The International Monetary Fund (IMF) mission that visited Pakistan from Sept 24 to Oct 8, under the 37-month Extended Fund Facility and the 28-month Resilience and Sustainability Facility, acknowledged “significant progress” toward a staff-level agreement but stopped short of concluding one.
This delay matters. Without a final agreement, disbursements remain stalled, holding back around $1.25 billion in critical inflows. Pakistan’s balance of payments remains precariously dependent on timely IMF tranches, donor releases, and friendly-country deposits.
The World Bank’s recent analysis paints a starker picture: poverty reduction has not just stalled — it has reversed. In its September 2025 report, the Bank reveals that the national projected poverty rate rose to 25.3 per cent in FY24, up by about seven percentage points since FY22 over three years, reaching its highest level in six years.
Under the international poverty threshold, the incidence is even more severe — 44.7pc of Pakistanis now live below the global poverty line. The report warns that Pakistan’s earlier growth model, which drove sizable gains in poverty reduction during 2001–2015, has proven insufficient to cope with recent shocks. Economic turbulence, inflation, and recurring climate disasters have pushed households that had only just escaped poverty back under the line.
Amid short-term struggles, the need to set a long-term course cannot be postponed
Pakistan has achieved notable stabilisation on some economic fronts. The current account posted a surplus of about $2.1 billion in FY25 — the first annual surplus in 14 years — reversing a deficit of the same magnitude the year before.
Remittances surged about 27pc year-on-year to $38.3bn, pushing total liquid foreign exchange reserves close to $20bn now.
These gains, however, mask underlying fragility: the goods trade deficit is widening — up 46pc year-on-year to $3.34bn in September — and much of last year’s current account surplus’s positive impact remains tied to remittance inflows rather than a broad export revival. That explains a quick reversal of the surplus trend in this fiscal year. In July-August 2025 Pakistan booked a current account deficit of $624m.
In the short term, policymakers must fight multiple fires at once. The first is securing external financing. The IMF programme remains the only credible anchor for investor confidence and donor coordination. Any slippage in programme benchmarks or delays in disbursement could quickly reignite pressure on the currency and debt markets.
The second is managing the fiscal squeeze. With public debt exceeding 70pc of GDP and interest payments consuming half of total revenue, the state has little room to manoeuvre. Yet austerity that bites too hard risks social backlash and further contraction.
Weak growth itself is another concern. With the economy expanding by 3.04pc in the last fiscal year, unemployment remains high and private investment hesitant. Fiscal and monetary levers offer limited traction: stimulus risks fuelling inflation; restraint dampens recovery.
Moreover, climate vulnerability compounds the problem. The floods of 2025 — following the devastation of 2022 — displaced millions, wiped out crops, and demanded large-scale reconstruction spending. Climate adaptation has become a recurring fiscal emergency, not a distant concern.
Amid these near-term struggles, the need to set a long-term course cannot be postponed. Pakistan’s recurring crises stem from structural flaws — low revenue mobilisation, inefficient public spending, energy and water mismanagement, weak human capital, and policy inconsistency.
Raising the tax-to-GDP ratio remains the single most critical reform for fiscal sustainability. The country’s tax-to-GDP ratio only recently hit 10.6pc by the end of June 2025. Broadening the base, eliminating exemptions, and digitising collection are not glamorous measures, but they are indispensable.
Institutional reform is equally urgent. Public financial management must become more transparent, budgets more credible, and expenditures better prioritised. Decades of fragmented decision-making and ad hoc subsidies have distorted both incentives and outcomes.
Similarly, energy-sector restructuring — reducing circular debt, aligning tariffs with cost recovery, and shifting toward renewables — is essential for both fiscal health and climate resilience. Without it, Pakistan will continue borrowing to pay for inefficiencies.
Private investment and export competitiveness are the missing engines of sustainable growth. The export base remains narrow, the business environment unpredictable. Simplifying regulations, ensuring exchange-rate realism, and lowering input bottlenecks can revive manufacturing and services. Human capital, too, must rise to the top of the policy agenda. Education, health, and digital inclusion determine whether Pakistan’s youth bulge becomes a demographic dividend or a burden.
Bridging short-term stabilisation with long-term reform requires a deliberate blueprint. The authorities must first complete the IMF review and secure disbursements to buy breathing space. Then, instead of blanket expenditure cuts, the government should reallocate spending — away from untargeted subsidies and toward high-impact social protection, health, and climate resilience programmes.
Reconstruction should be financed primarily through concessional loans and grants, not expensive market debt. Immediate revenue gains should come from administrative measures — closing loopholes, tightening compliance, and integrating federal and provincial tax efforts.
Communication is critical. Building political consensus, engaging provinces constructively, and explaining trade-offs openly can prevent policy reversals and maintain momentum.
Pakistan’s leadership today faces a tough balancing act. It must face short-term challenges while sowing the seeds of long-term economic renewal. That means taking ownership of reforms, protecting the vulnerable, and aligning every policy choice with a national direction.
Published in Dawn, The Business and Finance Weekly, October 13th, 2025
