he government is exuberantly celebrating what some of its leaders deem remarkable success of its economic policies. They cite the soaring Pakistan Stock Exchange index and significant reduction in inflation rates as clear indicators of an economic turn-around. The PSX has witnessed a substantial sustained rally.

Economic indicators, such as increased cement and petroleum sales, a substantial drop in interest rates from 23 percent to 15 percent, and improved trade balances have further contributed to the bullish market sentiment. This impressive surge is largely driven by a sharp decline in inflation, which fell to 4.9 percent in November 2024 — the lowest level since 2017 — thereby boosting investor confidence and fostering optimism about further reductions in policy rates.

Moreover, Pakistan is diligently progressing with its International Monetary Fund programme, demonstrating a strong commitment to macroeconomic stability and sustainable growth. The Ministry of Finance has confirmed that the 37-month, $7 billion extended fund facility (EFF) is advancing smoothly, with the government meeting all conditionalities. Finance Minister Muhammad Aurangzeb has emphasised that adhering to the reform agenda is essential for the successful completion of the programme and to ensure that this is Pakistan’s last engagement with the IMF.

Key reform areas include taxation, energy management state-owned enterprises and public finance. All these were highlighted during a recent briefing to the National Assembly’s standing committee on finance. These reforms have not only strengthened investor confidence but also positioned Pakistan favourably on the global investment stage.

Pakistan is increasingly viewed as a favourable destination for foreign investment. Recent engagements with Saudi Arabia, including high-level discussions and the visit of Saudi Investment Minister Khalid bin Abdulaziz Al-Falih, underscore the potential for robust collaboration. As Saudi Arabia’s Vision 2030 drives a transformative agenda, Pakistan’s resilient private sector has a unique opportunity to align with the developments. High-value sectors like solar power, mining and agriculture offer promising avenues for investment, supported by commitments such as the recently signed memorandums of understanding worth $2.8 billion.

However, there is a risk that the government may be overly enthusiastic about these achievements. While the current gains are commendable and provide a basis for optimism, it is essential to recognise that Pakistan’s structural issues remain a significant concern. The country’s total external debt reached $130.85 billion in 2023, equivalent to 352 percent of its total exports and 39 percent of its gross national income (GNI).

Among its creditors, China holds the largest share at 22 percent ($28.79 billion), followed by the World Bank with 18 percent ($23.55 billion) and the Asian Development Bank with 15 percent ($19.63 billion). Debt servicing remains a significant burden, amounting to $14 billion in 2023, which includes $4.33 billion in interest payments and $9.67 billion in principal repayments. This servicing constitutes 43 percent of export earnings and 5 percent of GNI, reflecting the fiscal strain posed by both principal and elevated interest costs.

Furthermore, Pakistan’s structural economic health remains fragile, casting doubt on the nation’s trajectory. Fundamental economic indicators reveal persistent weaknesses that could impede sustainable long-term growth. High external debt, under-investment in critical sectors like health and education, and elevated unemployment rates among the educated populace indicate deep-rooted structural issues that need to be addressed.

Although Pakistan outperforms some regional counterparts in areas such as agricultural productivity — with a value added per worker of 3,105.69 compared to India’s 2,116.18 and Bangladesh’s 1,380.46 — and broader social safety nets reaching 6.93 percent of the population compared to India’s 4.44 percent and Bangladesh’s 0.15 percent, significant deficiencies persist. Pakistan lags in healthcare expenditure (43.09 per capita versus India’s 74 and Bangladesh’s 57.94), has a high learning poverty rate of 79.54 percent compared to India’s 56.07 percent and Bangladesh’s 51.22 percent, and faces higher unemployment among individuals with advanced education, particularly among females (33.86 percent versus around 20 percent in India and Bangladesh).

These structural weaknesses underscore the necessity for continued reforms and strategic investments to ensure that recent economic advancements translate into sustained and inclusive growth. Thus, while there is justified optimism regarding the government’s current successes, a cautious and balanced outlook is warranted given the persistent and multifaceted structural challenges facing Pakistan’s economy.

Despite recent positive developments, several structural issues threaten to impede Pakistan’s ability to convert these short-term gains into sustained long-term growth. Reducing the country’s debt burden is crucial and requires urgent, strategic action. The significant portion of debt allocated to servicing — $14 billion in 2023, consuming 43 percent of export earnings and 5 percent of GNI — severely limits the government’s capacity to invest in essential services and infrastructure. To address this, Pakistan must implement measures that generate revenue without exacerbating the financial hardships of its population.

Key strategies include enforcing tax compliance among business classes and those outside the tax net. This can significantly increase government revenue. Additionally, improving diplomatic relations with neighbouring countries could allow for a reduction in military expenditures. Given Pakistan’s nuclear capabily, the necessity for high defence spending should diminishe. However, the resurgence of terrorism necessitates increased spending on security, posing additional challenges to the national economy.

Political instability is deeply intertwined with Pakistan’s economic condition, adversely affecting job creation and tarnishing the country’s image as a viable destination for long-term investments. Turbulent political environments lead to a decline in foreign investment, as investors seek more stable regions. Domestic investors may also divert their capital to speculative ventures instead of productive investments, which do not contribute to national productivity. Furthermore, political turmoil distracts governments from effective governance, forcing them to focus on short-term political gains rather than long-term economic strategies.

Heightened political polarisation, characterised by personal rivalries and the imprisonment of opposition figures, exacerbates this issue. Frequent changes in government disrupt policy continuity, as successive administrations often reverse some of the policies introduced by their predecessors. This practice undermines economic stability and prevents the implementation of sustained, long-term development plans.

Pakistan’s current industrial policy is suboptimal. It has a heavy reliance on low-end exports with minimal value addition. This lack of innovation hampers competitiveness in the global market, where many countries produce similar products at lower costs. Additionally, excessive dependence on imports for machinery and essential production inputs increases production costs and reduces profit margins. Investments from China-Pakistan Economic Corridor have inadvertently crowded out local industries by making energy expensive, forcing many domestic businesses to shut down or relocate abroad. As a result, local investors, facing high production costs and limited profitability, are redirecting their investments to speculative activities rather than productive ventures. This shift undermines the potential for sustainable economic growth and negates short-term economic gains.

Pakistan’s education system faces significant challenges that undermine its potential to contribute to economic and social development. Despite increased higher education enrolment, especially at the university level, the system emphasises rote learning and high grades over innovation and practical problem-solving skills. This focus results in a workforce that excels in exams but lacks the critical thinking and creative capabilities necessary for driving economic progress.

Consequently, worker productivity remains low. This problem is exacerbated by poor education and a lack of vocational training, particularly among underprivileged populations. With a learning poverty rate of 79.54 percent, Pakistan lags behind its regional peers, limiting its capacity for economic and social advancement. High unemployment rates among educated individuals, especially females (33.86 percent), indicate a mismatch between education outcomes and labor market needs.

Addressing these issues requires comprehensive educational reforms that prioritise innovation, critical thinking and practical skills, alongside expanding vocational training and skill development initiatives to enhance worker productivity and reduce unemployment.

Pakistan’s extensive reliance on social services, such as the Benazir Income Support Programme, may have some unintended consequences. While temporary financial support is necessary for vulnerable populations, prolonged reliance can discourage self-reliance and perpetuate economic dependency. To mitigate this, the government must complement financial aid with comprehensive skill development programs that enable individuals to attain self-sufficiency.

Focusing on developing skills and learning trades is imperative to ensure that social services do not lead to pauperisation. By integrating skill development initiatives with financial support, Pakistan can empower its population to achieve dignified livelihoods and reduce long-term dependency on government aid.

While the government’s celebration of recent economic successes is understandable, it is crucial to acknowledge and address the deep-rooted structural challenges that threaten sustainable growth. Pakistan must undertake comprehensive reforms in debt management, political stability, industrial policy, institutional quality, education and social services to overcome these challenges. Only by addressing these fundamental issues can the nation transform its short-term economic gains into a trajectory of sustained and inclusive growth, securing a prosperous economic future for its citizens.

The writer is a tenured associate professor and head of the Department of Economics, COMSATS University Islamabad, Lahore Campus