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he past year has witnessed a remarkable transformation in Pakistan’s macroeconomic landscape. Fiscal deficits have narrowed, with a historic primary surplus of 3.0 percent of GDP for July-March, the first fiscal surplus in 24 years, and inflation has receded to a six-decade low of 0.3 percent (in April 2025), down from 17.3 percent a year earlier. Foreign exchange reserves have risen $16.64 billion and the Pakistan Stock Exchange index has surged by 50 percent in FY2025, reflecting improved investor confidence.
These achievements have drawn global acknowledgment and led to an upgrade of Pakistan’s sovereign credit rating by Fitch from CCC+ to B- (Stable outlook). The current account has posted an unexpected surplus and remittances have hit historic highs - with $4.1 billion received in March 2025 and total remittances up 31 percent year-on-year.
To a casual observer, these maybe signs that Pakistan’s economic ship is finally on the right course. However, macro-stability, while critical, is not a panacea for the deep-seated bottlenecks stifling investment and industrial development. If anything, the latest data underline just how persistent and dangerous these bottlenecks remain.
FDI and capital formation
Let’s begin with foreign direct investment (FDI). Despite the improved macro backdrop, net FDI amounted to $1.785 billion during July-April, declining by 2.8 percent year-on-year. Most of the inflows were concentrated in sectors with low spillover potential, such as power and services, and originated from a narrow band of countries including China. There is little indication of green-field investment in manufacturing, high-tech or export-oriented industries, even as the investment-to-GDP ratio edged up marginally to 13.8 percent, reflecting persistent underperformance compared to regional peers.
Why does this matter? Because the FDI can drive growth and productivity only if it brings in new technology, management knowhow and linkages to the domestic economy. Pakistan’s FDI profile offers few such spillovers. Instead, it creates dependency on a handful of external partners and exposes the economy to geopolitical and sectoral shocks.
Domestic investment situation is hardly better. Gross fixed capital formation remains sluggish. Helped by the policy rate being slashed to 11 percent in May 2025, down from a peak of 22 percent, private sector credit has increased but financial intermediation remains shallow. Most SMEs and tech entrepreneurs continue to face high collateral requirements and limited access to risk capital, even as the number of active microfinance borrowers has increased to 12.3 million.
Structural rigidity
The situation is even more sobering in large-scale manufacturing (LSM). Despite policy efforts and a recovery in some sub-sectors, LSM output contracted by 1.5 percent during July-March, with persistent structural bottlenecks, high input costs and contractions in key sectors (food, chemicals, iron and steel, electrical equipment) impeding a broad-based recovery. While the automobile sector grew by 40 percent and the textile sector by 2.2 percent, these remain exceptions rather than the rule. The mining and quarrying sector also continued to contract, falling by 3.4 percent in FY2025.
Unless policymakers use this window to bring about structural reforms that address the root causes of industrial stagnation, the current gains will prove fleeting. The choice is stark: persist with business as usual or seize the moment.
The much-promoted IT sector posted a 23.7 percent increase in export receipts ($2.8 billion) and achieved a trade surplus of $2.43 billion. However, it remains a fraction of what’s needed to transform the economy. The lack of advanced manufacturing, poor R&D and weak links between academia and industry further compound the problem.
A practical understanding of these trends suggests a structural trap: Pakistan’s industrial sector is stuck in low-value, low-productivity activities, unable to break into higher value-added manufacturing or capitalise on regional supply chain shifts. Unlike Vietnam or Bangladesh, which have used FDI and industrial policy to move up into higher-value manufacturing, Pakistan remains dependent on primary exports and remittances.
Barriers to entry and growth
The business environment continues to hold back would-be investors and entrepreneurs. Regulatory unpredictability, cumbersome tax procedures and slow contract enforcement deter both domestic and foreign investors. Despite recent reforms, Pakistan continues to lag behind regional competitors on virtually every indicator of ease of doing business, from starting a business to resolving insolvency. The incorporation of 26,104 new companies (July-March FY2025) and growth in microfinance are positive signals, yet capital market volatility remains pronounced. It can be exacerbated by political and geopolitical uncertainty. The stock exchange’s gains in 2025 are impressive but remain vulnerable to shifts in confidence, as institutional depth is still lacking.
For SMEs, access to formal credit and risk capital remains a major bottleneck. Informality is pervasive, stifling innovation and productivity despite some progress in financial inclusion and company formation.
Reform, the way forward
What is the way forward? Not more of the same. Pakistan cannot count on periodic episodes of macro-stabilisation to drive real, sustained growth. Instead, bold structural reforms are required.
These must include deepening financial markets and improving SME access to credit, as well as rationalising and digitalising the tax and regulatory system particularly since the tax base remains narrow and revenue heavily reliant on indirect taxes. Additionally, it is essential to invest in human capital and skills development. 56,000 individuals trained under the Prime Minister’s Youth Skill Development Programme, this year; much more remains to be done.
Adopting a modern industrial policy focused on technology, export diversification, and integration into global value chains is critical. The FDI policy must be recalibrated to attract not just capital, but also knowledge and market access.
In his budget speech the finance minister emphasised reforms in energy sector (IPP renegotiations, NTDC improvements), tariff rationalisation under the National Tariff Policy 2025-30, ongoing SOE restructuring and privatization (PIA, DISCOs, GENCOs), improved debt management and increased allocations for social protection and climate resilience—including Pakistan’s first Carbon Market Policy and green financing. These are important steps whose success will depend on thorough implementation and integration into a coherent strategy for industrial renewal.
Climate finance and digital transformation are promising (e.g., Pakistan’s first Carbon Market Policy launched in 2024, climate budget tagging, and IT&ITeS trade surplus), but need to be woven into the wider economy, not left as niche initiatives. Above all, policy stability, institutional strengthening and political consensus are needed to create a credible, long-term vision for Pakistan’s industrial and investment future.
Pakistan has achieved impressive stabilization. Official data highlights both the extent of progress and the persistence of core bottlenecks. Unless policymakers use this window to bring about structural reforms that address the root causes of industrial stagnation and weak investment, the current gains will prove fleeting. The choice is stark: persist with business as usual or seize the moment for transformation. For Pakistan’s economy and its people, there is only one real path forward.
The writer is a research associate at the Sustainable Development Policy Institute.