Pakistan’s economic activity is expected to improve during the current fiscal year, although the outlook remains exposed to several external and domestic risks, according to the State Bank of Pakistan’s biannual Monetary Policy Report. The report projects an increase in economic activity but identifies uncertainty surrounding international developments, climate-related challenges and global tariff policies as important factors that could affect the country’s growth trajectory. These risks come as Pakistan continues efforts to strengthen economic stability while meeting reform commitments under its ongoing International Monetary Fund programme.
External developments remain a significant consideration for Pakistan’s economic outlook. The country’s civilian and military leadership has been involved in efforts relating to tensions between Iran and the United States, while the government is also taking measures to limit the impact of climate-related disruptions on the economy. At the same time, Pakistani authorities are engaging with US counterparts over tariffs applicable to Pakistani exports, an issue that could influence the competitiveness of exporters and the country’s foreign exchange earnings.
The SBP report also highlights an important domestic risk to the expected improvement in economic activity. Delays in implementing the structural reform agenda could affect exports, productivity and the economy’s ability to sustain higher growth without creating excessive inflationary or current account pressures. These reforms remain under close monitoring by the IMF as part of Pakistan’s ongoing programme, making their implementation important for maintaining economic stability and improving the foundations for longer-term growth.
The assessment of improving economic activity has also generated debate over the strength and reliability of available indicators. Surveys used by the SBP to assess business conditions have generally pointed toward improving activity, although some assessments based on independent surveys have presented a less optimistic picture. Questions have also been raised over the relationship between sales, production and imports, particularly in sectors where inventories have declined.
Developments in employment and industrial activity add another dimension to the outlook. While sales in certain sectors may have improved, declining inventories and increased imports do not necessarily indicate a corresponding increase in domestic production. The situation has raised questions about whether the recent improvement in economic activity is being driven by stronger domestic output or by higher consumption supported partly through imported goods.
Fiscal and monetary policies also remain central to the growth debate. Pakistan continues to operate under fiscal measures designed to increase government revenue, while monetary policy remains relatively restrictive compared with several regional economies. The policy rate currently stands at 11.5 percent, significantly below the peak of 22 percent recorded in recent years but still considerably higher than rates in some competing regional economies.
The high interest rate environment has prompted renewed calls for monetary easing. However, monetary policy decisions continue to balance economic activity against inflation and external stability. Lower borrowing costs could support investment and business expansion, but policymakers also need to consider inflationary pressures, exchange rate stability and the country’s external financing position.
Tax policy remains another major issue in the economic reform agenda. The IMF has pushed for changes aimed at addressing structural weaknesses in Pakistan’s taxation system and reducing the influence of powerful economic groups over taxation and access to credit. However, concerns remain regarding the continued heavy dependence on indirect taxation.
Indirect taxes continue to represent a substantial share of Federal Board of Revenue collections. A significant portion of taxes classified under direct taxation is also collected through withholding mechanisms, including taxes imposed on transactions involving goods. The structure means that a considerable part of the tax burden can ultimately be passed on to consumers through higher prices.
Tax enforcement measures have also increasingly focused on collection at different stages of the supply chain. While such measures can increase documented tax collection, their impact on consumer prices and businesses remains an important consideration. Developments in sectors such as sugar have highlighted concerns about whether additional tax collection at the production stage can ultimately translate into higher prices for consumers.
Export policy is another area requiring closer examination. Pakistan continues to view exports as a major source of economic growth and foreign exchange, with exporters receiving various fiscal and monetary incentives. Recently approved export support measures, including an export refinance scheme involving Rs88 billion, have also attracted attention following reports of possible misuse.
Questions have emerged over the implementation of the export incentive and subsidy measures and whether the schemes received the necessary approval under Pakistan’s IMF programme. Any disagreement over these measures could become relevant during the upcoming review under the programme.
The economic contribution of export sectors also requires assessment beyond headline export growth. Several export industries depend on imported raw materials and semi-finished goods, which can increase foreign exchange requirements and contribute to pressure on the current account. At the same time, remittance inflows have become an increasingly important source of foreign exchange for Pakistan.
This situation highlights the need for a detailed assessment of the costs and benefits associated with incentives provided to individual export sectors. Policymakers may need to evaluate how much revenue each sector generates, how much foreign exchange it earns and how much foreign exchange it requires for imported inputs before determining the most effective allocation of fiscal and monetary support.
Pakistan’s economic outlook therefore presents a mixed picture. The SBP expects economic activity to strengthen, while external developments, climate risks, tariff policies and domestic structural reforms could influence the pace and sustainability of that improvement. The implementation of reforms under the IMF programme remains particularly important as the country approaches another stage of its programme review.
A sustained improvement in economic activity will require more than short-term increases in sales or imports. Stronger productivity, higher domestic investment, improved exports, a more effective tax structure and greater efficiency across key economic sectors will be necessary to support durable growth.
The debate over Pakistan’s expected economic uptick ultimately reflects the need for a more detailed assessment of underlying economic conditions. Clearer information about production, employment, investment, taxation and productivity can help policymakers distinguish between temporary improvements and broader economic recovery. A realistic assessment of these indicators could allow the government and economic institutions to take timely decisions and address weaknesses before they become larger constraints on growth.
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