ISLAMABAD: Pakistan’s model of growth — dominated by (public) consumption, high levels of debt, low productivity and poor capital accumulation — is increasingly unsustainable and requires measures to increase investment and productivity, while heavily investing in human capital accumulation to increase the country’s long-term growth potential, says the World Bank.
The bank in its “Country Partnership Framework document” noted that real GDP growth is projected to remain below potential and average three percent over fiscal year 2025-26, while gross financing needs will remain sizeable, at around 28 percent of GDP. Pakistan’s economic outlook therefore remains highly vulnerable to downside shocks, including natural disasters, global price shocks, and deteriorations in macroeconomic policy.
The document noted that after decades of decline, poverty has begun to rise. Pakistan saw an extended period of increasing real household consumption between 2001 and 2018 (60 percent rise), leading to a sustained decline in poverty from 64.3 to 21.9 percent. This was driven primarily by increased off-farm opportunities and out-migration (boosting remittances). The Covid-19 pandemic, followed by catastrophic floods in 2022, increased commodity prices, contributed to low growth, and precipitated currency devaluation, leading to record-level inflation (29.2 percent) in 2022–23 and to an estimated increase of 2.4 million poor people since 2022.
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Food insecurity is also on the rise, particularly among rural districts of KP, Sindh, and Balochistan, affecting nearly one-third of the country’s population. School dropouts are also increasing in the poorest districts.
Inequality remains high. While monetary inequality is relatively low and stable with a Gini coefficient of 31.1 in 2024, actual inequality levels are markedly higher once underreported top incomes are accounted for. Spatial disparities are also systematic and persistent, with rural poverty rates twice as high as urban rates and large differences between districts and among the provinces. There are also large and persistent gender inequities—Pakistan is ranked 142 out of 146 countries in the World Economic Forum 2023 Gender Gap Report. Gender gaps are especially stark in human development outcomes. Female labor force participation (FLFP), at 25 percent in 2020 (up from 23 percent a decade prior), is the fourth lowest among lower-middle-income countries.
For Pakistan to achieve poverty reduction and shared prosperity on a livable planet, it will need to break out of its current model of development. The pace of economic growth and structural transformation has been long stunted by distortive policies that benefit only a few, who have historically coalesced to oppose growth-oriented reforms as well as increases in progressive public spending in human capital and basic services for the poorest, it added.
Pakistan faces severe human development challenges in all dimensions of the Human Capital Index, which—at 41 out of 100—is much lower than it should be at Pakistan’s income levels.
Pakistan’s current model of growth rests on two interrelated and fundamental weaknesses: its fiscal framework and low private investment and productivity. The country faces a structural fiscal deficit resulting from partly inefficient and regressive expenditures that consistently exceed revenues (parts of which stem from regressive fiscal policies) with weak intergovernmental fiscal coordination. Revenues are inadequate and collected from a narrow compliant base. Expenditures are also misallocated through fragmented and overlapping expenditure systems. Persistent deficits lead to high debt and government borrowing that crowds out private sector credit, while high debt servicing costs crowd out public investment in basic services. Policy distortions, trade protections, and a large inefficient state footprint limits productivity and export competitiveness. In the absence of private investment and export growth, consumption-driven growth fuels external imbalances. The resulting frequency and depth of economic crises have been increasing, deterring private investment and muting long-term growth potential. This pattern is precisely what the current reform program of the government is trying to reverse, as numerous credible and coordinated achievements can help change expectations for the better. Fiscal imbalances persist because of low revenue collection due to multiple regressive tax exemptions and a complex tax system, and inefficient and regressive public spending. The 11 percent tax-to-GDP ratio is well under what is needed to increase productive and progressive public investments in critical infrastructure and basic services, human capital development, and social safety nets. The tax base is narrow due to, inter alia, a complex tax regime that encourages informality and tax evasion, insufficient taxation of sectors such as agriculture, real estate, and retail, and weak and fragmented tax policy and compliance, including at the provincial and local levels. The tax-to-GDP ratio needs to raise durably above 15 percent, and expenditures on regressive subsidies, federal spending on provincial mandates, and overgenerous benefits to civil servants need to be redirected towards more efficient, productive, and progressive public spending on education and health, water and sanitation, critical basic infrastructure, and other public goods. Simplifying the taxation system can also benefit the private sector, especially SMEs, while encouraging compliance and formalisation. The government has recently started turning around the macroeconomic situation with a large fiscal reform program that aims to address these longstanding issues, given the need for new fiscal resources to invest in human capital and infrastructure to durably improve the long-term growth outlook. Improving the effectiveness and progressivity of public spending should also provide savings to contribute to increased fiscal space.
Productivity is low in large part due to distortionary policies constraining investment and exports. Despite progress in business environment reforms, firm growth and expansion continue to be constrained by high transaction costs, red tape, and anti-competitive practices.
The government owns over 200 state-owned enterprises (SOEs) and state entities, valued at about 48 percent of GDP. Many are engaged in commercial activities, crowding out a private sector that is often subject to unfair competition with SOEs that often have preferential access to finance, subsidies, assets, and public contracts. Inefficiencies are particularly prevalent in public infrastructure SOEs, such as in power distribution and transmission, roads, and railways. A new privatization program is underway. Early successes will be key to strengthen the reform momentum and generate a positive cycle of expectations and credibility strengthening.
The document noted that Pakistan is currently among the top 10 percent of the world’s most protected economies, as measured by the average rate of duties levied on imports. The current government has announced a strong ambition to reverse longstanding inward oriented and protectionist trade policies. Increasing trade openness would be key to reducing the anti-export bias that limits competition and productivity growth. This should be done in tandem with improvements to the domestic business environment and supporting domestic firms’ productivity so that the expected impact of reduced tariffs on increased exports and reduced trade deficits actually materializes.
Copyright Business Recorder, 2025