By Naeem Gondal
The structural vulnerabilities of Pakistan’s economy have long tested the resilience of its state architecture. The regional military escalation of May 2025 brought those vulnerabilities into sharper focus. Yet the country’s economic impasse cannot be reduced to a single security shock. Its central paradox is a chronic failure to translate macroeconomic stabilisation into enduring structural prosperity.
Geopolitical tensions heighten uncertainty, but they are not sufficient to explain Pakistan’s persistent development constraints. The deeper question is why improved macroeconomic conditions have not generated a sufficiently broad base of investment, competitive exports and productive employment.
Pakistan’s stabilisation paradox
Stabilisation is necessary, but it is not synonymous with development. Lower inflation, stronger external buffers and improved fiscal balances can restore room for policy. They do not, by themselves, resolve the institutional disincentives that discourage firms from investing, exporting and expanding formal employment.
In its May 9, 2025 assessment, the IMF recognised progress in restoring macroeconomic stability while identifying geopolitical tensions and persistent domestic vulnerabilities as risks. That combination captures Pakistan’s predicament: recovery can be real while its foundations remain insufficiently resilient.
Investment, FDI and risk perception
The Pakistan Economic Survey 2024–25, released in June 2025, provisionally estimated total investment at 13.8% of GDP, compared with 13.1% in FY2023–24. This represented improvement, rather than stagnation, but from a low base. An investment share closer to 25% should be treated as a development ambition, not as a universal statistical threshold for job creation.
The State Bank of Pakistan’s FY2024–25 annual report recorded net FDI of about US$2.5 billion, approximately US$100 million above the previous year. Aggregate inflows therefore showed modest improvement despite geopolitical risk. The structural concern is their breadth and productive contribution, rather than an assumed collapse caused by May’s escalation.
My concern is not simply the quantity of capital entering Pakistan, but whether the investment environment attracts sustained, diversified greenfield activity that strengthens productivity and export capacity. Security risk perception is one part of that environment. Energy costs, regulatory predictability and the treatment of formal enterprise are equally consequential.
Why export competitiveness remains weak
Pakistan’s export base remains narrow and heavily dependent on textiles, even though the sector includes important value-added garment and other product lines. Diversification requires more than temporary incentives: manufacturers need reliable access to inputs, predictable energy costs and a policy framework that rewards participation in international markets.
Consumer inflation remained comparatively low around the May escalation. Pakistan Bureau of Statistics data put national headline CPI inflation at 3.5% year on year in May 2025, up from 0.3% in April, while prices declined by 0.2% month on month. These movements do not establish a causal connection between the military escalation and inflation.
The competitiveness problem is structural. Even when consumer inflation falls, high production costs and uncertainty can continue to erode manufacturers’ ability to compete with regional peers.
Debt servicing and the fiscal constraint
Debt obligations restrict the state’s capacity to invest in development. The Ministry of Finance’s January 2026 Fiscal Policy Statement reports FY2024–25 interest, or markup, payments of approximately Rs8.89 trillion—roughly half of consolidated federal and provincial total revenue for the same year. Interest payments are not the same as total debt service, which also includes principal repayments.
The same statement records consolidated tax revenue at 11.2% of GDP, with FBR collections alone at 10.3%. The issue is whether Pakistan can sustain and deepen its tax effort through a more equitable and productive base, rather than repeated pressure on already documented activity.
For scale, the June 2025 Economic Survey provisionally placed FY2024–25 nominal GDP at Rs114.692 trillion, approximately US$411 billion. The later Fiscal Policy Statement uses a revised GDP denominator of Rs113.935 trillion for that same fiscal year. The fiscal ratios cited here are taken directly from that later release; they are not recalculated using the earlier Survey estimate.
Structural barriers to investment and exports
The energy cost problem
High and unpredictable energy costs impose a serious burden on industrial production. The question is not merely whether firms receive a temporary tariff concession, but whether the power sector can deliver reliable, competitively priced electricity without transferring its accumulated inefficiencies to productive enterprise.
Tax asymmetry and over-regulation
Documentation drives too often place their most immediate burden on compliant formal businesses. The alternative is not to abandon documentation, but to widen effective coverage across real estate, wholesale and retail activity, and agricultural income. Agricultural income is not legally exempt across the board, and reforms are under way; the challenge is uneven enforcement, compliance and the distribution of the tax burden.
Trade policy uncertainty
Unpredictable changes in tariffs on imported raw materials can disrupt production planning and reinforce an inward-looking industrial model. A coherent trade regime should make the export option more attractive, rather than allowing protection and administrative uncertainty to become substitutes for competitiveness.
A strategic policy roadmap
To break this cycle, fiscal policy must move beyond short-term firefighting towards sustained structural reform. The following measures are my proposals, rather than a description of adopted government policy.
Macroeconomic reforms
Targeted fiscal consolidation. Replace excessive reliance on withholding taxes on formal transactions with an automated, broader direct-tax net covering real estate, wholesale and retail businesses, and agricultural income. A consolidated tax-to-GDP ratio of 15% over three years should be the target, supported by fair enforcement rather than repeated taxation of the same compliant base.
Competitive energy pricing. Restructure power-sector circular debt while advancing institutional unbundling and effective open access in transmission. Dedicated industrial wheeling tariffs linked to net export performance should form part of a framework that makes competitive energy access an instrument of productive expansion.
Microeconomic reforms
Supply-chain digitisation. Build on existing electronic trade-documentation systems by integrating import and export compliance more closely with logistics tracking. The objective should be a shorter, more transparent route from documentation to physical movement of goods.
Export-linked SME credit guarantees. Establish a specialised credit-risk guarantee fund through the central bank to support single-digit working-capital financing for SMEs committing to non-traditional export diversification. The proposal’s fiscal cost and credit risks would need explicit design and oversight, but the policy principle is clear: scarce financing support should be tied to productive capability and measurable export expansion.
From stabilisation to economic sovereignty
Pakistan cannot build durable prosperity by repeatedly restoring stability without changing the structures that make that stability precarious. May 2025 is a reminder of the importance of resilience, not a sufficient explanation for every economic weakness.
Sustainable economic sovereignty requires treating security, trade infrastructure and fiscal equity as indivisible pillars of national power. The task is to institutionalise stabilisation so that it becomes a platform for investment, competitive exports and enduring structural prosperity.
Data note: historical statistics refer to FY2024–25 or May 2025, as specified. Provisional estimates and later revisions are identified separately.