Post-stabilisation — hard choices Pakistan must make in 2026

2025 was a year of cementing economic stabilisation. Inflation nosedived, as this was the first year since 2018 that inflation remained in single digits throughout the year. SBP foreign exchange reserves are approaching $16 billion, covering two to three months of imports, a level last seen in 2021. These two variables alone are testimony to the stability achieved in 2025.

However, economic growth remained elusive especially for the LSM sector, and stability was primarily achieved through continued tight monetary and fiscal policies. The quest for 2026 is to find a path towards sustainable economic growth, and that requires investment, both domestic and foreign. This remains the missing link.

At the tail end of 2025, there was some good news. One was PIA’s successful privatisation, the first major privatization in almost two decades. The jinx is broken, and it paves the way for further SOE privatisation and deregulation in 2026.

The other positive development is the likely conversion of the UAE’s US$1 billion deposits into equity in the Fauji Foundation. A joint venture fund of US$2 billion (US$1 billion UAE equity and US$1 billion equivalent in shares of Fauji Foundation companies) is expected to be formed. This fund is expected to invest in greenfield projects in energy, mining, and agriculture.

This sets the tone for 2026 to revive investment and instil structural reforms. However, one must remain cautiously optimistic, as these two developments are occurring in silos. PIA privatization was relatively easier, while UAE investment, largely, appears to be a dividend of improved geopolitical conditions in 2025. A more sustainable path has yet to be established.

Pakistan’s core problem remains a lack of coordination and an absence of harmonization. It is as if the right hand is not talking to the left. Fiscal consolidation has been achieved through excessively high taxation on the formal sector, while the FBR is yet to make substantial progress on broadening the tax base. As a result, informality in the economy is rising, including smuggling, while the formal footprint continues to shrink.

Given these conditions, formal sector players are reluctant to invest in manufacturing. The incentive is to become a trader and remain part of the shadow economy. This must change in 2026. The prime minister has hinted at lowering income and sales tax rates, along with abolishing super taxes and surcharges. This is the right approach, but given Pakistan’s IMF programme and precarious fiscal position, it cannot happen without broadening the tax base. This pattern is not new; it has persisted for decades and remains one of the most difficult structural challenges to resolve. If 2026 fails to reverse the said ‘incentive’, the economy risks becoming even more informal, less productive, and increasingly hostile to long-term investment.

Another question is whether the UAE investment represents the first drop of rain. Strictly speaking, it is not a conventional private-sector investment or partnership. Implicit guarantees are involved, and geopolitics is at play. What is needed is to build confidence among local private players to attract foreign partners through joint ventures. This requires structural reforms and long-term political stability.

PIA privatisation is indeed a structural reform, but much more is required, particularly in the energy sector, where SOE losses are far larger and inefficiencies impose significant costs on the broader economy. The challenge lies in resolving the energy crisis. A comprehensive overhaul of the sector is needed, and without DISCO privatization, reliable and affordable energy will remain a mirage. Energy reform is no longer optional; it is a prerequisite for competitiveness, exports, and sustained investment.

The government’s stated policy is export-led growth, yet little has been done to promote exports. Last month, exports fell to a 28-month low, and the outlook, particularly for textiles,

remains bleak due to a weakening US market and a high cost of doing business at home. Competitiveness can be revived by lowering energy and tax costs, simplifying regulation, and restoring policy predictability for businesses. Without decisive domestic reforms, Pakistan’s exporters will continue to lose ground regardless of global market conditions.

These are tough questions that must be internalized. The government needs to think beyond headlines and focus on long-term solutions. Inclusive growth and export expansion require competitiveness, which can only be achieved through fiscal, energy, and governance reforms. However, these will not suffice without long-term political stability, for which the government and the public must be aligned.

There is now a growing realization that these challenges must be confronted, and 2026 must mark a decisive shift towards credible reform. Hope is no longer enough; what is needed is execution of bold policy measures. Pakistan must project credibility through sustained reforms, policy continuity, and transparent communication to regain investor confidence and unlock its economic potential. Also, there is dire need of improving the country’s image through clear and credible messaging at international level. Once that is achieved, investment and growth will follow naturally in an economy with vast, untapped potential.

Copyright Business Recorder, 2026