Arshad Mahmood Awan
While Pakistan’s macroeconomic indicators show signs of improvement, the underlying structural issues that hinder sustainable economic growth remain largely unaddressed. The country’s current account is stable, with a surplus expected in FY25. Inflation has eased to single digits, and food inflation is under 5 percent. Fiscal discipline is visible, with FY24 marking the first primary surplus since FY04 and another one projected for FY25. These are solid achievements and represent important progress for the economy. However, they present only part of the picture and conceal the grim reality facing the country’s economic future.
Despite improvements in these key indicators, GDP growth remains alarmingly low. The World Bank has revised its growth forecast for FY25 to a mere 2.8 percent, marking a dismal three-year rolling growth average of just 1.7 percent — the lowest since 1953. At the same time, private sector credit has fallen to its lowest level since the privatization of banks, dropping from 23 percent of GDP in FY07 to just 10 percent today. These figures cannot be ignored, and they highlight a troubling reality: the macroeconomic improvements are not translating into meaningful, broad-based growth.
The narrative that improving macro indicators signal economic revival is misleading and dangerously simplistic. Pakistan’s economy has long cycled through periods of boom and bust, with temporary surges followed by crises. In FY22, the country was hit by an unprecedented economic crisis driven by high domestic demand and a global commodity super cycle. Today, the factors driving improvements—such as suppressed demand and falling international commodity prices—are cyclical in nature and do not signal a lasting recovery. The fiscal surpluses being achieved are largely due to the overburdening of an already narrow tax base, a policy that brings short-term gains but creates long-term instability.
This is not a broad-based recovery. It is an economy in stabilization at an alarmingly low equilibrium, and such a situation is neither sustainable nor desirable. Job creation is stagnant, and growth is largely absent across key sectors. Manufacturing is contracting, as evidenced by negative growth in large-scale manufacturing (LSM) in the first quarter. Agriculture, too, is facing challenges, with poor cotton yields suggesting another year of underperformance in a sector that has long been central to Pakistan’s economy.
The IMF’s revised medium-term growth projections reflect the structural weaknesses in Pakistan’s economy. Growth forecasts for FY26 have been downgraded from 5 percent to a meager 4.5 percent by FY28. This rate is painfully slow for a country with a population growing rapidly, making it increasingly difficult for the economy to keep pace with demographic demands. The economy’s reliance on cyclical factors, such as stable interest rates and a stable currency, further exposes the fragility of the current recovery. These are not reforms—they are temporary stabilizing measures that do nothing to address the underlying vulnerabilities in the economy.
Where, then, are the reforms that the economy so desperately needs? Lower interest rates and a stable currency driven by cyclical factors are not reforms. They simply represent short-term responses to economic conditions. Similarly, raising energy tariffs to reduce circular debt is not a reform. It is merely passing inefficiencies onto consumers, pushing the burden onto ordinary citizens without addressing the deep-rooted inefficiencies that plague the energy sector. The structural vulnerabilities that led to the 2022 crisis are still very much present, meaning that any future growth spurt is likely to trigger yet another crisis. The cycles of boom and bust are becoming shorter, but the fragility of the system remains intact.
The stock market’s recent rally, with the KSE-30 index hitting record highs, offers another example of how the narrative of economic improvement can be misleading. While the index is currently 10 percent higher than its 2017 peak, this represents a delayed recovery, not transformative economic growth. This surge is benefiting a select group of investors, and while the bull run might continue for another year or two, it does not reflect broader economic progress. It is a rally driven by liquidity rather than productivity, and it provides no guarantees for the long-term health of the economy.
The profits from this rally are concentrated in a few sectors, primarily banking, which has benefited from low-cost deposits and limited lending, and fertilizers, which are buoyed by subsidized gas. Energy companies, for their part, are offsetting inefficiencies by passing the costs onto consumers. These are not sectors that drive innovation or create long-term value for the broader economy. There are no breakthroughs in technology, no unicorn startups in the making, no transformative shifts in industries such as renewable energy or vehicle manufacturing. Without such innovations, the economy lacks the engines of growth that could fuel sustainable progress.
Pakistan’s road to economic revival will require more than just stability in macroeconomic numbers. It will need a fundamental shift in the country’s approach to economic governance, one that prioritizes genuine reforms over temporary fixes. Investment is essential for driving growth, and it must come from both local and foreign sources. Local private conglomerates must take the lead in driving this investment, but they will be hesitant to do so as long as heavy-handed policies—such as coercive negotiations with Independent Power Producers (IPPs)—undermine their confidence in the business environment. For foreign investment to flow into the country, Pakistan must create a favorable environment that incentivizes long-term capital inflows, particularly by establishing the sanctity of contracts and ensuring the rule of law.
The business environment also needs significant reform. Policies that encourage innovation and entrepreneurship must be prioritized, and the government must demonstrate a long-term commitment to creating a stable and attractive environment for investment. Lowering energy costs and ensuring energy security will be critical to fostering a thriving manufacturing sector. Without these structural reforms, Pakistan will remain trapped in a low-growth cycle, unable to break free from the cycles of boom and bust.
The simple truth is that while the macroeconomic indicators might improve, this does not guarantee that ordinary citizens will feel the benefits. Without the necessary reforms to address structural vulnerabilities, the improvements in the numbers will remain hollow. Pakistan’s economic future depends on the government’s ability to implement real reforms—those that go beyond mere stabilizing measures and address the core issues hindering growth. Until then, Pakistan will continue to face the same cycles of stagnation and crisis, and the promise of a brighter economic future will remain out of reach.
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