ECONOMY
In theory, Pakistan’s economy needs a healthy middle class to drive growth. But by many accounts, that middle tier is eroding. What was once considered the country’s economic backbone is now showing signs of deep fatigue, squeezed by high inflation, stagnant wages and collapsing purchasing power. And as this middle-class belt shrinks, so does the promise of a stable, prosperous economy.
To understand the crisis, consider the long view. In the 1990s, Pakistan was seen as having the largest proportion of middle-class citizens in South Asia. A combination of industrial expansion, urbanisation and relatively strong purchasing power helped foster the growth of this segment. But three decades later, the trajectory has reversed:
In the 1990s, Pakistan’s middle class was estimated to make up around 35 to 40 per cent of the population, the largest share among its South Asian peers, according to a Wall Street Journal analysis based on World Bank and Asian Development Bank data. By 2017, this share remained around 40 per cent, buoyed by rising urban consumption and the growth of the services sector, again as reported by the Wall Street Journal using data on household asset ownership.
However, by 2019, the middle class had shrunk to roughly 30 per cent of the population -- defined by the World Bank as those earning more than $10 per day -- as cited by the Wall Street Journal. As of 2024, expert estimates based on ADB and World Bank data suggest the middle class now accounts for just 15 to 20 per cent of the population, with the urban middle class particularly squeezed by economic pressures.
These numbers tell a painful truth: Pakistan’s middle class has more than halved in relative terms since its peak. That contraction is not just a statistical footnote—it has far-reaching consequences for the economy and society alike.
One of the biggest pressures on middle-income households has been the crushing burden of inflation. From 2021 to 2023, consumer prices in Pakistan surged by over 75 per cent, peaking at nearly 30 per cent year-on-year in mid-2023. Although inflation has slowed in 2024, the damage has been done: real wages have not kept pace. According to the Pakistan Bureau of Statistics, the urban construction wage index dropped to 84.6 in 2024 (base: 2015–16), while the Consumer Price Index rose to over 260 in the same period, signaling a decline in real wages of roughly 20 per cent over three years.
This erosion of purchasing power is being felt across households. A Karachi-based finance manager recently told reporters, “My salary has not increased... The rent is increasing, school fees are increasing, our electricity bill has doubled,… Our salaries keep us hand to mouth.” She’s far from alone. Civil servants, teachers and even mid-level professionals now report borrowing monthly just to cover essential groceries and medicine.
With incomes squeezed, so too is the economy’s engine: consumption. Pakistan has long been a consumption-driven economy. Household consumption as a share of GDP stood at 85.9 per cent in 2022, one of the highest in the world, compared to a global average of around 63 per cent. But this apparent strength masks a vulnerability: consumption is now largely fueled by borrowing, remittances and informal income, not rising real earnings. And when inflation hits, discretionary spending collapses.
This trend was particularly visible during Eidul Fitr 2024. Traders reported price hikes of 40–50 per cent, but overall retail sales declined by nearly 30 per cent. Middle-class households that once bought multiple new outfits for the holiday opted for just one, or none. Across major cities, from upscale malls in Clifton to traditional bazaars in Lahore and Rawalpindi, shopkeepers reported unsold inventory and lower footfall. Instead of being a seasonal slump, it was a structural demand shock.
Middle-class consumers need affordable housing loans and SMEs require working capital. The financial sector, in coordination with the central bank, should ease collateral requirements and expand credit guarantee schemes
The downturn in consumption is being reflected in the real estate and SME sectors, both of which have historically relied heavily on the urban middle class. Over the past two years, property transactions have plummeted in major cities, down more than 90 per cent in some areas, according to market data. A major reason: high taxes on property transfers and a shortage of affordable housing finance. As housing sales dried up, the construction industry has stalled, dragging down employment for masons, electricians and carpenters.
Small businesses are suffering in parallel. The retail, service and light manufacturing enterprises that typically serve middle-income consumers are now facing falling revenues and tighter cash flows. The credit crunch has only worsened this, with banks reluctant to lend in an uncertain macro environment. The State Bank’s persistently high policy rate -- over 20 per cent for much of 2023–2024 -- has further squeezed small enterprises and households alike.
The consequences of this erosion of the middle class go beyond economics. A robust middle class is the bedrock of stable democracies and social cohesion. Middle-income households invest in education, demand accountability and typically push for moderate, reformist politics.
When this group is weakened, social fragmentation often follows. In Pakistan, this has manifested in rising populist rhetoric, growing distrust in institutions and greater economic polarisation. The wealth gap has widened: while high-net-worth individuals have shifted assets offshore or into hard currencies, middle-income families are trapped in a cycle of inflation, debt and decline.
This is not an irreversible trend, but reversing it will require focused policy action. First, inflation targeting must be paired with pro-growth stimulus for the middle tier. This means targeted subsidies, not across-the-board price controls. Energy subsidies, for instance, could be means-tested and delivered through mobile wallets, rather than blunt fuel price caps that benefit the rich more than the poor.
Second, tax reform must shift toward progressivity. As it stands, Pakistan’s tax system is regressive: indirect taxes like GST and fuel levies hurt the middle class disproportionately. Broadening the tax net and taxing real estate and wealth more effectively would not only raise revenue but also reduce inequality.
Third, credit access must be expanded. Middle-class consumers need affordable housing loans and SMEs require working capital. The financial sector, in coordination with the central bank, should ease collateral requirements and expand credit guarantee schemes. Microfinance institutions have made headway, but commercial banks must step up.
Pakistan’s economic future depends on restoring confidence and capability to its middle-income segment. Without them, growth becomes erratic, investment falters and democratic institutions weaken. Rebuilding the middle class is not only a moral imperative, but also an economic necessity. If we fail to protect the economic dignity of the majority of the 240 million people living in the country, the consequences will be felt not just in balance sheets, but in classrooms, clinics and streets across the country.
The writer is an investment banker based in Riyadh,
Saudi Arabia, with eight years of experience across consulting, corporate finance, strategy and investments. You can connect with him on LinkedIn: https://www.linkedin.com/in/mustafafahim/