Pakistan's production crisis
Pakistan is celebrating its success in avoiding default and achieving economic stabilisation. The government claims that the economy is in a recovery phase and that the country will soon experience rapid growth.
However, independent experts partly agree and partly disagree with these claims. They acknowledge that default has been avoided for now, but remain sceptical about claims of stabilisation and revival. They argue that the fundamental factors required for economic recovery do not support the government's assertions. An analysis of economic indicators supports their position, as significant economic challenges still persist.
The challenges are numerous and complex, including a lower growth rate, higher unemployment, a debt crisis, inflation, unemployment and circular debt. However, the greatest challenge is Pakistan's weak production capacity. Production capacity is a fundamental pillar of any economy. It determines the strength and sustainability of an economy and provides the foundation for developing other sectors. Production capacity also indicates the financial health of the economy. The importance of production capacity can be seen in the examples of the declining superpower, the USA, and the rising superpower, China. China has built its rise on strong production capacity, while the USA is described as facing pressures due to weakening production strength. China continues to consolidate its rise and contributes about 30% to global economic growth.
Unfortunately, Pakistan's production system has deteriorated over the years, and the government has been unable to provide the required attention. The state failed to develop an economic ecosystem capable of supporting production sectors in building capacity. As a result, the production system has many flaws that the government either overlooks or fails to understand. Consequently, industrial and agricultural output, key components of production capacity, have stagnated or declined over time. For example, the rebasing of the economy in 2021 revealed that the industrial share of GDP dropped from 20.9% to 19.5%. Recently, these issues have worsened due to adverse conditions. Despite the government's claims that the economy and production capacity are improving, actual progress remains unsatisfactory. The large-scale manufacturing industry is still facing problems.
Simultaneously, the agriculture sector is facing multifaceted challenges. Rising input prices, low-quality inputs, declining output prices and climate change the major challenges. Poor policy framework and governance have left the sector largely on its own, and farmers have suffered. Farmers are the biggest victims of these problems, and hundreds of thousands have been pushed into poverty. The recent surge in poverty in Punjab and Sindh can largely be attributed to weak agricultural performance.
Weak production capacity has triggered multiple economic problems for Pakistan, including financial instability. A weak production base results in little or no export surplus, which reduces foreign exchange earnings. With limited production capacity, the country cannot meet local demand and must rely on imports to satisfy domestic consumption. Pakistan is even importing agricultural commodities, which is a matter of serious concern for a country traditionally considered an agricultural economy.
This dual problem, lower exports and higher imports due to weak production capacity and ever-increasing consumption, has left the government with no option but to borrow in order to meet domestic needs. This pattern has led to unsustainable borrowing. Consequently, public debt has continued to increase, particularly during the past two decades. Rising debt has also contributed to the depletion of national reserves.
A weak production base, declining foreign reserves and rising loans put pressure on the national currency. Currency depreciation forces the government to print more money to meet the needs of the domestic money market. This creates three major problems: erosion of purchasing power, higher inflation and a painful rise in debt.
Pakistan must recognise that a weak production base, high inflation, depleting foreign reserves and ever-increasing debt greatly impact social development. These economic pressures create social challenges and gradually weaken the social fabric. They lead to sharp divisions in society and intensify income and wealth inequality. Society increasingly divides into the haves and have-nots. Those with power enjoy privileges while others struggle to survive.
Such divisions weaken social cohesion and encourage ethnic, religious, class and group-based politics. People seek refuge in identity groups and defend them without distinguishing between right and wrong. This environment fuels hate politics and can lead to conflict. It also provides exploitative actors with opportunities to manipulate marginalised communities for political gain and create security challenges for the state.
Unfortunately, the combination of weak production capacity, high inflation, declining foreign reserves and rising debt has badly affected social development in Pakistan. Poverty has risen sharply and is estimated at around 45%. Food insecurity is also high at 58.8%. More than 26 million children remain out of school. Inequality has increased significantly over the past few years. These developments have weakened social cohesion, widened the divide between the haves and have-nots, intensified class tensions and deepened ethnic grievances. Anti-state elements and militant groups are exploiting these vulnerabilities.
Political polarisation has also intensified. Supporters of political parties increasingly follow their leaders without question. Political leaders are often portrayed as flawless, and criticism is treated as hostility. As a result, divisions within society continue to deepen and even major institutions of the state are being criticised or attacked by different political groups. The discussion above clearly highlights that weak production capacity is a central factor behind Pakistan's economic, social and security challenges. Therefore, all efforts should focus on reforming and strengthening the production sector. The fragile production base largely stems from an anti-business ecosystem, inefficient bureaucracy, rent-seeking behaviour, exploitative conduct by segments of the ruling elite and a counterproductive governance system. Addressing these structural weaknesses should become an immediate priority.
Unfortunately, instead of addressing these issues to boost production capacity, Pakistan has often relied on short-term and counterproductive measures to stimulate growth. For instance, the country began selling productive assets such as Pakistan Steel Mills. Such decisions further weaken industrial capacity and make economic growth increasingly dependent on consumption. Consumption itself is not inherently problematic if it is supported by strong domestic production. However, in Pakistan's case, consumption largely relies on imports, subsidies and social safety programmes such as the Benazir Income Support Programme (BISP) and the Ehsaas Programme. This approach complicates economic management because subsidies and welfare programmes are frequently financed through borrowing from international or domestic financial institutions.
In recent years, the government attempted to address these challenges by establishing the Special Investment Facilitation Council (SIFC). The council was tasked with accelerating economic growth and resolving structural economic challenges. However, it has struggled to achieve its objectives due to weaknesses in its structure and staffing arrangements. If these institutional issues are addressed, the SIFC could still become an important catalyst for economic reform and investment. In conclusion, Pakistan's economic challenges are complex and deeply rooted in its economic structure and governance system, with serious implications for social stability and national security. Pakistan must avoid shortcuts or piecemeal policy solutions. Instead, it needs a comprehensive policy framework supported by a detailed implementation strategy.
THE WRITER IS A POLITICAL ECONOMIST AND VISITING RESEARCH FELLOW AT HEBEI UNIVERSITY, CHINA