akistan’s economy is showing signs of cautious recovery after years of instability, with several key indicators showing gradual improvement. The GDP growth rate for the fiscal year 2025 was 2.68 percent, marking a modest but important rebound from previous predictions. Inflation, which had reached unbearable levels for most citizens, has declined to 4.5 percent, providing much-needed relief to households and businesses across the country.

The positive developments have stemmed from a combination of fiscal tightening, monetary discipline and relative exchange rate stability that the government has worked hard to maintain. Apart from these improvements, Pakistan’s foreign policy has become more dynamic and nuanced. The country has successfully engaged multiple global powers without becoming overly reliant on a single ally.

The strategic partnership with China remains strong, particularly through the China-Pakistan Economic Corridor which continues to be a cornerstone of infrastructure development. At the same time, relations with the United States have stabilised following periods of strain. Ties with Russia have deepened through energy cooperation agreements.

Pakistan has also maintained its traditional alliance with Saudi Arabia while carefully managing its relationship with Iran. This balanced, multi-alignment approach has allowed Pakistan to secure economic concessions, attract investment and gain diplomatic support from various power centres. The ability to benefit from these relationships will be critical for Pakistan’s economic future.

A critical test of Pakistan’s economic management lies in its ability to maintain foreign investor confidence, particularly for large-scale infrastructure projects. The recent dispute between the Power Division and the State Bank of Pakistan over Rs 431 billion in unpaid dues to Chinese power companies highlights the challenges in this regard. The SBP maintains that only $26.5 million are outstanding. However, the Power Division insists that “billions” are stuck in commercial banks due to procedural delays. Such discrepancies in perceptions underline the urgent need for greater transparency and efficiency to maintain credibility as an investment destination.

The Board of Investment has identified six Special Economic Zones as priority destinations for Chinese investment. Land allocations and infrastructure development are already under way at some sites including Rashakai and Dhabeji. To ensure timely execution of projects, the government has proposed implementing service level agreements (SLAs) that bind authorities to clear investor-related bottlenecks within agreed timeframes. These measures represent positive steps, but their effectiveness will depend on consistent implementation and follow-through. Pakistan’s ability to honour its commitments to foreign investors will be closely watched by the international business community and could determine the flow of future investment into the country.

Bureaucratic red tape has long been a major obstacle for both foreign and domestic investors. Recognising this persistent problem, the government has initiated what it calls a “regulatory guillotine” to eliminate unnecessary business hurdles. Business Facilitation Centres aim to integrate federal and provincial departments under a single-window system, potentially reducing approval times for permits and licenses. Early estimates suggest that these reforms could cut the cost of doing business by Rs 250 billion annually and provide a substantial boost to economic activity.

Tax reforms have become a centrepiece of the government’s economic agenda. Prime Minister Shahbaz Sharif is personally pushing for greater documentation and digitisation at the Federal Board of Revenue. The introduction of a simplified Urdu-language tax return form represents a practical step toward broadening the tax net, making compliance easier for small businesses and individual taxpayers. Digital enforcement units and faceless customs assessments are being rolled out to reduce opportunities for corruption and enhance transparency in revenue collection. These technological improvements could significantly strengthen Pakistan’s tax administration if properly implemented and maintained.

Export growth must be stimulated through targeted incentives and support for value-added industries. Foreign direct investment should be encouraged through consistent policies and reliable dispute resolution mechanisms. 

Despite these positive steps, Pakistan’s tax system remains highly reliant on indirect taxes that disproportionately burden lower-income citizens. The narrow tax base continues to constrain revenue generation as major sectors like real estate and wholesale trade largely remain outside the formal tax net. Achieving sustainable revenue growth will require difficult political decisions to bring these untaxed or under-taxed sectors into the system.

Pakistan’s fiscal position has shown some improvement, with the deficit narrowing to 5.4 percent of GDP in FY 2025 from 6.8 percent the previous year. The primary surplus has increased substantially, reaching Rs 2.7 trillion and providing the government with some fiscal breathing room. Provincial governments have contributed to this improvement by posting a surplus of Rs 921 billion, demonstrating better fiscal management at sub-national level. These developments suggest that fiscal consolidation efforts are beginning to yield results, though much work remains to be done to achieve long-term stability.

The debt situation remains a significant challenge. Debt servicing is consuming a substantial portion of government’s revenue. This heavy debt burden leaves limited fiscal space for critical development spending on infrastructure, education and healthcare – investments that are essential for long-term growth. The government must carefully balance necessary austerity measures with strategic investments that can stimulate economic activity and generate future revenue. Finding this balance will require difficult choices and disciplined execution of fiscal policies over an extended period.

One of the most encouraging economic developments has been Pakistan’s current account surplus of $2.1 billion – the first in 14 years. This turnaround has been driven largely by a remarkable 26 percent increase in remittances, which reached $38.3 billion in FY 2025. However, the persistent trade deficit in goods and services remains a vulnerability that could undermine external sector stability. Reducing this deficit will require concerted efforts to boost exports through policies that encourage value addition in key sectors like textiles, IT and agriculture.

The sharp decline in inflation to 4.5 percent represents a major achievement, providing relief to consumers and businesses alike. Maintaining this price stability will require continued vigilance from the SBP in managing a prudent monetary policy. Careful calibration of interest rates will be necessary to prevent inflationary pressures from reemerging while ensuring adequate credit availability to support business growth and investment. Exchange rate stability will also play a crucial role in keeping imported inflation in check, given Pakistan’s dependence on imported energy and other essential commodities.

Looking ahead, Pakistan faces several critical challenges that could affect its economic achievements. Political instability remains a persistent risk that could lead to policy reversals or implementation gaps. External shocks such as oil price spikes or climate-related disasters could derail economic progress. The government must develop robust contingency plans to mitigate these risks while staying focused on long-term structural reforms.

Pakistan must prioritise certain key areas. Strengthening institutions should be at the top of the agenda, ensuring policy continuity and reducing political interference in economic decision-making. Broadening the tax base remains essential for fiscal sustainability, requiring the government to bring untaxed sectors into the formal economy while making the system more equitable.

Export growth must be stimulated through targeted incentives and support for value-added industries. Foreign direct investment should be encouraged through consistent policies and reliable dispute resolution mechanisms. Investments in human capital through education and vocational training will enhance productivity and competitiveness. Finally, social protection programmes must be strengthened to shield vulnerable populations from economic shocks.

The current economic stabilisation provides a foundation for inclusive and equitable growth. By maintaining fiscal discipline, deepening beneficial foreign partnerships and pursuing inclusive economic policies, Pakistan can transition from crisis management to sustainable development. The challenges are significant, but with prudent governance and consistent policy execution, the country can secure a more stable and prosperous future for its citizens. The coming years will be crucial in determining whether Pakistan can break free from its boom-bust economic cycles and achieve lasting progress.

Dr Ikramul Haq, writer and an advocate of the Supreme Court, is an adjunct teacher at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.