Pakistan must earn growth

Pakistan’s fiscal numbers are better than targeted. In the first quarter of the fiscal year, the Federal Board of Revenue (FBR) marginally beat its collection target, with revenues growing 7-8 percent over the same period last year. The primary surplus remains healthy and the fiscal deficit is narrowing. By the yardstick of the IMF programme, Islamabad is doing what it promised.

But meeting a lender’s targets is not the same as reviving an economy. The government has spent considerable political and economic capital restoring macroeconomic stability, and deserves credit for doing so. Yet stabilisation has largely run its course as a policy achievement. Without structural reform, it cannot carry Pakistan onto a durable growth path.

The finance minister often describes this phase as restoring “basic economic hygiene”. That message has landed. The more important question now is what comes after ‘hygiene’.

Behind the headline numbers, the quality of fiscal adjustment remains poor. Tax broadening is conspicuously absent, while the latest attempt to bring retailers and traders into the net appears to be going the way of its predecessors. Governments have been trying to tax this constituency since the early 1990s, with remarkably little success. Traders account for a substantial share of economic activity but contribute a negligible share of tax revenues, leaving formal businesses and salaried workers to carry a disproportionate burden.

The finance minister has recently asked the formal business community, and even the media, to help bring traders into the tax net. Corporate Pakistan would certainly welcome their inclusion. But it is difficult to see what businesses or journalists can do that the state itself cannot.

The prevailing perception is therefore not that the government lacks administrative capacity, but that it lacks political will.

The civilian administration and the military establishment are widely regarded as aligned, the courts have rarely prevented economic enforcement, and organised political opposition is weak. If any government possessed the political space to enforce taxation on traders, realtors and large agricultural landowners, this one does. Its failure to do so increasingly looks like a choice rather than a constraint.

Meanwhile, the squeeze on those already inside the system continues. Formal businesses complain of advance tax demands and delayed refunds as the FBR scrambles to meet collection targets. Effective tax rates are already punitive, yet enforcement remains concentrated on the small group of taxpayers that is visible, documented and easiest to squeeze.

The same asymmetry exists within the trading community. Larger traders are more likely to pay because their transactions, premises and supply chains are harder to conceal, which is one reason Karachi tends to perform better on documentation.

Smaller and medium-sized traders, particularly across Punjab’s commercial centres, remain far more resistant to registration. Successive governments have responded with negotiations, extensions and diluted enforcement, reinforcing the belief that organised non-compliance carries fewer consequences than formalisation.

This inequity is more damaging today because the compliant economy is already carrying unusually heavy burdens. Add high electricity costs, taxation and levies on captive power, regulatory costs and a widening array of withholding taxes, and the formal sector is effectively being asked to subsidise an economy that remains substantially informal. That is not merely unfair taxation. It is an incentive to stay small, remain undocumented or move activity outside the formal economy altogether.

The second grievance is austerity, or rather its conspicuous absence within the state itself. Pakistan recorded its lowest fiscal deficit in two decades in FY26, yet expenditure on running government continued to expand faster than many other categories of spending.

The finance minister regularly complains about bloated layers of administration, but the state remains much better at diagnosing institutional duplication than eliminating it.

Indeed, Pakistan’s instinct when an institution fails is often to create another institution around it. A regulator underperforms, so a facilitator is established. The facilitator struggles, so a council or authority is added. Instead of reforming weak institutions, the state layers new ones on top of them, producing more offices, more mandates and more expenditure without necessarily producing more capacity.

That makes the optics of austerity especially damaging. Households and formal businesses are repeatedly told that difficult adjustments are unavoidable, while federal and provincial governments show relatively little visible restraint themselves. Ministers and political leaders defend frequent foreign travel, large entourages and elaborate road protocols while asking taxpayers to absorb higher rates and fewer subsidies. Even where such expenditure is fiscally small, its political cost is not. Governments cannot demand sacrifice indefinitely while appearing exempt from it.

There is a similar contradiction in the state’s economic philosophy. On one side, the government is accelerating privatisation and promising a larger role for private capital. On the other, the public sector continues to expand through new authorities, companies, funds and interventionist mechanisms. That is hardly the architecture of a state committed to competitive neutrality or a genuinely level playing field.

Investors understand these contradictions better than policymakers sometimes acknowledge. Domestic capital is reluctant to enter the formal economy when formalisation means higher taxation, greater regulatory exposure and little corresponding protection from arbitrary policy changes. Foreign direct investment rarely solves that problem from the outside. Foreign investors generally follow the confidence demonstrated by domestic capital rather than substitute for its absence.

This is why Pakistan’s growth problem can no longer be explained primarily by macroeconomic instability. Stability was necessary, but it was never sufficient. The next phase requires making formal investment economically rational again.

That means broadening the tax base rather than repeatedly raising effective taxation on those already paying. It means taxing traders, property and agricultural incomes credibly and enforcing those taxes rather than endlessly negotiating their implementation. It means reducing the cost and footprint of government, dismantling administrative duplication and demonstrating restraint at the top. And as the base broadens, it means lowering the burden on compliant businesses and households.

Pakistan has secured stability by asking a narrow part of the economy to carry an extraordinary load. That may satisfy an IMF review and buy time. It cannot produce sustained growth.

Growth now has to be earned.

Copyright Business Recorder, 2026