Why Pakistan’s economy stays trapped

Debt, deficits and dysfunction constitute the three fault lines, which define Pakistan’s looming economic reckoning. Pakistan’s economic crisis has become a story of recurring fault lines: rising public debt, missed tax targets, and sluggish growth. By the end of FY25, public debt had climbed to Rs80.6 trillion – up 13 percent – driven by a yawning fiscal deficit of Rs7.1 trillion and slower-than-expected GDP growth.

The Asian Development Bank projects only 3 percent growth for the year, well below the government’s 4.2 percent target. The IMF, too, has cast doubt on the Federal Board of Revenue’s (FBR’s) reform plan.

This gap between ambition and reality reflects more than weak economics; it underscores decades of governance rot.

Successive governments have pledged to broaden the tax base, only to retreat when powerful lobbies resist. The result is an inequitable system where corporates and the salaried class shoulder the heaviest burden while agriculture, traders, and politically-connected sectors remain largely untouched. To plug the gap, the state borrows more, perpetuating a cycle of debt and dependence.

The key questions are: where do these fault lines lead? And what lies at the root of this malaise?

The economic fallout is already visible. First, rising debt has eroded fiscal sovereignty. With debt servicing consuming the lion’s share of expenditure, little remains for health, education, or infrastructure. Development budgets are routinely sacrificed at the altar of debt repayments.

Second, the credibility gap between government forecasts and multilateral institutions erodes investor confidence. When the ADB (Asian Development Bank) predicts 3 percent growth but Islamabad insists on 4.2 percent, investors read this as denial, not strategy. Policy built on wishful projections cannot inspire capital inflows.

Third, weak revenue collection has trapped Pakistan in a low-growth cycle. Without resources to invest in technology, energy, and human capital, the economy limps along, barely keeping up with population growth.

The political consequences are equally dire. Taxing the compliant while sparing the influential is a policy that undermines public trust. Citizens see a state captured by the elite, unwilling to demand sacrifice from those who can afford it. This breeds resentment, delegitimizes institutions, and fuels populist movements that thrive on disillusionment.

Internationally, debt dependency narrows choices. A country perpetually negotiating bailouts cannot pursue foreign policy from a position of strength. Strategic autonomy is sacrificed at the altar of economic survival.

Pakistan’s economic troubles stem not from lack of technical solutions but from entrenched political economy. Elite capture is central. Landed interests, traders, and industrial lobbies wield enough influence to block reforms. Broadening the tax net remains a slogan, never a reality.

Short-termism in politics compounds the problem. Governments prioritize survival over reform, preferring populist subsidies or loan rollovers to tough structural changes. This “firefighting” mentality prevents long-term planning.

Weak institutions further erode capacity. The FBR has repeatedly failed to modernize and state-owned enterprises continue to bleed billions.

Finally, there is a lack of accountability. Rent-seekers – those who benefit from exemptions, subsidies, or debt write-offs – rarely face consequences. Without accountability, reforms are cosmetic and reversible.

Breaking the cycle requires courage more than creativity.

First, the tax base must be broadened. Agriculture, real estate, and the wholesale-retail sector must contribute. Technology can help through digital records and integration with NADRA, but political will is decisive.

Second, fiscal discipline is non-negotiable. This means cutting non-development expenditures, rationalizing subsidies, and focusing resources on health, education, and technology. Borrowing to cover deficits is no longer sustainable.

Third, institutions must be rebuilt. The FBR must be incentivized to deliver results. State-owned enterprises should be restructured or privatized to stop hemorrhaging public money.

Fourth, a national consensus is essential. Just as the 18th Amendment required political negotiation, so does economic reform. Without bipartisan ownership, every new government will undo its predecessor’s initiatives, leaving the economy in limbo.

Finally, growth engines must shift. Consumption-driven booms are unsustainable. Exports, renewable energy, IT, and human capital must drive growth if Pakistan hopes to reach the 6–7 percent trajectory needed to absorb its workforce.

Copyright Business Recorder, 2025