Reforms & governance: unlocking Pakistan's growth potential

Pakistan's economic trajectory in late 2025 is defined by a rigorous yet essential framework of discipline imposed by the IMF. Following the approval of the $7 billion Extended Fund Facility (EFF) in September 2024, the country embarked on a 37-month journey of stabilisation that has begun to reshape the fundamental contours of the national economy.

While early indicators such as the reduction of the policy rate to 11% and a projected inflation rate of 4.1% suggest a macroeconomic turnaround, the core of the challenge lies beyond mere fiscal arithmetic. It rests on governance. As the IMF's November 2025 Governance and Corruption Diagnostic Assessment highlights, Pakistan's ability to unlock its true growth potential depends not just on balancing the books, but on dismantling the systemic inefficiencies that have long stifled competition and innovation. The stabilisation measures implemented since late 2024 have yielded undeniable results, though the cost has been substantial. According to the State Bank of Pakistan (SBP) Annual Report released in October 2025, the country's foreign exchange reserves have stabilised around $18.3 billion, providing a much-needed buffer against external shocks and currency volatility.

The SBP's aggressive monetary tightening, followed by a calculated easing cycle starting in early 2025, successfully anchored inflation expectations, bringing the Consumer Price Index (CPI) down to single digits for the first time in years. However, this stability has come at a steep cost to industrial output and employment. Real GDP growth is projected at a modest 2.7%, a figure that is insufficient to absorb the country's growing youth labour force. The constraint is clear: Pakistan cannot stimulate growth through traditional fiscal expansion without reigniting the twin deficits — fiscal and current account — that have historically plagued its economy. Instead, growth must now come from structural efficiency and export orientation.

A pivotal element of the current economic strategy is the implementation of the IMF's 15-point governance reform plan. Unlike previous programmes that focused heavily on quantitative performance criteria, the current EFF explicitly links disbursements to qualitative governance reforms. The Governance and Corruption Diagnostic Assessment paints a stark picture of systemic failures in accountability and identifies critical areas for immediate rectification. Key among these is the restructuring of the Public Procurement Regulatory Authority (PPRA). For decades, state-owned enterprises (SOEs) have enjoyed preferential treatment in government contracts, effectively crowding out private competitors and inflating public costs.

The new framework mandates a level playing field, requiring that SOEs compete on equal terms with the private sector. This is not merely a procedural change; it is a fundamental shift in the state-led growth model intended to foster a more competitive market environment. Furthermore, the report demands unprecedented transparency from the Special Investment Facilitation Council (SIFC). While the SIFC has been pivotal in fast-tracking investments in agriculture, IT and mining, ensuring its operations aligned with standard regulatory frameworks is crucial for long-term investor confidence. The IMF's requirement for the publication of an annual report detailing all investments, concessions, and incentives is a necessary step to ensure that the drive for foreign direct investment (FDI) does not compromise long-term fiscal sustainability or create new distortions in the market. This transparency is vital for maintaining the trust of multilateral partners and ensuring that economic benefits are broadly distributed rather than concentrated in specific sectors.

The FBR has shown signs of improvement, though structural weaknesses persist. Data from the Revenue Division Year Book 2024-25 indicates a significant breakthrough: for the first time in over a decade, Pakistan achieved a tax-to-GDP ratio of 10.3%, collecting Rs11.744 trillion in FY25. This represents a 26.3% year-by-year growth in revenue, suggesting that administrative measures, including the digitalisation of tax returns and the mandatory integration of data across financial sectors, are beginning to yield results. However, a deeper analysis of this revenue reveals continued reliance on indirect taxation, which disproportionately burdens the lower and middle classes. The 26.4% growth in sales tax collection stands in contrast to the slower pace of bringing high-net-worth individuals into the direct tax net.

To address this imbalance, the Ministry of Finance is mandated to publish a "tax simplification strategy" by May 2026. The objective is to reduce the complexity that facilitates evasion while expanding the tax base to include chronically undertaxed sectors such as retail, real estate, and large-scale agriculture.

The recent controversy regarding the Active Taxpayers List (ATL) for 2025 further highlights the friction inherent in these reforms. The FBR's move to automatically extend filing deadlines to avoid mass disqualifications shows a pragmatic approach, but the underlying issue remains: compliance costs are too high, and trust in the tax machinery is too low. Digitalisation is the tool, but rebuilding the social contract between the taxpayer and the state is the mission. Perhaps the most critical component of Pakistan's economic malaise remains the power sector's circular debt. In September 2025, the government announced a historic Rs1.225 trillion ($4.29 billion) settlement plan, coordinated with 18 commercial banks. This deal, which involves restructuring existing loans and securing fresh financing at reduced rates, provides a temporary breather for the liquidity-starved sector.

However, financial engineering alone cannot solve a structural problem. Nepra explicitly warns in its State of Industry Report that the sector is plagued by an idle capacity crisis, with average utilisation standing at just 34%. Consumers are effectively paying capacity charges for electricity that is never generated, a burden that renders Pakistani exports uncompetitive regionally.

The respite provided by the debt restructuring must be utilised to execute painful but necessary reforms, specifically grid modernisation to reduce technical line losses and the privatisation of distribution companies (DISCOs).

Moving beyond the management-contract model to actual divestment of inefficient DISCOs is essential to stop the hemorrhage of public funds. Without these structural fixes, the circular debt will simply re-accumulate, threatening to derail the entire IMF programme by FY27. The government's commitment to these reforms is being tested daily by the political cost of rising tariffs, yet the alternative — a return to unmanaged load-shedding and fiscal insolvency — is far worse.

The bleeding of fiscal resources by loss-making SOEs has been a primary driver of Pakistan's fiscal deficit, and the privatisation of Pakistan International Airlines (PIA) has emerged as the litmus test for the government's commitment to reform. With accumulated losses exceeding $2.5 billion, the national carrier is financially unsustainable.

As of November 2025, the prime minister has directed authorities to swiftly and transparently conclude the bidding process for 75% of PIA's shares. The success of this transaction will send a powerful signal to global markets. A transparent sale to a competent operator would not only stop the fiscal bleeding but also demonstrate that Pakistan is open for business.

Conversely, another delay or a murky transaction would severely damage investor confidence and potentially violate the structural benchmarks set by the IMF. Pakistan currently stands on a "narrow path" to stability. The opportunities are tangible: a stabilised rupee, a downward trajectory for inflation and a clear roadmap for governance reform. The revival of the Reko Diq copper and gold mining project, projected to generate $74 billion in free cash flow over its lifespan, and the continued development of Gwadar offer medium-term hope for foreign exchange generation. However, the risks are equally potent. "Reform fatigue" among the public, driven by high energy costs and taxation, poses a significant risk to political stability. For policymakers, the year 2026 will be decisive. The focus must shift from stabilisation to transformation, requiring the political will to enforce the governance plan, the technical capacity to execute energy reforms, and the wisdom to protect the most vulnerable. Only by adhering to this rigorous course can Pakistan transition from a cycle of crisis management to an era of sustainable, inclusive growth.

THE WRITER IS A MEMBER OF PEC AND HAS A MASTER'S IN ENGINEERING