n recent months, economic headlines about Pakistan have been dominated by the stability vocabulary. The fiscal deficit is shrinking, the current account has swung into surplus, inflation is near historic lows and the rupee has found its footing against the dollar. These are not trivial achievements for a country that has been plagued by cyclical balance-of-payments crises, inflationary shocks and persistent fiscal imbalances.

The international community has taken note. Credit rating agencies like Fitch have upgraded Pakistan’s outlook, and international financial institutions have lauded the government’s “prudent policy stance.” Investors, always on the lookout for macro-stable frontiers, are beginning to take another look at the Pakistani market.

Yet, beneath the surface lies a more complicated and sobering picture. The key question facing Pakistan’s policymakers, business leaders and investors is whether this newfound macro-economic stability is a solid foundation for sustainable investment and business expansion, or merely a temporary mirage masking unresolved structural weaknesses.

The promise of stability

Let’s start with the positives. The government’s efforts to bring down the fiscal deficit, reducing it from 3.7 percent to 2.6 percent of GDP in under a year reflect a disciplined approach to public finances. This has been achieved by cutting back on current spending and boosting revenue, through a surge in non-tax revenues (e.g., profits from the State Bank and petroleum levies). The current account posted a $1.9 billion surplus, reversing years of deficit. Foreign exchange reserves have climbed, lending much-needed confidence to both local and foreign investors.

Inflation, long the bane of Pakistani households and businesses, has fallen dramatically. The consumer price index rose by just 0.3 percent year-on-year in April 2025, down from over 17 percent a year ago. This has allowed the central bank to roll out a more accommodative monetary stance, slashing policy rates and enabling cheaper credit for the private sector.

These developments matter. Lower macro-economic volatility reduces risk premiums, encourages both domestic and foreign investment and provides fiscal space for targeted development spending. Private sector credit has grown significantly, and the Pakistan Stock Exchange, though volatile, has responded positively to signals of stability.

Lack of structural change

However, stabilisation is a necessary but not sufficient condition for long-term growth and competitiveness. Too often, Pakistan’s macro-stabilisation cycles have failed to carry over into broad-based, sustainable development. The current wave, for all its achievements, risks repeating this pattern.

The macro-economic stabilisation is an important achievement for Pakistan. It offers a window of opportunity for reform. In the absence of a decisive pivot toward competitiveness, innovation and institutional strength, the promise of stability risks fading into another mirage.

A closer look at investment flows is telling. Foreign direct investment declined by 2.8 percent year-on-year in the first ten months of FY2025, with inflows remaining heavily concentrated in a few sectors (power, financial services oil and gas) and originating largely from traditional partners like China, the UK and Hong Kong. Portfolio investment has seen persistent outflows, reflecting lingering concerns about political risk, regulatory unpredictability and foreign exchange constraints.

The fiscal tightening, while essential, has not been accompanied by robust public development spending or deep structural reforms. Much of the revenue surge comes from non-tax sources, not from broadening the tax base or improving compliance crucial for sustainable fiscal health. Import compression, a key factor behind the current account surplus, is not a viable long-term strategy if it restricts access to essential capital goods and disrupts industrial supply chains.

Industrial performance

Large-scale manufacturing (LSM) continues to contract, posting a 1.5 percent decline in output during the period under review. While some export-oriented sectors and automobiles have shown growth, the gains are uneven and fragile. Energy bottlenecks, regulatory complexityand weak infrastructure remain formidable barriers to industrial revival.

Moreover, Pakistan’s export basket remains narrow and dominated by low-value-added textiles and commodities. Despite the surge in IT exports, a rare bright spot, the broader ecosystem for innovation, entrepreneurship and technological upgrading is stunted by gaps in human capital and digital infrastructure.

Deep reform

The current stability should be seen as an opportunity for ambitious structural reforms and not as an end in itself. Policy stability must be matched by a predictable tax and regulatory regime, stronger contract enforcement and a coherent industrial strategy that incentivises value addition, technology adoption and export diversification.

Investment in education, skills and infrastructure is essential for translating macro-stability into inclusive and sustainable growth. Financial sector deepening and capital market reforms are needed to draw in private savings into productive enterprise, particularly for SMEs and innovative startups.

The government’s recent steps toward climate finance and digital transformation are promising, but scale and impact remain modest. Pakistan must move beyond ad hoc incentives and piecemeal reforms to deliver a sustained, structural transformation.

Pakistan’s macroeconomic stabilisation is an important achievement. It offers a window of opportunity for reform. In the absence of a decisive pivot toward competitiveness, innovation and institutional strength, the promise of stability risks fading into another mirage. The onus is primarily on policymakers and the private sector to seize this moment and build a truly resilient and dynamic economy.

The writer is research associate at the Sustainable Development Policy Institute