Zafar Iqbal
Pakistan’s economy appears trapped in a cycle it cannot escape. Governments change, coalitions shift, slogans evolve — but the underlying economic model remains largely untouched. What we are witnessing is not a strategy for growth but a struggle over limited resources, a scramble to secure a share of a shrinking pie. Meanwhile, the deeper foundations of social and economic mobility are neglected. Inequality widens, poverty deepens, and the state’s fiscal health continues to erode. The country does not merely need reforms; it needs a structural reset.
Around the world, countries that have successfully lifted millions out of poverty have done so through sustained economic expansion driven by exports. Within a single generation, nations in East Asia transformed themselves by focusing on competitiveness, manufacturing, and integration into global markets. Pakistan, too, often speaks of export-led growth. The rhetoric is familiar. But the reality on the ground tells a different story.
Fiscal authority today lies largely with the provinces, particularly after the 18th Constitutional Amendment. Yet instead of using that authority to build efficient tax systems and invest in long-term development, larger provinces are engaged in heavy spending with limited attention to structural reform. Political parties governing at the provincial level show little appetite for fiscal discipline or meaningful decentralisation. The third tier of government — local bodies — remains weak, underfunded, or politically sidelined. Without empowered municipalities, cities cannot become engines of growth.
The imbalance in taxation is striking. Formal sectors — especially salaried individuals and documented businesses — shoulder a disproportionate burden. Meanwhile, vast segments of the economy remain undertaxed. Property taxation is negligible compared to regional peers. In Punjab, for example, property-related tax collection reportedly lags far behind that of individual major Indian cities such as Mumbai. Agricultural income tax remains largely symbolic despite agriculture’s significant contribution to GDP. Sales tax collection on services is also below potential.
Manufacturing, which should be the backbone of export growth, faces the highest taxation and some of the region’s most expensive energy costs. Chronic inefficiencies in the power sector have led to circular debt and high tariffs, undermining industrial competitiveness. Exporters struggle to compete internationally when input costs are structurally inflated. The result is stagnant export growth and declining global market share.
At the federal level, fiscal pressures are intense. Debt servicing consumes a major portion of revenues. Without meaningful burden-sharing from provinces, the centre’s financial position grows increasingly fragile. A broader tax base is essential — one that includes agriculture, retail, real estate, and services in a fair and transparent manner. Municipal governments should be empowered to collect local taxes and reinvest them into urban infrastructure, sanitation, transport, and housing. Liveable cities attract investment; dysfunctional ones repel it.
The energy sector requires urgent rationalisation. The federal government’s footprint in generation and distribution must shrink. Provinces should share responsibility for managing liabilities. Structural reforms — including transparent pricing mechanisms and private sector participation — are critical to restoring financial viability. Similarly, state-owned enterprises continue to drain public resources. Efforts to restructure or privatise entities such as Pakistan International Airlines highlight both the political resistance and the urgency of reform. Without cleaning up these balance sheets, fiscal consolidation will remain elusive.
Provincial fiscal prudence is equally important. Public sector hiring sprees, often politically motivated, add long-term pension and salary liabilities. Expanding government payrolls may offer short-term political gain, but they crowd out development spending and deepen fiscal strain. Rationalisation, digitisation, and performance-based governance must replace patronage-based expansion.
Even if fiscal and structural reforms are initiated, another fundamental challenge looms: policy inconsistency. Investors — domestic and foreign — require predictability. Pakistan’s investment rate is at a multi-decade low, and foreign direct investment has slowed dramatically. Each political transition tends to bring sweeping policy reversals. Agreements are revisited, incentives are withdrawn, and regulatory frameworks are reshaped. The signal sent to markets is one of uncertainty.
Economic continuity must transcend political rivalry. Too often, incoming administrations prioritise weakening political opponents or revising previous governments’ initiatives rather than preserving economic momentum. Political suppression may create the appearance of stability, but it does not inspire investor confidence. Sustainable growth requires institutional maturity, rule of law, and inclusive politics.
Another structural weakness lies in over-reliance on workers’ remittances. Overseas Pakistanis play a vital role in supporting the economy, and their contributions deserve recognition. However, remittances largely finance household consumption and real estate investment rather than productive industrial expansion. While these inflows help manage the current account deficit in the short term, they can create a false sense of external stability. Consumption-driven growth often fuels imports, perpetuating trade imbalances instead of correcting them.
Export diversification is essential. Pakistan’s export basket remains narrow, heavily reliant on low-value textiles. Moving up the value chain requires investment in technology, skills development, and infrastructure. Education reform is central to this transformation. Public service delivery — particularly in primary and secondary education — must improve dramatically. Without a skilled workforce, export-led growth cannot materialise. Governance reform in education, health, and local administration is not separate from economic reform; it is foundational to it.
Credibility is perhaps the scarcest economic asset today. Government statements about reform must be matched by visible, consistent action. Markets respond not to speeches but to signals embedded in policy frameworks, budgets, and institutional behaviour. Transparent decision-making, data-driven planning, and protection of contracts can gradually rebuild trust.
The path forward is not mysterious. Broaden the tax base fairly. Rationalise public spending. Reform the energy sector. Empower municipalities. Clean up or privatise loss-making state enterprises. Ensure policy continuity. Promote export-oriented industries. Invest in human capital. Encourage political inclusiveness. None of these steps are revolutionary; many have been recommended for decades. What has been missing is sustained implementation.
Pakistan stands at a crossroads. Continuing the current cycle — borrowing to consume, taxing the narrow formal sector, postponing reform, and relying on remittances — will only prolong stagnation. A structural reset demands political courage and collective responsibility across federal and provincial lines.
Economic revival is ultimately about opportunity. When citizens see pathways for upward mobility — through jobs, education, entrepreneurship — social stability follows. When opportunities shrink, frustration grows. The choice is clear: manage decline through temporary fixes, or build a durable foundation for growth. Without addressing the fundamentals, the cycle will continue. With reform, Pakistan can still chart a different course.
