Widening inequality a source of social distress

Pakistan's economy continues to face deep-seated socio-economic challenges despite the government's claims of macroeconomic stability and improved fiscal indicators. While recent months have seen relative calm in the exchange rate, improved foreign inflows, and a recovery in the stock market, these gains have not translated into meaningful improvements in the lives of ordinary citizens.

According to the World Bank's report "Reclaiming Momentum Towards Prosperity: Pakistan's Poverty, Equity and Resilience Assessment" (2025), the national poverty rate has risen to over 25.3% in FY 2023-24, with nearly 13 million Pakistanis falling below the poverty line in recent years. The report further highlights that when assessed against the updated international poverty threshold of $4.20 per day, nearly 44.7% of Pakistan's population – almost half the country – lives in poverty.

This stark increase marks a reversal of earlier progress when poverty had declined from 64% in FY 2001-02 to 21.9% in FY 2018-19. The findings emphasise that macroeconomic gains, while important for stabilisation, have failed to reach the most vulnerable groups, resulting in a widening inequality gap and growing social distress.

The World Bank attributes this reversal to a combination of overlapping shocks and structural weaknesses. The Covid-19 pandemic, the global energy and commodity price crisis, and the 2022 floods collectively disrupted livelihoods, destroyed agricultural output, and deepened financial vulnerabilities. At the same time, Pakistan's macroeconomic instability – characterised by high inflation, currency depreciation, and fiscal imbalances – has further eroded real incomes.

The report notes that social safety nets remain underdeveloped and poorly targeted, limiting their ability to shield vulnerable households from inflationary shocks. The erosion of purchasing power has disproportionately affected low-income groups, while the benefits of fiscal and financial stabilisation have largely accrued to higher-income segments and corporate sectors. As a result, Pakistan finds itself in a paradoxical situation: the economy shows signs of recovery on paper, but living conditions for the majority continue to deteriorate.

Inflation remains the single most pressing issue for ordinary citizens. According to the Pakistan Bureau of Statistics (PBS) data, the Consumer Price Inflation (CPI) stood at 31.4% year-on-year in September 2023, up from 27.4% in August of the same year. Although inflation moderated somewhat in FY2024, averaging around 26% for the July-April period, prices of essential goods have remained persistently high.

The Pakistan Economic Survey 2024-25, released by the Ministry of Finance, notes that inflation decelerated to around 11% by July 2024 and fell further to 6.9% in September 2024, the lowest in three years. However, the relief has been limited and uneven, as core food prices – especially wheat flour, cooking oil, pulses, and vegetables – continue to climb.

The State Bank of Pakistan (SBP) in its Inflation Monitor for September 2023 reported sharp increases in food and transportation costs, which together account for nearly half of the consumption basket for most households. For working class families, these persistent price increases translate into reduced purchasing power, nutritional deprivation, and mounting financial stress. Even modest inflation levels can devastate the poor, who spend the majority of their income on food and utilities.

The inflationary burden is not only a short-term inconvenience, but also a structural threat to welfare and growth. When prices rise faster than incomes, real wages fall, leading to decreased consumption, reduced savings, and higher indebtedness. Families cut back on essential health and education expenditures, deepening the intergenerational cycle of poverty.

Inflation also discourages investment in small businesses and agriculture, sectors that employ large portions of Pakistan's workforce. In rural areas, rising input costs – fertilisers, fuel, and feed – have significantly squeezed the margins of small farmers, pushing many towards subsistence or debt. Meanwhile, urban households face higher rents, transportation costs, and energy bills, further straining household budgets. The inflation poverty nexus has thus created a vicious cycle: inflation increases poverty, and rising poverty, in turn, weakens the economy's resilience to future shocks.

The persistence of high inflation and poverty also reflects deeper policy limitations. The State Bank of Pakistan has pursued a tight monetary policy to contain inflation, but this has slowed credit availability and dampened growth in labour-intensive sectors. On the fiscal side, the government's attempts at consolidation – reducing subsidies and raising indirect taxes – have contributed to higher prices and reduced disposable income, particularly for low-income groups. While such measures are often prerequisites under international lending agreements, their social costs are significant.

Without adequate compensation mechanisms, austerity measures risk pushing more households into poverty. The World Bank has repeatedly cautioned that Pakistan's reliance on short-term stabilisation policies without parallel investment in human capital, job creation, and institutional reform will perpetuate economic inequality. Addressing these socio-economic challenges requires a holistic approach that balances stabilisation with inclusion. Social safety nets such as the Benazir Income Support Programme (BISP) must be expanded and indexed to inflation to maintain their real value.

Conditional cash transfers tied to education and health outcomes can prevent poor households from sacrificing long-term welfare for short-term survival. Public investment should prioritise employment generation, particularly in agriculture, construction, and small-scale manufacturing – sectors that absorb low-skilled labour.

Similarly, strengthening rural infrastructure and access to markets can boost productivity and incomes for small farmers. To mitigate inflationary pressures, the government must also tackle supply-side bottlenecks by improving storage, transport, and market competition to prevent artificial price hikes and supply disruptions.

Fiscal reforms are equally critical. The government should broaden the tax base through progressive taxation rather than relying heavily on regressive indirect taxes that disproportionately affect the poor. Revenue gained from subsidy rationalisation and tax reforms should be redirected towards health, education, and social protection.

A robust monitoring system for poverty and inflation indicators, based on frequent household surveys and transparent publication of disaggregated data, would allow for evidence-based policy adjustments. The World Bank recommends developing microsimulation models that can forecast welfare impacts under different policy scenarios, helping policymakers anticipate and mitigate unintended consequences.

The challenge for Pakistan is not only to stabilise its macroeconomic indicators, but to translate that stability into shared prosperity. The recent rise in poverty to over one-fourth of the population is a reminder that growth without inclusion is unsustainable. Inflation, though showing signs of easing, continues to erode the living standards of millions, threatening to undo years of developmental progress.

The government's ability to restore public confidence will depend on its capacity to cushion vulnerable groups, generate decent employment, and ensure fair distribution of economic gains. Sustainable growth must be built on social justice, not merely fiscal arithmetic. Pakistan's current situation calls for policies that place human welfare at the centre of economic recovery – policies that protect the poor, empower workers, and build resilience against future shocks.

The writer is a member of PEC and holds a Master's degree in engineering