Islamabad: Pakistan’s economic recovery has been stronger than expected, however, the country has failed to take advantage of the opportunity to recover a sustainable path due to the absence of bold and lasting reforms, according to the International Finance Institute (IIF) based in Washington.
In a special report, the IIF said that, although Pakistan has successfully rebuilt its economic shock absorbers and insured financing, profits will probably prove to be of short duration without integral structural reforms, particularly in the expansion of taxes, privatization and resolution of circular debt.
The report emphasized that Pakistan has advanced little in these critical areas, particularly the privatization and restructuring of the energy sector, with a circular debt still unsolved. The IIF warned that these unresolved problems represent a significant risk for Pakistan’s economic perspectives for fiscal year 2016.
In particular, inflation has decreased significantly, allowing the State Bank for Pakistan (SBP) to reduce its 11 % policy rate since the flexion cycle began in June 2024.
In addition, Pakistan registered its first current account surplus (0.5pc of GDP) since fiscal year11, together with the highest primary balance (2.4pc of GDP) in more than two decades in the fiscal year 2015. These developments have resulted in multilateral and bilateral support sustained and credit improvements.
However, the IIF stressed that despite these positive holders, the economic situation is not as promising as it seems. Geopolitical tensions, both regional and global, pose significant challenges for fiscal year 26, while internal political instability, although decreasing, remains fragile. The relationship between the military establishment and the PTI party of the opposition remains dim, increasing uncertainty.
Stresses structural weaknesses in tax extension, privatization and energy sector, undermining long -term stability
While the accumulated tax and external shock absorbers in the 2014/25 fiscal year have provided some relief, they are still limited. The increase of $ 5 billion in reserve assets has increased the import coverage of the country to only 2.4 months, while the main balance surplus has led to a slight reduction in the total public sector debt, which remains high in around 67pc of GDP. These figures suggest that, although short -term stability has been achieved, long -term sustainability remains uncertain.
The IIF also pointed out that the recent commercial agreement with the United States, the largest export partner of Pakistan, could provide some support to the textile industry, although the benefits are expected to be modest. Agriculture, which represents almost a quarter of GDP and uses 40 % of the workforce, will probably remain slow. The Kharif season, which covers key crops such as rice, sugar cane, cotton and maise, has faced the early water scarcity followed by heavy rains in Monzón, which could weigh much in crops in the first half of the fiscal year 2016.
In addition, mortal sudden floods have exacerbated challenges, sinking Pakistan in his second great flood crisis in three years. This could have serious implications for growth, as well as for external and fiscal balances in the country.
Inflation, while improving, is still a concern. A strong increase in food prices, caused by floods, led to an increase of 2.9 percent from month to month in the main inflation in July, the greatest increase in two years. The inflation of the nucleus remains sticky, around 7 % in urban areas and 8 pieces in rural areas. In addition, energy price adjustments are expected (including higher gas tariffs, subsidy eliminations and increased fuel costs) and new fiscal measures feed inflation in the short term. As a result, the SBP stopped the trimming of interest rates in June and July, and the IIF expects interest rates to remain waiting for a prolonged period, with inflation averaging 6.5pc in the fiscal year 2016.
On the external front, the IIF predicted that Pakistan’s current account will be influenced by import normalization (particularly machinery, raw materials and consumer goods). Exports will depend largely on the progress of the American commercial agreement of Pakistan, although the IIF remains skeptical of its impact on exports. In the absence of a strong increase in basic products prices, the current account deficit is expected to remain modest (approximately 0.5PC of GDP in the 2016 fiscal year), which allows a reserve accumulation, although import coverage will remain critically low in approximately 2.5 months.
The IIF also expressed concern about Pakistan’s fiscal situation. Although the country’s fiscal deficit was reduced to 5.4pc of GDP in fiscal year 2015 and total income grew by 35.6 percent, much of this growth came from unique factors, such as record profits from the State Bank of Pakistan.
The Federal Income Board (FBR) did not reach its objective in approximately 1 percent of GDP, and the Federal GDP tax ratio remains stuck in around 10 percent. For the fiscal year26, the authorities predict another major increase in tax revenues, but this can be difficult to keep the tax burden already high in the formal sector and the exclusion of retail/wholesale sectors, which represent approximately 20PC of GDP, of the fiscal network.
On the expenditure side, subsidies reductions (particularly in electricity) and net loans to public companies have helped, but total spending still increased by 18 percent in fiscal year 2015. The IIF also pointed out that recent tensions with India could lead to an increase in defense spending in fiscal year 26.
As a result, the objectives of the authorities of a 3.9pc of GDP deficit and a primary surplus of 2.4pc for the FY26 seem too ambitious. The great dependence on national financing is also a matter of concern, and the IIF warned that fiscal performance will continue to be a key test for the IMF program, with created interests that complicate the progress of the reforms.
Posted in Dawn, on August 23, 2025
