Pakistan’s macroeconomic outlook reflects a paradox. On the surface, recent trends suggest stabilisation, with inflation easing and growth showing modest recovery.
Yet beneath these fragile improvements lie structural weaknesses that hinder long-term progress. Chief among them is the persistently low domestic savings rate, just 7.4 per cent of GDP compared to 27 per cent in South Asia and 41 per cent in East Asia. As SBP Governor Jameel Ahmad notes, this chronic shortfall forces Pakistan to rely on external inflows to fund development.
While such inflows offer temporary relief, they have entrenched the country in a recurring boom-bust cycle. Balance of payment crises, exchange rate volatility and inflation repeatedly erode growth momentum. Each cycle of aid, debt rollovers, and IMF tranches yields brief stability, only to collapse under the impact of shocks or mismanagement. The result is an economy that survives but rarely thrives.
The dismal trends in investment, both private and public, reinforce the bleakness of this scenario. According to the Pakistan Bureau of Statistics, private investment has shrunk from nearly 12 per cent of GDP in 2008-09 to a mere 9.0 per cent in 2024-25, while public investment has fallen from 4.0 per cent to just 2.9 per cent in the same period. In other words, both the state and the private sector are investing less in the country’s productive capacity, resulting in fewer new industries, less infrastructure and declining employment opportunities. This withdrawal of capital formation erodes the very foundation of future growth. The reduced pipeline of projects not only drags down GDP but also sends a discouraging signal to foreign investors who gauge a country’s economic vitality by its own investment trends.
Moody’s Ratings, in its updated Macro Profile, acknowledges Pakistan’s recent improvements in its external position. Yet, it shows a stark reality: the country’s foreign exchange reserves remain perilously low compared to its external debt obligations, keeping Pakistan hostage to the IMF programme and continued foreign support. This fragile equilibrium, precariously maintained by debt rollbacks, remittances and multilateral financing, is not a sustainable strategy. The fact that a small external shock, be it a dip in remittances, a delay in IMF disbursement, or a global commodity price spike, can tip Pakistan back into crisis illustrates just how narrow the margin for error has become.
There have been modest gains in the external sector. Exports to regional countries – Afghanistan, China, Bangladesh, Sri Lanka, Iran, Nepal, Bhutan and the Maldives – rose 5.1 per cent to $357 million in July 2025, from $339 million a year earlier. The increase, driven mainly by shipments to China, Sri Lanka and Bangladesh, signals some resilience. Yet these gains remain small compared to Pakistan’s vast external financing needs and rely on a narrow set of markets and products, leaving trade vulnerable to shocks. Without structural reforms in savings, investment, and industrial performance, such improvements will remain short-lived.
The large-scale manufacturing sector is a glaring example of lost potential. Contributing around 8.0 per cent to GDP, big industry should have been the backbone of Pakistan’s growth, driving exports, generating employment and facilitating technology transfer. Instead, it has been caught in a cycle of stagnation, with growth either low or outright negative. In FY25, the sector posted a negative growth rate of 0.7 per cent, following years of subpar performance where annual growth averaged less than 1.0 per cent.
Import substitution, once touted as a strategy to reduce dependence on external markets, has weakened significantly. Meanwhile, World Bank data show that Pakistan ranks lowest in the region in total investment, with gross fixed capital formation standing at just 12 per cent of GDP, far below Sri Lanka’s 20 per cent and Bangladesh’s impressive 31 per cent. This stark divergence highlights how other countries in the region are laying strong foundations for future growth, while Pakistan continues to lag behind.
To address these challenges, the government has launched a risk-sharing scheme (July 2025–June 2028) to expand financing for agriculture and allied sectors. It aims to encourage banks to extend credit to farmers, focusing on smallholders in Sindh and Punjab, as well as all categories in Khyber Pakhtunkhwa, Balochistan, Azad Jammu and Kashmir and Gilgit-Baltistan. The initiative could alleviate the credit crunch, enhance food security and bolster rural incomes. However, its success depends on transparent implementation, proper targeting, and conversion of credit into productivity gains rather than short-term relief. If managed well, it can reduce poverty and reliance on food imports; if mismanaged, it risks becoming another subsidy-driven fiscal burden.
Equally important is the recognition that the future of Pakistan’s economy will not be decided solely in the boardrooms of big conglomerates or government ministries, but in the workshops, warehouses, and small offices spread across the country. SMEs are the key to building an inclusive and sustainable growth model. SMEs account for the majority of employment in Pakistan and empowering them is essential not only for economic growth but also for social stability. Yet SMEs continue to face formidable barriers, including a lack of access to finance, inadequate infrastructure, limited integration into supply chains and burdensome regulations.
Addressing these bottlenecks could unleash a wave of entrepreneurship and innovation, enabling the economy to diversify and reduce its dependence on volatile external inflows. The government and financial sector must prioritise SME financing, provide training and capacity-building and integrate digital tools to make it easier for small businesses to operate efficiently and competitively.
Ultimately, Pakistan’s challenge is not one of diagnosing its economic malaise, but of finding the political will and institutional capacity to implement solutions. The low savings rate must be addressed through measures that encourage household savings, such as tax incentives, accessible financial products and improved trust in the banking system. Investment must be revived by reducing policy uncertainty, improving the ease of doing business and ensuring a level playing field for domestic and foreign investors. Industrial policy must focus on productivity, technology adoption, and export competitiveness rather than protectionism. Agriculture, while supported by schemes like the new risk-sharing initiative, must be modernised through mechanisation, research and better water management. Most importantly, Pakistan needs to break its addiction to external inflows and embrace a growth model driven by domestic resources, innovation and productivity.
The time for half-measures and temporary fixes has long passed. Pakistan’s economic trajectory will not change unless it makes a deliberate and sustained effort to address its structural weaknesses. The current moment, with inflation easing and growth slowly returning, provides a rare window of opportunity. If the country squanders this opportunity and continues to rely on short-term external support, it risks remaining trapped in a cycle of crisis and recovery, never reaching its full potential. But if it seizes this moment to mobilise domestic savings, revive investment, empower SMEs and modernise industry and agriculture, Pakistan can lay the foundations for durable, inclusive and sustainable growth.
The writer is a trade facilitation expert, working with the federal government of Pakistan.