EDITORIAL: There are mixed feelings about the economic outlook. At one end, the changing geopolitical situation is favouring Pakistan, boosting economic and business confidence.
However, there is another side that is far from rosy. There are clear risks to the revival of economic growth and the maintenance of stability, which the Asian Development Bank (ADB) warns about in its latest report.
The development agency warned that policy slippage could weaken business confidence, lead to a rise in borrowing costs, and increase external finance risks. The ADB forecasts GDP growth of 3 percent in FY26, compared to the government’s target of 4.2 percent (the IMF expects the growth to be lower than the government’s target).
The government spokespersons and ministers (including the finance minister) are attempting to negate the ground reality in the public eye. They are constantly trumping the beat of economic stabilisation in the form of falling inflation, stable currency, primary fiscal balances, and building SBP reserves. More than half of these achievements are cyclical in nature.
After massive inflation and negative growth, the dead cat is bouncing. It is natural for inflation to decline after massive demand destruction amid the end of the global commodity supercycle. There are no reforms to explain these achievements.
The government has had primary fiscal surpluses for the last two years and is expected to have another one this year. No doubt, the surplus last year was one of the highest in history (in terms of GDP). However, it is not due to fiscal austerity in the form of taxation reform or reducing the size of the inefficient government.
The tax-to-GDP ratio only grew by imposing a higher tax burden on the already thinned tax base – the government is attempting to kill the goose laying golden eggs. There is a super tax on corporations. Exporters’ income tax is perhaps the highest amongst the competitors; and the worst treatment for the salaried class, which is not only suppressed by inflation but also by extremely high taxation.
Higher taxation has disincentivized capital formation. No big group is interested in fresh investment — even exporters are moving away from high-value-added garment businesses. One company did exist in apparel exports lately, citing lower returns on investment as the reason. At such high tax rates and exorbitant energy prices, others were expected to make similar announcements.
The working class, especially those with better skills suited for corporate jobs, is moving out of the country, often to relatively lower positions and compromised salaries, as they seek to escape the unjust system of higher taxation. Any reduction in expenditure for development makes the growth prospect bleaker. Without progress in reducing both federal and provincial government size, and without progress in taxing the untaxed, there is no progress. Business as usual continues.
The achievement of higher SBP reserves is due to the central bank buying dollars from the interbank market — on a net basis; it bought USD 8.3 billion from the market in FY25, which has helped SBP reserves rise to USD 14.5 billion. However, that could not happen without choking imports and keeping the growth low.
The country needs investment to finance the current account deficit, which is missing. Last year, out of USD 2.5 billion in net FDI, more than USD 2 billion was retained earnings. The fresh inflows are not even USD 500 million. All that we have are empty promises and hope to leverage geopolitical positions.
Yes, better ties with Saudi Arabia and America may help secure some dollars for temporary relief and may result in a small spurt of growth in the near to medium-term future. However, history suggests that our relationships are transactional, especially with the US. They may provide some direct and indirect support against working on their geostrategic goals in the region.
The dollars in the form of aid, debt, and investment may give us a false impression of transitioning from a low-growth equilibrium to a high-growth one. However, with a growing population and increasing economic size, the injections are becoming larger, and this has an impact on growth that needs to be limited. There is no escape from the economic principles; no one can openly resist them or refuse to obey.
The government should seize the opportunity of a better geopolitical situation to implement tough reforms while sentiment is more favourable. It should bring policies to get investment in production and exports. Otherwise, the next burst is not far away, and unintended consequences of defence pacts will keep on haunting us.
Copyright Business Recorder, 2025
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