continue to play a critical role in supporting the current account. Foreign-exchange reserves remain instruments for balance-of-payments support rather than indicators of long-term external strength.
Divergence between SBP payments records and Pakistan Bureau of Statistics (PSB) customs records exposes coordination gaps. Payment records focus on realized export proceeds and import payments. Customs records track physical movement of goods. Valuation and timing differences persist. Lack of integrated trade intelligence weakens policy formulation.
The cumulative evidence confirms that Pakistan has achieved statistical stability without any substantive transformation. Persistent fiscal imbalances, low tax yield with high tax rates, weak export diversification, shallow financial intermediation and limited institutional coordination remain explicit policy failures. Reliance on monetary tightening and bank-financed deficits has suppressed private investment and industrial expansion.
Pakistan requires a decisive shift from stability-centered policymaking to productivity-driven reforms. Government must reduce fiscal reliance on the banking system to restore credit flow to the private sector. For this, it must broaden the tax base, rationalize high tax rates and improve voluntary compliance to reduce borrowing pressures. One of the many maladies in Pakistan’s tax system is cumbersome withholding tax system contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services. This kind of irrational system of withholding of tax at source is operationally inefficient, anti-business, complex, time-consuming and costly.
The withholding tax regime must be abolished, except for payroll, dividends, interest income from banks, and taxable payments to non-residents. The implementation of agenda of simplification of tax codes and rationalization of tax policy can improve tax compliance. Provided this agenda is also accompanied by substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to collect taxes fairly and justly, using modern technological tools.
The present weak and fragmented structures of the federal and provincial tax agencies have failed to achieve the above objectives. Therefore, the fundamental challenge in 2026 is to provide a simple, but efficient federalized tax system that is manned by a competent, proficient and service-oriented administration, which is presently non-existent.
Tax administrations, both at federal and provincial levels are outdated and outmoded, besides suffering from inefficiencies, lack of trained work force and requisite infrastructure and facilities. The absence of requisite level of digitization, professionalism and human skills is their major malady. Tax reforms certainly do not mean mere amendments in tax laws or making cosmetic changes here and there. There is no effort till to this today to restructure the entire tax administration on modern lines.
The reliance on monetary tightening and banking sector financing of deficits in 2025 suppressed private investment and industrial expansion. The absence of a credible export led growth strategy continues to expose the economy to recurrent balance of payments crisis.
The way forward for the government is export expansion and value addition as core policy priorities to ensure sustainable foreign exchange earnings. It must also strengthen institutional coordination between fiscal monetary and trade authorities to improve policy effectiveness. The economic potential of Pakistan remains substantial, but its realization demands governance reform and disciplined policymaking—achieving a break from crisis driven economic management.
_____________________________________________________________
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions