On the path of stabilization

Pakistan’s economy, long buffeted by structural flaws, cyclical shocks and political instability, is presently showing signs of cautious revival following a period of extraordinary difficulty.

The currency has regained marginal strength, the stock market has entered a phase of consistent recovery, and the remittance inflows have broken historical records. The international credit rating agencies have acknowledged Pakistan’s improved fiscal conduct and macroeconomic stability by revising outlooks upwards.

The overall sentiment, both within and beyond the financial corridors of Islamabad suggests that Pakistan may finally be entering a period of post-crisis rehabilitation, though the path ahead remains uneven and fraught with challenges.

The recent upgrade of Pakistan’s Long-Term Foreign-Currency Issuer Default Rating by Fitch Ratings from ‘CCC+’ to ‘B-’ reflects improved fiscal discipline and restored external buffers. The outlook has been maintained as stable, signaling a greater degree of international confidence in the government’s ability to pursue necessary but difficult reforms. The agency acknowledged that Pakistan has performed well on quantitative performance criteria of International Monetary Fund (IMF), especially in terms of reserve accumulation and achieving a primary surplus.

The general government budget deficit is expected to narrow to 6% of GDP in the current fiscal year (FY2025), down from nearly 7% in FY2024, while the primary surplus is expected to more than double to over 2% of GDP. Improvement in fiscal position has largely come from restrained public spending and higher provincial surpluses.

Tax revenue shortfalls, partly due to lower-than-expected imports and inflation, remain a concern. The government’s revenue base continues to be narrow, and interest payment-to-revenue ratio forecast at 59% in FY2025 remains significantly higher than the ‘B’ median of around 13%. The pressure of domestic interest payments, while easing due to falling inflation, still limits fiscal space for development and social spending. The State Bank of Pakistan’s extraordinary dividend, amounting to 2% of GDP, has supported the budget and offered temporary breathing space.

The central bank has achieved remarkable success in rebuilding reserves—foreign exchange holdings reaching nearly US$18 billion by March 2025, compared to less than US$8 billion in early 2023. The current account posted a US$700 million surplus during the first eight months of FY2025, thanks to historic high remittances and favourable import prices.

The record-breaking US$4.1 billion in remittances received in March 2025 represents a structural lifeline, reaffirming the critical role of Pakistan’s overseas workforce in economic stabilization. The United Arab Emirates (UAE) alone is expected to contribute over US$7 billion in remittances this year, underscoring the strategic importance of maintaining and deepening economic and diplomatic ties with Gulf states.

The rupee has shown marginal but steady improvement, settling at 280.57 against the US dollar in interbank markets. The open-market volatility has subsided, and the currency has stabilized within a narrower band, benefiting from calmer global markets and easing oil prices. Reduced oil import bill has softened Pakistan’s external financing needs, while the controlled import regime, though limiting in growth terms, has supported reserve accumulation.

The equity market has mirrored macroeconomic improvements. KSE-100 Index gained 1,536.70 points on a single day, reaching 116,390.04, and the trend continued, adding another 385 points the following day. Investor sentiment has turned positive, buoyed by strong remittance flows, stability in global markets, and improved macro indicators.

The value of traded shares surged to Rs30.45 billion, and volume indicators have held steady. The gains were led by large-cap companies like ENGRO, OGDC, and PSO, reflecting investor appetite for energy and industrial stocks. Uptrend in the stock market also coincides with onset of the corporate result season, which is expected to reaffirm confidence if earnings show resilience.

The inflationary pressure, which had previously threatened economic destabilization, has finally shown signs of retreat. CPI inflation is expected to average 5% in FY2025, down significantly from over 20% in FY2023–FY2024 being attributed to declining food and energy prices, tighter monetary policy, and a relatively stable exchange rate.

The deceleration in price hikes offers much-needed room for monetary easing in the future, though the State Bank of Pakistan(SBP) remains committed to maintaining a tight policy stance to anchor inflationary expectations.The international economic environment continues to impact Pakistan’s economic trajectory as US dollar’s recent weakness against major currencies and commodity price adjustments have lessened external stress.

The US-China tariff uncertainties and softening demand in developed markets remain a risk, especially for Pakistan’s textile exports which form 35% of the country’s total exports and contribute 3% to GDP. The global investor sentiment, though improving, remains fragile considering tariff-related unpredictability from key trading partners and fluctuating global bond yields.

Pakistan-UAE bilateral economic relationship has emerged as a standout success with the UAE becoming Pakistan’s largest trading partner in the Gulf and a leading investor in strategic sectors like energy, ports, communications, real estate, and financial services.

The UAE’s long-term investment commitments and operational partnerships through companies like DP World and Etihad have deepened structural linkages. The presence of 1.5 million Pakistani workers in the UAE, makes it the second largest overseas Pakistani community and a strategic economic asset.

The ambassador’s comments about increasing remittance volumes and the ongoing port-related investments further reinforce UAE’s potential as a strong pillar in Pakistan’s future development model.

The structural reform agenda, although still under pressure from political volatility, has shown initial signs of traction. Passage of agricultural income tax laws by provincial governments, enhanced revenue mobilization targetsand strengthened regulatory oversight, signal a shift toward fiscal seriousness.

Effectiveness of the Special Investment Facilitation Council (SIFC) in removing bureaucratic hurdles and enhancing investor confidence has been widely praised. The council’s role in enabling quick approvals, reducing red tape, and providing a one-window facility for foreign investors must be institutionalized beyond short-term mandates to maintain momentum.

Debt sustainability challenge remains unresolved despite improvements. The overall government debt-to-GDP ratio is expected to decline gradually but remains significantly above the ‘B’ median. The country faces external debt maturities of $9 billion in FY2026 after servicing US$8 billion in FY2025. Reduced reliance on commercial market borrowing has helped in less exposure to market shocks, but Pakistan’s debt profile remains sensitive to interest rate fluctuations and currency movements.

The economic rebound is occurring against a backdrop of persistent risks. Implementation capacity of federal and provincial governments remains uneven, and reform fatigue may re-emerge once external pressures ease.

The political consensus around IMF-supported reforms, while currently intact, is vulnerable to shifts in public sentiment or changes in leadership. The successful continuation of reforms, particularly those related to tax equity, SOE privatization, and governance, will depend on both political will and technical execution.

The private sector remains hesitant but observant. Access to credit has improved marginally, and private sector borrowing has begun to rise, though at a slower-than-desired pace. The industrial capacity remains underutilized, particularly in manufacturing sectors that have suffered from energy shortages, high interest rates, and import restrictions. The opportunity to reinvigorate industrial growth exists, but requires policy continuity, predictable regulations, and lower operational costs.

The services sector, which contributes over 50% of GDP, is still under-leveraged as a growth and export engine. IT exports, though growing at over 25% annually, still fall short of the country’s full potential. The international digital services market offers immense opportunities for Pakistan, but investment in human capital, regulatory clarity, and infrastructure are preconditions for scaling globally.

The improvement in macroeconomic indicators should not mask the continued presence of structural unemployment, income inequality, and social exclusion. Rural economy is heavily dependent on seasonal agriculture, which is vulnerable to climate shocks and water availability. Income disparity across provinces continues to widen, and although urban informal sector absorbs the bulk of labour force but without offering social protection or job stability.

The long-term sustainability of Pakistan’s recovery hinges on a deliberate shift in its development paradigm. The country must institutionalize financial inclusion at the core of its national policy. Access to banking, digital payment systems, microcredit, and insurance can enable informal workers, small enterprises, and rural households to participate in formal economic growth.

The government should expand programs like Raast and digitize BISP to cover more underserved populations, particularly women and youth.

Transformation of governance from a bureaucratic to a corporate model is essential for efficiency and merit-based leadership. Adoption of performance-linked contracts, independent boards in SOEs, and modern auditing standards can professionalize public service delivery. Decentralization of fiscal responsibility with transparency in provincial budgets can improve accountability.

The country must invest in human capital through targeted education reforms, vocational training, and digital skill programmes that align with industry needs.

Global economic environment will remain volatile, but Pakistan’s recent stabilization presents a rare window for deep institutional reform. The resilience shown in the face of adversity must now translate into structural competitiveness. The path forward requires that fiscal consolidation, private sector empowerment, and targeted social safety nets move together. The present is a moment of relative calm that must be used to prepare for enduring storms.

(Huzaima Bukhari&Dr. Ikramul Haq, lawyers and partners of Huzaima& Ikram, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions)

Copyright Business Recorder, 2025