akistan’s 78-year economic journey is a boom-and-bust cycle. Periodic spurts of growth were often followed by balance-of-payments crises, forcing Pakistan to seek repeated bailouts; 24 IMF programmes in 77 years of independence. Average inflation since 1957 is 8.7 percent, but spikes such as 39 percent in 2023 have continued to erode incomes.

Time and again, exchange-rate volatility and heavy borrowing to finance imports made the economy uncompetitive, leading to frequent external crises. Each crisis forced steep devaluation and austerity that tamed inflation temporarily, only for stimulus and political expediency to set the stage for the next spike.

At the root lie multiple structural imbalances. For instance, since independence, Pakistan has run trade deficits nearly every year—only three fiscal years (1947-1948, 1950-1951 and 1970-1971) saw exports exceed imports. This import-dependence, alongside rapid population growth, meant that any economic growth quickly sucked in foreign goods, draining scarce dollars. Each dollar of deficit is a dollar that must be financed from elsewhere—via remittances, borrowing or drawing down reserves.

When those funds dry up, as seen recently, authorities slam the brakes: the rupee is devalued, imports are rationed and austerity budgets are imposed to “stabilise” the economy. These stopgap measures bring brief relief. The current account showed a surplus most recently after import restrictions were put in place. However, structural import needs (for energy and capital goods) will erode the benefit and current accounts will be in deficit this year. In effect, Pakistan has oscillated between unsustainable consumption fuelled by foreign capital and painful compression to restore equilibrium.

Against this turbulent backdrop, one steady lifeline has been the millions of overseas Pakistanis sending money home. Workers’ remittances have grown from modest sums in the 1980s to a record $38.3 billion in FY2025, the highest ever in Pakistan’s history. These transfers now rival Pakistan’s export earnings, propping up the external account and bolstering household spending. Remittances have effectively masked structural weaknesses: they inject foreign exchange that helps plug the trade gap and shore up the rupee and they boost domestic consumption, from urban real estate to rural welfare. The inflows have become a critical buffer against external shocks, often preventing balance-of-payments crises from biting even harder.

However, these inflows are vulnerable to global trends: a recession in the Gulf or stricter immigration policies (as in case of the UAE) could abruptly reduce the cash sent home. Remittances have indeed been a blessing, but they are no substitute for a resilient domestic economic engine. Pakistan’s challenge is to channel this diaspora dividend into investment, not just consumption, while weaning the economy off the crutches of foreign loans.

Pakistan’s frequent recourse to foreign loans, from the IMF, World Bank and bilateral lenders, has shaped its policy landscape. Each bailout or development loan comes with strings attached. These strings are often necessary initiatives, but we are asked to implement them in the wrong manner or at the wrong time (such as abruptly withdrawing the wheat support price or imposing a tax on imported solar systems to encourage grid electricity).

Over the decades, this has nudged the country’s taxation policy toward the path of least resistance, i.e., indirect taxes on consumers. Under creditor pressure to raise revenues quickly, successive governments repeatedly relied on regressive tax system, where the poor pay heavily through higher prices on essentials, while the wealthy often evade direct taxation.

The reliance on multilateral lenders has also compromised policy sovereignty. While creditors’ conditionality aims to enforce discipline, it often results in maintaining macroeconomic stability at the expense of microeconomic stability. To restore the latter, governments make decisions that destabilise the macroeconomy; and the cycle goes on.

Over the decades, this vicious cycle has eroded the social contract. Taxes go up and utility tariffs soar—yet, public services remain shabby, as much of the incremental revenue is spent to repay loans rather than being invested in schools or hospitals. In FY2025-2026, debt servicing (Rs 8.3 trillion) will consume nearly 47 percent of the federal budget, crowding out spending on development. The public debt stock now stands at around three-quarters of the GDP, well above prudential limits. Each IMF tranche disbursed has kept the country afloat, but at the price of deferring tough choices.

What does the ordinary Pakistani seek from the economy? The aspirations have been remarkably consistent: low inflation, steady employment, quality public services and opportunities for upward mobility. Every Independence Day, editorials echo these basic hopes: that prices of staples will remain within reach; that electricity will be reliable and affordable; that schools and hospitals will improve; and that young people can build a future without leaving the country. Yet, the policy frameworks in place have often failed to deliver on these aspirations. Instead, they have been moulded by a mix of donor conditions, elite influence and governance shortfalls that prioritise short-term fixes or narrow interests over the common citizen’s welfare.

Take inflation: the person on the street desires price stability above all, yet improving macroeconomic stability under the IMF programme inevitably unleashes inflationary bouts that hurt the poor the most. Or consider public services: the average Pakistani pays indirect taxes on almost everything, but sees little improvement in government schools or clinics. This disconnect breeds an understandable cynicism. People crave jobs, yet many industries have stagnated either due to the high cost of energy or an environment, where doing business often depends on having connections.

What paths could Pakistan’s economy take in the short to medium term? Three plausible scenarios emerge for the years ahead, each with very different implications.

First, business as usual: Pakistan manages to maintain the current IMF-supported stabilisation. Inflation stays in single digits and the currency holds steady, thanks to continued strict monetary policy. The recent improvements—a primary budget surplus and recovering reserves continue—preventing any immediate crisis. However, growth remains anaemic, around 3-4 percent. The stability is brittle: it hinges on high remittances, moderate oil prices and unwavering fiscal discipline. Any shock, a bad harvest, a spike in global fuel costs, or domestic political instability, could upset the delicate balance.

In a more optimistic scenario, the country seizes the moment to implement deep structural reforms that set the stage for sustainable growth. This would mean broadening the tax base and cracking down on evasion, so the wealthy pay their share and reliance on indirect taxes eases. Painful as it may be, the government could bring institutional reforms, prune wasteful expenditures and loss-making state enterprises, freeing up resources for the public good. With improved governance and transparency, Pakistan could attract greater foreign investment. Over the next few years, persistent implementation of reforms will gradually raise growth to a higher gear, while keeping inflation moderate. Crucially, policy autonomy will grow as dependence on new foreign loans diminishes. This scenario envisions Pakistan finally bending the curve of its debt trajectory downward—a transition from perpetual firefighting to genuine development. Though ambitious, it is the path to fulfilling ordinary citizens’ aspirations in the long run.

The third scenario is a pessimistic one: a relapse into crisis and debt distress. If reforms falter and external conditions worsen, Pakistan could slip back into a familiar debt trap. Under this trajectory, populist policies or political turmoil might lead to fiscal slippages. The trade deficit could widen dangerously if global commodity prices rise or remittances slow, quickly draining reserves. Lenders, seeing reform reversals, might withhold disbursements. In such a case, the country could face a balance-of-payments meltdown requiring emergency measures. This is a scenario Pakistan must strive to avoid at all costs.

As Pakistan marks its Independence Day, the state of the economy demands sober reflection and urgent course correction. Analysts can only build different scenarios. Our decision-makers will need to choose the one that can help avoid the boom-bust cycle.

The writer heads the Sustainable Development Policy Institute and is a member of the Asian Development Bank Institute’s Advisory Board. His LinkedIn handle is Abidsuleri.