The Heritage Institute’s Index of Economic Freedom is widely used to assess the institutional and structural foundations that shape long-term economic growth and development. The index evaluates 12 core freedoms, including property rights, government integrity, judicial effectiveness, tax burden, government spending, fiscal health, business and labour freedom, monetary stability, trade openness, investment freedom, and financial freedom. Together, these indicators aim to capture how supportive a country’s policy and governance environment is for economic activity and private enterprise.
In its 2025 edition, which used data up to June 2024, the index classified Pakistan as a “repressed” economy. Pakistan ranked 150th out of 184 countries, scoring 49.1 out of 100. The report painted a largely pessimistic picture of the country’s reform trajectory, stating that the government showed limited commitment to deep economic reform and that progress in key areas remained marginal. It pointed to resistance within institutions to public finance management reforms, outdated economic structures, and a judiciary vulnerable to political interference and corruption, all of which undermine property rights and investor confidence. The report also highlighted stagnant labour markets, widespread underemployment in the informal sector, and high inflation that disrupted monetary stability at the time of assessment.
It is important to note that when the data cut-off was reached in mid-2024, Pakistan’s economic debate was dominated by concerns over avoiding sovereign default rather than pursuing broad structural reform. Inflation at that point hovered around 12 percent but was already trending downward. These contextual factors help explain some of the report’s harsher assessments, particularly regarding macroeconomic stress and reform momentum.
At the same time, the index exposes its own limitations when applied to Pakistan’s economic realities. Notably, Pakistan received relatively high scores for government spending at 88.9 percent and tax burden at 78.3 percent. These scores are derived primarily from government spending and tax collection as a share of GDP. With public spending around 20 percent of GDP and tax revenue close to 10 percent, Pakistan appears, on paper, to have a relatively small state and a low tax burden. However, this aggregate view obscures critical details. Nearly 70 percent of total government expenditure is absorbed by interest payments and defence spending, while inefficiencies and waste persist elsewhere. Similarly, a low tax-to-GDP ratio does not reflect the heavy burden borne by the narrow base of compliant taxpayers.
Looking ahead to the first quarter of 2026, Pakistan’s economic freedom outlook remains uncertain. Since the publication of the 2025 index, the tax burden on both individuals and corporations has increased significantly. The top marginal income tax rate for individuals has risen from 35 percent to 45 percent, while the super tax on large corporations, initially introduced as a temporary measure, has gained judicial backing. As a result, the effective tax rate on large corporate entities now exceeds 50 percent, raising concerns about investment incentives and business confidence.
There have been notable improvements as well. Inflation has eased considerably and is now around 5 percent. The government has also signalled a stronger reform agenda through measures such as the privatisation of Pakistan International Airlines, the introduction of a more open and trade-oriented tariff regime, and regulatory reforms under the regulatory guillotine process. These steps could positively influence future assessments of business freedom, trade freedom, and regulatory quality.
However, several structural weaknesses identified in the 2025 index remain unresolved or have worsened. Unemployment has increased, and informal employment continues to dominate the labour market. According to the latest labour force survey, 81 percent of Pakistan’s workforce is employed in the informal sector, rising to 71 percent in urban areas. This marks a significant increase from the 72.5 percent recorded in the 2020–21 survey and poses a serious challenge for an economy seeking sustainable and inclusive growth.
Institutional credibility also remains under strain. Concerns about political interference in the judiciary and the erosion of property rights, highlighted in the Heritage report, have been echoed in the IMF’s recent diagnostic assessment. Such conditions weaken dispute resolution mechanisms, deter private investment, and limit the benefits of macroeconomic stabilisation. Private-sector investment has yet to recover, with the investment-to-GDP ratio remaining subdued. Exports in the latter half of 2025 declined compared to the previous year, partly reflecting the impact of broad tariff reductions.
Taken together, these trends suggest that Pakistan’s economic freedom outlook presents a mixed and fragile picture. While reform initiatives and improved price stability may lift certain scores, persistent weaknesses in labour markets, taxation equity, judicial independence, and investment dynamics risk offsetting those gains. The trajectory of economic freedom will ultimately depend on whether reform momentum can be sustained without further deterioration in core institutional parameters.
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