The problem with Pakistan’s stabilisation reforms is that they come at a high growth sacrifice and the stability they lend to the economy is short-lived.
The government advises the public to tighten their belts, pay higher taxes and not expect a lot out of the government in terms of welfare programmes. The public might be happy to make these sacrifices if they are one-time and result in permanent macroeconomic stability. But that has not been the case.
Pakistan’s economy has moved in cycles, with years of belt-tightening, austerity, and contractionary fiscal policy giving way to periods when policymakers have pursued growth. Both these types of periods have neutralised the gains made by the other, resulting in a kind of zero-sum game. Unless the fundamentals and DNA of the economy are fixed in meaningful ways, we will keep vacillating between cycles of spurious stabilisation and unsustainable growth.
Pakistan’s fiscal managers targeted a deficit of 3.9 per cent, which was expected to yield a primary surplus, defined as the excess of revenues over non-interest expenditure, of 2.4 per cent of GDP. Finance Minister Aurangzeb conveyed the government’s growth expectation for FY2025-26, which at 4.2 per cent is significantly higher than last year’s GDP growth rate of 2.7 per cent. His conversations about the economy continue to miss whether this growth is inclusive and sustainable, or if any significant reforms have been made to alter the fundamental dynamics of the economy, something we will keep referring to as the DNA of the economy.
The finance minister also claimed a remarkable victory on the macroeconomic front – inflation nosedived from a high point of 29 per cent in 2023 and the exchange rate stabilised, enabling the central bank to maintain foreign exchange reserves. But is all this enough and should we feel comfortably placed at where we should be after 25 IMF programmes and after experiencing several short and elongated boom-and-bust cycles?
Aurangzeb’s confident remarks on the country’s key macroeconomic indicators conveyed an impression that the economy is finally taking off after years of economic turbulence characterised by stagflation, which is manifested in low growth and high inflation, depleting dollar reserves and stagnant exports. It appears that, while remittances may have helped steady the ship, exports – the primary source of foreign exchange for most industrialised and developed economies – haven’t risen at the rate at which they could start infusing confidence amongst Pakistan’s policymakers.
Speaking about the budget, left-leaning economist Akbar Zaidi has said that “it’s not a growth budget; in fact, it is an anti-poor, anti-growth budget given the distribution of taxes and income. The government has let us down”. According to Zaidi, “this budget does little beyond meeting IMF conditions; it lacks a vision for long-term economic recovery”.
Akbar Zaidi’s comments do justice to the state of Pakistan’s economic affairs and make a fair evaluation about the claims of the government, which, without concrete measures, are not much more than greenwashing.
Preoccupied with the Fund’s wishes and the conditionalities for securing the next tranche of $1.1 billion, the country’s economic managers are disinclined to do any homework or give a second thought to the fiscal targets and subsidy cuts imposed by the IMF. It can be argued that deliberations within Pakistani quarters are merely tick-box exercises, having little relevance to the policy decisions being made, most of which are handed down to the authorities by the fund.
This is not a new comment on Pakistan’s economy or its dealings with the fund. This is, in fact, as old as it gets. This externally driven approach, characterised by a strong commitment to monetary tightening and contractionary fiscal policy, is detrimental to long-term growth.
This budget appears to further this line of economic thinking, adopting a myopic vision for an economy that requires a carefully curated economic path to drive growth that is coupled with equity and inclusion. No one here is pandering to the ideas of the radical left, but we must not be misled by the commandments of the conservative right that concentrates capital in a few hands.
The days of either this or that are long gone. Countries must now adopt the best aspects of both economic philosophies and choose policies that promote growth while advancing fair and equal opportunities and growth for all. While the IMF has saved Pakistan once too many times, our only disagreement with it is the extent to which it advances policies that disproportionately burden the poor.
The real cost of this budget will have to be borne by the poor. Pakistan’s poverty levels have already been rising. While poverty has not been consistently measured or estimated per a standard methodology, a large part of Pakistan’s population, approximately 40 per cent, according to some statistics, lives below the UN poverty line of $1.25 per day. This budget furthers these inequities by burdening the poor disproportionately, the very people who were already bearing the brunt of rising costs of living and stagnant wages. By prioritising fiscal consolidation over social protection, it only promises to deepen the wounds of the poor.
The budget is also silent on meaningful taxation reforms. Pakistan’s tax-to-GDP ratio at around 9-10 per cent is among the lowest in the region, compared to India’s 22 per cent and Nepal’s 18 per cent, but the marginal tax rate is among the highest. This points to the need for expanding the tax base and spreading the collection evenly amongst the tax sources as opposed to the current configuration that relies disproportionately on sales tax, which has serious implications for poverty and economic inequality.
Agriculture, which contributes nearly 20 per cent to the GDP, accounts for less than 1.0 per cent of Pakistan’s total tax revenue, while the real estate and retail sectors are also not among the top contributors to tax revenue. These are sectors where the Pakistani elite parks funds to evade the eye of the tax collector. They have consistently paid high returns and expanded the entrenchment of a small group of capital owners over the economy. While elite capture is exaggerated and the term has become a catchphrase in Pakistan’s political parlance and is often used to mean many confusing and contradictory things, Pakistan’s elite has indeed profited out of the misery of the country’s lower-income groups that continue to suffer.
Pakistan may not be in the situation that had taken it to the brink of default in the second quarter of FY2022, but the 2025-2026 budget reflects a combination of missed opportunities and misaligned priorities. Not set for immediate failure, Pakistan will however remain trapped in a perpetual cycle of debt, IMF dependency and rising inequality.
The window for corrective action is usually narrow and failure to act now will only deepen economic and social distress. Yet, with the right political will and inclusive policy choices, this moment of crisis can be turned into an opportunity to build a more resilient, fair and self-reliant economy for future generations.
Mehvish Nida is an MPhil student.
Asad Ejaz Butt is an economist based in Boston, USA.
