Hard work for inclusive growth begins
As expected, Pakistan has reached a staff-level agreement with the International Monetary Fund (IMF), unlocking $1.2 billion under the Extended Fund Facility (EFF) and Resilience & Sustainability Facility (RSF). This inflow will help strengthen foreign exchange reserves, stabilise the currency, and unlock additional funding from partners such as the ADB, World Bank, IDB, AIIB, and bilateral lenders.
It also signals to the global community that structural reforms are finally being implemented in both letter and spirit. While this marks an important shift towards macroeconomic stability, the real challenge now is sustaining growth – not just short-term recovery, but durable, inclusive expansion that can create jobs and raise incomes.
Growth still below potential
Economists expect GDP growth for FY 2025-26 to range between 3% and 3.5%, following the flood-related crop losses. While better than last year, it remains well below the 5-6% growth needed to absorb Pakistan's expanding labour force and lift millions from low-income traps. Over the past two and a half years, currency stability and the beginning of monetary easing have encouraged a tentative revival in industrial activity. Yet much more is required.
With a population of over 240 million growing at 2.5% annually, Pakistan must achieve overall GDP growth of 6-7% to deliver 4-5% per capita growth – the true measure of prosperity. Anything less means stagnation. This is not theoretical. India and Bangladesh have sustained such growth for more than a decade through structural reforms, export diversification, and consistent policy frameworks. Their steady performance demonstrates what disciplined reform can achieve.
Structural imbalances
Pakistan's economic structure itself limits growth. Agriculture still accounts for nearly one-fourth of GDP and employs about 37% of the workforce, yet productivity remains low and climate-vulnerable. The sector must shift from subsistence crops towards value-added agro-industry.
The tax base is another constraint. Pakistan's tax-to-GDP ratio of around 10% is among the lowest in emerging markets. Vast sectors, including agriculture, real estate, and parts of the informal economy, remain outside the net, forcing excessive reliance on indirect taxes. At the same time, corporate tax rates remain high, discouraging investment and expansion. Capital continues to chase unproductive real estate instead of factories and exports, reflecting weak incentives and policy inconsistency. Unless capital allocation changes, productivity will remain stuck.
Investment window
There is, however, a silver lining. Relations with the Western world have improved, encouraging early interest in mining, minerals, and energy transition projects. These ties are vital as Pakistan seeks to diversify investment sources beyond China. China's CPEC 1.0 and 2.0 initiatives delivered critical infrastructure, but most were guaranteed-return projects with limited spillover for local employment – except for a few private joint ventures such as Servis-Long March Tyre.
In contrast, global technology giants – Microsoft, Amazon, Google, Meta – have announced multibillion-dollar projects in Malaysia, Thailand, Indonesia, and India, attracted by predictable regulation, educated labour, and investment security. Pakistan must offer similar conditions if it hopes to attract comparable commitments. For that, we need export- and investment-led growth of at least 5% annually for the next five years. Once the fundamentals are credible – policy consistency, stable currency, rule of law – foreign investors will come for opportunity, not fire-sale bargains.
Policy priorities
To turn stabilisation into sustained growth, Pakistan must pursue a focused set of reforms:
1. Rebalance taxation: Lower corporate tax rates to 20-25% to reward entrepreneurship and reinvestment, while bringing agriculture and real estate into the tax net. Use technology to improve compliance and transparency.
2. Reform state-owned enterprises: Loss-making SOEs drain over Rs500 billion annually from the budget. Swift privatisation – starting with PIA – would restore fiscal space and investor confidence.
3. Improve human capital: Education and skill-building must be national priorities. Pakistan's female labour force participation remains among the world's lowest; enabling women through safety, childcare, and skills programmes can lift GDP by several percentage points.
4. Encourage productive investment: Offer targeted incentives for export-oriented manufacturing, IT, and renewable energy instead of speculative real estate. Cheaper and reliable energy and land access are crucial for industrial competitiveness.
5. Reward job creation: Treat formal sector employment generation as a public good that deserves tax credits or subsidies, recognising entrepreneurs as key nation-builders.
6. Ensure peace and good governance: No economy can grow amid instability. Predictable law enforcement, efficient bureaucracy, and rule of law are indispensable to retain investor confidence.
From stabilisation to transformation
Macroeconomic stabilisation is a necessary floor, not a ceiling. The goal must be transformation – broad-based growth across provinces and sectors. Pakistan's improving ties with the US and multilateral institutions, a booming KSE-100 index, and an encouraging currency stability provide a brief window of optimism. But without structural follow-through, this momentum may prove fleeting. The upcoming PIA privatisation will be the litmus test: success could symbolise Pakistan's break from fiscal haemorrhage and signal to investors that reforms are irreversible. Team Pakistan has achieved stability; now it must deliver prosperity. Sustainable growth, inclusive employment, and institutional reform – not temporary bailouts – will define whether this chapter of economic history marks a turning point or just another pause before the next crisis.
The writer is an independent economic analyst