Pakistan’s Economy Faces Fragility Despite Stabilization Efforts

​ ⁤ Updated june 5, 2025

As Pakistan prepares its budget for 2025-26, a‍ new report suggests the country’s economy, while showing signs of stabilization, remains vulnerable. The Islamabad-based think tank, Tabadlab, urges the government to avoid ⁤policies that could lead to “bad growth,” a pattern seen⁢ in Pakistan’s past.

The report cautions against raising tax rates,​ which are already ⁢among the highest in the region. It also advises against consumption-led growth due ‍to insufficient⁤ foreign⁤ exchange reserves.According⁢ to Tabadlab, reserves are only​ enough to⁤ cover⁤ two months of imports as of‍ June 3, making⁢ the economy susceptible ⁣to ​boom-and-bust cycles.

Key economic⁤ indicators have largely stabilized, the⁤ report notes. Inflation has decreased to 5%, and ‌the interest​ rate has been cut from ‍21% to⁤ 11%. The rupee has stabilized around Rs280​ against the ⁣U.S.‌ dollar, and the risk of⁤ default⁢ has decreased as debt growth slowed.

Tabadlab advises against ​increasing tax rates in budget‌ FY26
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The⁤ think tank attributes this‍ stability to government discipline, ‌austerity measures, and favorable⁢ global conditions, such as low ‌oil prices. ‌It ​also acknowledges improved alignment and contribution across the government.

the Federal Board of Revenue (FBR) is expected ⁤to fall short ‌of its ​Rs13⁤ trillion tax target by Rs1⁣ trillion, though this would still exceed last year’s Rs9 trillion‌ target by‌ Rs3 trillion. The policy rate cut ⁣from 21% to 11% reduced debt servicing costs by Rs1 trillion,while austerity‍ measures impacting public sector development ​funding saved another Rs1 trillion.

Though, the report emphasizes that the cost of economic⁣ stability and⁣ austerity has been notable. Poverty⁣ has increased by 6.5% over the past seven ⁢years, and the unemployment ​rate stands at 8%. Healthcare spending has also declined.

Pakistan remains⁣ vulnerable to twin ​deficits, with a narrow tax base limiting revenue growth and insufficient foreign exchange reserves hindering import ‍capacity. ‌The tax-to-GDP ratio is 10.6%, while the target for sustainable growth is 13%.

What’s next

Looking ahead,the report suggests core economic indicators ⁢are expected to follow a steady trajectory. The government could accelerate growth by further reducing the policy rate​ from ‍11% to 9%, implementing sector-specific interventions in ‍agriculture and construction, increasing public sector development spending, reducing⁣ import tariffs, and providing fiscal relief through measures like withdrawing the ‘super tax’ and ⁣adjusting‍ income ‍tax slabs. Managing import growth remains crucial to avoid excessive imports, as seen in 2022.