Pakistan’s recent stabilisation has bought time. Reserves have improved. Remittance flows remain resilient. But stabilisation without transformation merely postpones the next crisis. The underlying growth model has failed.
The coming budget is therefore not merely a fiscal document. It is a test of the will and intention of the current government to reform Pakistan’s political economy.
Merchandise exports fell by more than 6 percent in the first ten months of FY2026, while the trade deficit widened by roughly 20 percent to around $32 billion. Goods exports stood at approximately $25.8 billion and services exports near $8.3 billion in Jul–Apr FY2026, placing annualised total exports of goods and services at roughly $41 billion—far below the repeatedly advertised ambition of $100 billion exports by 2030. Inflation climbed back into double digits at 10.9 percent in April 2026. Real per capita incomes remain below levels reached more than a decade ago.
As the federal budget for FY2026–27 approaches, Pakistan stands at a perilous crossroads. Pakistan’s average real GDP per capita growth has fallen in the current cycle to its lowest level since the 1960s—and lower than any decade since the country’s breakup in 1971. Preliminary estimates for FY2025–26 indicate subdued real GDP growth of around 3.7 per cent, with per capita growth remaining close to extremely low levels once population expansion is taken into account.
This follows a broader pattern in which growth between 2020 and 2024 averaged just 0.4 percent annually, compared with 2.6 percent in the 1970s (excluding 1971–72), 4.1 percent in the 1960s, and between roughly 1–3.5 percent in subsequent decades depending on the cycle. In per capita terms, the economy is now barely expanding in real terms, signalling structural stagnation rather than cyclical slowdown.
A young and rapidly expanding labour force is being absorbed into an economy that is not generating sufficient productive employment. At the same time, workers’ remittances remain the key external stabiliser, rising to around $33.8–34 billion in the first ten months of FY2026 according to State Bank data, but momentum is no longer uniformly accelerating: monthly inflows have shown volatility and a slight moderation in sequential growth after earlier double-digit expansion, even as they remain historically strong.
This resilience is increasingly important in a context where geopolitical tensions in the Gulf—particularly the Iran-related escalation and its impact on energy prices, shipping risk premia, and labour market uncertainty—pose a non-trivial downside risk to inflows from key corridors such as Saudi Arabia and the United Arab Emirates.
Pakistan is also confronting a severe demographic and employment imbalance: a rapidly expanding youth cohort is entering the labour force in an economy that is not generating sufficient productive jobs. With nearly 2.5 to 3 million young people joining the labour market every year, Pakistan needs to create roughly 25–30 million jobs over the next decade simply to prevent rising unemployment, outward migration, and social stress. As World Bank President Ajay Banga warned during his visit, this is a “generational challenge” where job creation is the North Star; failure to align growth with employment risks turning the youth bulge into instability rather than a dividend.
Meanwhile, the state’s fiscal structure is becoming increasingly unbalanced. In the current federal budget of Rs17.57 trillion, nearly Rs8.2 trillion—almost 47 percent—is consumed by debt servicing alone. Defence spending exceeds Rs2.5 trillion. Pensions have crossed Rs1 trillion. Current expenditure stands above Rs16 trillion, while the federal Public Sector Development Programme is only around Rs1 trillion. Even after record taxation, the state continues borrowing heavily simply to sustain itself. Pakistan is no longer primarily financing development; it is financing accumulated obligations from past failures.
This is not economic recovery. It is stagnation dressed up as stabilisation.
The deeper crisis is not simply macroeconomic. It is structural and political. Pakistan’s budget-making process has become captive to a narrow coalition of vested interests that profit from extraction, exemptions, speculation, and state patronage, while the productive economy is squeezed harder each year. At the same time, public discourse is repeatedly populated by narratives of future windfalls—from untapped mineral wealth to transformative trade corridors—that are presented as imminent game-changers.
Yet the underlying realities of geology, geopolitics, investment horizons, infrastructure deficits, and governance constraints suggest that any material gains from these areas, even under optimistic assumptions, are likely to be incremental and slow to materialise over the next decade, rather than delivering the step-change in growth often implied in official narratives.
Every budget claims to broaden the tax base. Yet the same pattern repeats itself: organised lobbies negotiate protections before the finance bill is even unveiled, politically connected sectors preserve exemptions, and the burden falls again on salaried households, documented businesses, exporters, consumers, and urban industry. Retail trade remains undertaxed. Agricultural income taxation remains largely symbolic. Real estate continues functioning as a preferred parking space for untaxed wealth. Meanwhile, the formal economy faces relentless withholding taxes, advance taxes, petroleum levies, electricity surcharges, customs duties, and inflationary indirect taxation.
This is not accidental dysfunction. It is the operating model of the Pakistani state.
The result is one of the lowest tax-to-GDP ratios among major emerging economies, alongside one of the harshest effective burdens on documented economic activity. For example, the Federal Board of Revenue reported Rs 605.6 billion in income tax collection from the salaried class in FY2024–25, up from Rs 391.4 billion the year before, reflecting sharper slab rates and a larger deduction burden on employees.
Productive firms are penalised for visibility, while informality and rent-seeking are rewarded. Exporters finance the state through delayed refunds and advance taxation. Manufacturers absorb some of the highest energy tariffs in Asia. Consumers face rising fuel and electricity prices to compensate for inefficiencies elsewhere. Banks increasingly prefer financing the sovereign through risk-free government paper rather than lending to productive industry, as fiscal dominance distorts incentives across the financial system.
Under the National Finance Commission framework, provinces receive the majority share of divisible tax revenues, yet continue to underperform in agricultural taxation, urban property taxation, and service-sector documentation
Yet Pakistan’s fiscal crisis is not only about who pays taxes. It is equally about where the money goes.
What makes the current moment particularly dangerous is that Pakistan is running out of fiscal illusions. The state can no longer simultaneously finance bloated current expenditure, loss-making public enterprises, untargeted subsidies, politically motivated mega projects, elite privileges, rising pension liabilities, and mounting debt servicing—while claiming there is no fiscal space for export competitiveness, urban infrastructure, or human capital.
This is the real budget debate: not accounting, but the allocation of national power.
The imbalance is now extreme. Current expenditure absorbs more than 92 percent of federal spending, leaving limited space for genuine development investment. Even within development spending, politically attractive infrastructure continues dominating allocations over urban productivity, export logistics, water systems, municipal capacity, industrial upgrading, and vocational training. Pakistan increasingly resembles a state borrowing to preserve an unreformed expenditure structure rather than investing for future growth.
Each year, governments announce ambitious “development” programmes dominated by highways, flyovers, prestige corridors, subsidised schemes, and politically marketable infrastructure—while underinvesting in the less visible foundations of long-term productivity: metropolitan transport, logistics systems, water infrastructure, municipal governance, vocational training, digital tax enforcement, industrial technology upgrading, and worker housing.
The obsession with mega projects reflects Pakistan’s deeper political economy. Large infrastructure schemes generate procurement contracts, land speculation, political branding, and patronage opportunities. They centralise discretion and reward connected construction, real estate, and import-dependent lobbies. Institutional reform, by contrast, threatens entrenched interests while producing fewer ribbon-cutting ceremonies.
But Pakistan does not suffer from a shortage of concrete. It suffers from a shortage of economically functional cities.
As debt servicing, defence, pensions, and subsidies consume the overwhelming majority of federal revenues, Pakistan’s fiscal system is steadily losing developmental capacity. The state increasingly exists to finance interest payments, preserve administrative structures, and sustain political equilibrium rather than expand productivity.
That is why the budget debate has become so distorted: every additional rupee for reform threatens entrenched expenditure coalitions already competing for shrinking fiscal space.
This misallocation is now economically unsustainable. Pakistan no longer has fiscal space to finance politically attractive but low-productivity spending. Every rupee tied up in inefficient state-owned enterprises, discretionary grants, poorly targeted subsidies, and politically driven Public Sector Development Programme schemes is a rupee unavailable for export competitiveness, technological upgrading, and urban productivity.
The next budget must therefore impose a strict productivity filter on all major public spending. Every Public Sector Development Programme project should be subjected to three tests: Does it raise exports? Does it improve labour and urban productivity? Does it crowd in private investment? Projects failing these tests should be delayed or cancelled regardless of political symbolism.
The Public Sector Development Programme itself must shift toward export-linked industrial zones, metropolitan transport systems, logistics hubs, digital enforcement capacity, climate resilience, industrial technology upgrading, and affordable worker housing near manufacturing clusters.
The budget should also freeze non-essential federal expansion, cap administrative current expenditure in real terms, and publish transparent restructuring timelines for major loss-making state-owned enterprises. Pakistan’s fiscal crisis is no longer simply a revenue problem. It is increasingly a state-efficiency problem.
The same realism must apply to the energy sector. Circular debt has evolved from a power-sector issue into a mechanism of macroeconomic strangulation. Capacity payments, transmission losses, theft, governance failures, and delayed reforms are repeatedly socialised through higher tariffs imposed on paying consumers and exporters. No serious export economy can sustain globally uncompetitive energy pricing while expecting manufacturing to flourish.
The budget must therefore include a credible, time-bound restructuring plan involving renegotiation of expensive contracts where feasible, accelerated grid modernisation, targeted subsidy rationalisation, privatisation or restructuring of failing distribution companies, and protection for low-income households rather than blanket inefficiency subsidies.
The provinces’ role in this imbalance can no longer be ignored. Under the National Finance Commission framework, provinces receive the majority share of divisible tax revenues, yet continue to underperform in agricultural taxation, urban property taxation, and service-sector documentation. The federation bears the political cost of aggressive revenue extraction while provinces preserve local patronage arrangements and low-tax political bargains.
The collapse of export competitiveness is therefore not an isolated trade problem. It is the direct consequence of a fiscal state that prioritises extraction and patronage over productivity.
Pakistan continues to speak the language of export-led growth while maintaining an anti-export economic structure. High tariffs protect inefficient domestic sectors while raising costs for downstream exporters. Exchange-rate instability destroys investment planning. Refund delays trap liquidity. Energy pricing converts governance failures into industrial penalties. Ports, customs systems, logistics chains, and regulatory frameworks remain cumbersome and unpredictable.
Without radical restructuring of both taxation and public expenditure, Pakistan will remain trapped in cycles of stabilisation without growth—forever postponing crisis rather than escaping it
Textiles still dominate exports but face mounting pressure from regional competitors with cheaper energy, more coherent industrial policies, and better logistics ecosystems, not to mention overvalued currency conditions and emerging challenges due to the growing use of artificial intelligence by competitor countries.
Services exports—particularly information technology and freelancing—have shown impressive momentum but remain far below potential due to weak infrastructure (for example, around 2 percent penetration of fixed broadband), financing constraints, skills gaps, and regulatory friction. High-potential sectors such as pharmaceuticals, engineering goods, technology services, and food processing remain constrained by bottlenecks.
Export growth will not emerge from temporary subsidies or annual incentive packages alone. It requires a fundamental shift in incentives so that productive investment consistently generates higher returns than speculation, protected monopolies, or arbitrage.
The budget should therefore introduce a stable, multi-year export competitiveness framework instead of annually changing schemes that destroy planning certainty. Incentives should be tied to performance: new markets entered, higher value-added exports, technology adoption, female employment generation, and small and medium enterprise integration into global supply chains. Exporters should receive automatic and time-bound refund processing. Advance tax distortions that trap working capital should be phased down. Corporate taxation for export-oriented investment should become regionally competitive and predictable over a five-year horizon.
At the same time, Pakistan must stop confusing real estate appreciation with economic development. Excessive national savings continue flowing into speculative land and plot trading instead of productive investment. Real estate valuation must move closer to market rates, vacant land taxation should be strengthened in major urban centres, and incentives should favour industrial investment, rental housing, and technology-intensive sectors rather than speculative flipping.
That brings Pakistan to the most overlooked reality in its economic debate: the country is already overwhelmingly urban in economic function, even if official definitions continue understating it. Administrative classifications place urbanisation near 39 percent, but broader measures based on density, connectivity, and labour-market integration suggest a far more urbanised society. Pakistan’s cities generate the overwhelming majority of industrial output, services activity, tax revenue, innovation, and export potential.
Yet governance remains trapped in a rural-patronage imagination inherited from the twentieth century.
Fiscal transfers, political incentives, and development priorities continue rewarding territorial patronage over economic productivity. Metropolitan governance remains fragmented across overlapping authorities designed more to preserve political control than enable efficient urban management. Cities that generate national wealth lack fiscal autonomy, planning authority, and infrastructure financing.
Nowhere is public-sector misallocation clearer than in Pakistan’s treatment of its cities. Agricultural land is consumed by speculative housing schemes instead of productive industrial clusters. Informal settlements expand without services. Public transport remains inadequate. Housing near employment centres is scarce. Water stress, pollution, and climate vulnerability intensify. Female labour-force participation remains constrained by unsafe mobility and weak urban infrastructure. Industrial productivity suffers because workers live farther from jobs in increasingly dysfunctional metropolitan regions.
Pakistan cannot achieve export competitiveness while systematically underinvesting in the urban systems that make modern exports possible.
If Pakistan is serious about export-led growth, urban reform must move from the margins to the centre of economic policy. That begins with acknowledging the true scale and nature of urbanisation using globally comparable standards rather than outdated administrative definitions that distort planning and fiscal allocation.
The budget should launch a National Urban Productivity Strategy focused on metropolitan governance, affordable housing, logistics integration, public transport, climate resilience, industrial clustering, and digital infrastructure. Fiscal transfers should increasingly reflect economic output, population density, and infrastructure stress—not outdated political formulas. Large cities require empowered local governments with authority over land use, transport, housing, utilities, and revenue mobilisation.
Urban reform is not a social-sector luxury. It is industrial policy.
Fiscal discipline remains unavoidable. Debt servicing alone consumes an enormous share of federal expenditure, and Pakistan cannot spend recklessly. But austerity without structural reform merely stabilises decline. Cutting productive development spending while preserving elite privileges and inefficient expenditure is not prudence; it is decay management.
The state must finally confront politically difficult reforms: restructuring or privatising loss-making state-owned enterprises, rationalising untargeted subsidies, reducing elite administrative consumption, reforming pension liabilities, shrinking unproductive state activity, and digitising procurement and tax systems to reduce leakages and discretion. The objective should not be balancing accounts, but redirecting scarce national capital toward productivity-enhancing investment.
A further, and often under-acknowledged, constraint is the structure and behaviour of the bureaucracy itself. Pakistan’s growth problem is not only fiscal; it is deeply administrative. The state does not merely tax production—it actively interferes with it through layers of discretionary authority, procedural friction, and regulatory uncertainty that function as a hidden tax on enterprise.
In practice, the bureaucracy operates through extensive discretionary powers in licensing, taxation enforcement, procurement approvals, land conversion, environmental clearances, customs classification, and regulatory interpretation. These powers create delay, uncertainty, and negotiated outcomes rather than predictable rules.
This structure is not just inefficient; it is systematically anti-entrepreneurial. It privileges incumbents who can navigate or influence administrative processes while raising barriers for new entrants, small and medium enterprises, exporters, and formal-sector expansion.
In such a system, even well-designed reforms are blunted at the implementation stage. Export incentives are diluted. Tax reforms are distorted. Industrial policy becomes inconsistent because execution depends on fragmented bureaucratic judgement rather than transparent rules.
For Pakistan to move from stabilisation to transformation, the administrative structures must be fundamentally restructured: from discretion to rules, from permissions to declarations, from case-by-case approvals to automated, digital, and time-bound processes.
Without dismantling administrative discretion, Pakistan will continue to reform its economy on paper while suffocating it in practice.
Will the state continue protecting coalitions built around speculation, exemptions, patronage, and extraction? Or will it finally shift resources toward exporters, productive cities, technology, formalisation, and competitive industry?
Without radical restructuring of both taxation and public expenditure, Pakistan will remain trapped in cycles of stabilisation without growth—forever postponing crisis rather than escaping it.
The choice is no longer between reform and comfort. It is between restructuring now and managing repeated crises later.
Anything less would not merely be economic failure. It would be policy malpractice.