Dr Bilawal Kamran
Pakistan’s economy had finally begun to show signs of life. After more than three years of painful stabilization, growth appeared within reach. The sacrifices demanded of ordinary citizens — rising prices, tighter credit, squeezed incomes — seemed on the verge of yielding something tangible. Then the oil price shock arrived, triggered by the fallout of the US-Iran conflict, and whatever momentum had gathered was swiftly undone. Pakistan finds itself, once again, back where it started.
The State Bank of Pakistan’s decision to raise the policy rate is the clearest signal that inflation has returned as a governing concern. Price pressures are climbing back into double digits in the April-June quarter, erasing the gains of recent months and forcing policymakers into a defensive posture at precisely the moment they should have been pressing forward. The IMF has responded accordingly, revising its growth forecast for FY27 downward from 4.1 percent to 3.5 percent. The current account deficit projection for the same period has been pushed up from 0.4 percent of GDP to 0.9 percent. Inflation estimates have risen from 7.0 percent to 8.4 percent. These are not minor statistical adjustments. They represent a meaningful reversal of trajectory.
The IMF has not relaxed its fiscal targets. The primary fiscal balance for FY27 remains fixed at Rs2.8 trillion, equivalent to 2.0 percent of GDP, while the overall fiscal deficit target stands at Rs4.9 trillion, or 3.5 percent of GDP. The Fund is holding firm and, if anything, pushing for stronger fiscal discipline going forward. The government, meanwhile, has been signalling its desire to lower tax rates in order to generate a sense of economic optimism and attract private investment. That ambition now collides with hard arithmetic. When growth is slipping and commodity-driven expenditures are rising, the space to offer tax relief shrinks rapidly. What looked like a viable political calculation a few months ago now looks premature.
The deeper problem is not the oil shock. External shocks are, by definition, beyond any government’s immediate control. The deeper problem is that the economy keeps arriving at this same crossroads. Growth accelerates modestly, an external disruption strikes, and the entire apparatus pivots back to crisis management. Pakistan appears locked in a low-growth trap, unable to generate the structural momentum needed to absorb shocks and continue expanding. The economy’s equilibrium growth level is not rising with time. If anything, it appears to be quietly falling.
This is largely because structural reform has remained on paper. The finance ministry has focused its energy on the bottom line: meeting revenue targets, controlling the deficit, and delivering the primary surplus demanded by international creditors. These are necessary disciplines. But meeting numerical targets says nothing about the quality of the fiscal operations that produce them. A government can hit its surplus figure through measures that simultaneously damage the productive economy, and Pakistan has done precisely that with troubling consistency.
The failure to broaden the tax base is the most glaring example. Year after year, successive administrations have preferred to intensify the burden on existing taxpayers rather than bring new sectors and incomes into the net. This approach is politically easier in the short term but economically corrosive over time. It discourages compliance, inflates informality, and produces a tax system that extracts maximum revenue from a narrow base while leaving the majority of economic activity untouched. The result is a fiscal architecture that is simultaneously over-demanding and structurally weak.
Nowhere is this weakness more visible than in the continued reliance on the petroleum levy. The federal government has correctly identified the levy as one of the few revenue instruments it does not need to share with the provinces under the National Finance Commission framework. That exemption from revenue sharing makes it politically attractive. However, in periods when global oil prices are already elevated — as they are now following the US-Iran shock — continuing to pile the petroleum levy onto consumers is deeply regressive. It hits lower-income groups hardest, pushes input costs upward across the economy, and feeds directly into the inflation that the State Bank is simultaneously trying to suppress through higher interest rates. The left hand is working against the right.
A more rational approach would be to reduce the petroleum levy during periods of exceptional price pressure and recover the fiscal shortfall through alternative revenue measures or targeted expenditure cuts. But here Pakistan runs into the second structural obstacle: the federation itself. Approximately sixty percent of any new revenue measure outside the levy must be shared with the provinces. Most of the viable expenditure-cutting options similarly rest with provincial governments. The federal government, despite enjoying an unusual degree of political harmony across institutions at the present moment, has found itself with very little room to manoeuvre. Political alignment has not translated into fiscal coordination. Everyone is on the same page politically, but the page contains no bold script.
This is the real story behind the numbers. Pakistan’s fiscal operations are not merely inefficient. They are structurally misaligned in ways that make serious reform genuinely difficult without a deliberate and politically costly restructuring of the federal-provincial fiscal relationship. That restructuring has not been attempted. In its absence, the federal government defaults to what is available: the petroleum levy, regressive taxation, and a stabilization framework that manages crisis without resolving the conditions that create it.
Every external shock that arrives exposes this same absence of buffers. There are no meaningful fiscal reserves to draw upon. The external account remains fragile. The productive base has not been diversified. And so the cycle continues: a period of painful adjustment, a brief window of recovery, a new shock, and a return to stabilization. Pakistan’s economy does not collapse. But it does not truly grow either. It endures, cycle after cycle, on a path that demands enormous sacrifice from its people while delivering structural progress to none of them. Until the underlying architecture is addressed, more of the same awaits.
