EDITORIAL: The World Bank’s latest assessment of Pakistan’s economy is neither overly grim nor overly optimistic — but it does present a clear warning. While growth may be stabilising and inflation moderating, the country’s longstanding failure to collect taxes from its most dynamic economic segments continues to undermine not just revenue generation, but long-term economic resilience.
The headline number — a projected 2.7 percent GDP growth in FY2024-25 — would suggest a slow but positive trajectory out of last year’s stagnation. Lower inflation, better credit access, and a recovery in private sector confidence are rightly flagged as supporting factors. So too is the revival of agricultural productivity, as investment flows back into farming and public policy nudges producers toward higher value-added crops. But this growth story, the Bank stresses, is not financially sustainable unless it is accompanied by serious and long-overdue tax reforms.
Indeed, what matters as much as how fast the economy grows is where that growth is coming from. According to the Bank’s regional development update, Pakistan’s growth over the past decade has been disproportionately driven by under-taxed sectors — most notably agriculture, which remains taxed at far lower rates than other sectors. That imbalance continues today. Meanwhile, services and informal segments also remain largely outside the formal tax net, despite their growing weight in overall GDP.
The consequence is a clear lack of tax buoyancy — tax revenues simply aren’t keeping up with GDP growth. This isn’t due to tax rates being too low, but because large and growing swathes of the economy are effectively exempt from contributing. The government’s pledge to raise tax revenue by 4–5 percentage points of GDP in the coming years sounds serious enough. But that level of ambition would require politically difficult reforms — particularly around personal and corporate income tax enforcement, and the taxation of agricultural and retail incomes — none of which has historically materialised.
What the World Bank makes abundantly clear is that Pakistan’s tax problem is structural. Widespread informality, excessive exemptions, and limited financial development account for a large part of the country’s tax shortfall — not just in personal and corporate income taxes, but also in consumption taxes. In fact, among South Asian economies, Pakistan ranks among those with the most severe revenue gaps relative to potential.
The Bank’s macroeconomic outlook does allow for some optimism. It acknowledges that inflation has come down faster than expected and that private investment appears to be reviving, helped by capital goods imports and improving credit flows. But it also warns of serious external risks — ranging from a global economic slowdown and rising protectionism to geopolitical instability and supply chain shocks — that could stall recovery or widen fiscal imbalances once again.
Even under the best assumptions — IMF backing, successful rollovers, and gradual reforms — growth is expected to hover between 2.7 and 3.4 percent over the next three years. That is simply not fast enough to deliver meaningful poverty reduction, especially in the face of rapid population growth. And without a much more responsive tax system, even modest gains may prove difficult to sustain without further borrowing.
The moment, then, is one of fragile balance. The country is stabilising, but not yet on stable ground. And unless this window is used to enact reforms that have been delayed for far too long, Pakistan will remain stuck in its familiar cycle — of recovery without redistribution, and growth that never pays for itself.
Copyright Business Recorder, 2025
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