Compared to the zero tax contribution by the unregistered 95% retailers, the registered and integrated businesses pay about 60% in the shape of sales tax, income tax and super tax. PHOTO: REUTERS
ISLAMABAD:
For much of Pakistan’s recent economic history, stability has been treated as a finish line rather than a starting point. In 2025, after years of volatility marked by sudden inflation spikes, high interest rates that followed, unstable exchange rates, and repeated IMF programmes, the country finally appeared to catch its breath.
Since the start of the year, inflation has eased, the exchange rate “seems” to remain steady, and foreign exchange reserves look less brittle than before. The language around policymaking has shifted from default to reforms. All this signals stability in the economy.
Yet stability, while necessary, is not the same thing as growth. The central question of 2025 was never whether Pakistan could stabilise; it did, but whether this stability could be translated into growth, jobs, and better living standards. On that front, the year leaves behind uncomfortable lessons.
The distinction between stability and growth is necessary here. If Pakistan had truly moved from stability to growth, the signals would have been clearer now. One would expect a visible pickup in private investment, followed by job creation and a recovery in real wages. Instead, growth remains low and uneven, suggesting that stability has not yet evolved into self-sustaining growth.
Economic activity has shown signs of recovery, but the pace remains hesitant. Investment remains weak, and savings are low. Credit to the private sector has increased this year; however, the data suggest that this credit is primarily for short-term working capital rather than new investment. This is also backed by a low investment-to-GDP ratio, which remained at 13.8%, a number relatively low compared to regional peers, where it ranges from 25-30%.
Where the limits of macroeconomic improvement became most visible are in human development. Despite easing inflation, unemployment remains elevated, as echoed by the current Labour Force Survey, which indicates that unemployment has risen from 6.3% in 2021 to 7.1% in 2025.
Similarly, according to the Human Development Index (HDI), Pakistan ranks 168 out of 193 countries, with a score of 0.54. This is a worrisome ranking because the country’s HDI has not improved but rather declined over the year.
For households, lower inflation doesn’t automatically mean affordability when incomes are stagnant, and jobs are uncertain. Lower inflation has benefited asset holders and those with relatively stable incomes, but for salaried middle-class households and daily wagers, purchasing power has not meaningfully recovered. High interest rates, meanwhile, have disproportionately constrained small businesses and first-time borrowers.
This disconnect explains the contradictory signals emerging from business sentiment surveys. On the one hand, business confidence has improved markedly in 2025 after two volatile years, according to the Gallup Pakistan Q2 Business Confidence Survey. Expectations are better, risks are perceived as lower, and there is cautious optimism about the future. On the other hand, Pakistan’s regional investment standing continues to slip.
According to the OICCI survey, the country has fallen two places, from 7th to 9th, in the regional ranking for investment priority. While risk perceptions are softening, concerns around political stability, policy continuity and regional competition continue to weigh on long-term investment decisions.
The result is an economy that has stabilised, but not yet advanced. However, this doesn’t imply that recent economic decisions were misplaced. On the contrary, stabilisation was necessary after years of macroeconomic stress. But stability is only valuable if it becomes a platform for growth rather than a recurring endpoint. Without reforms that raise productivity, encourage private investment and shield households from repeated adjustment cycles, the much-vaunted stabilisation is not sustainable.
Now, as we move into the next year, it is time to realise that Pakistan needs to take bold economic steps to transition from stability to growth. Stability has bought the country time; growth will require courage. The decision to move towards privatisation of PIA is, therefore, a welcome signal. This privatisation will not magically fix public finances, but it will help policymakers acknowledge the hard truth that loss-making SOEs drain fiscal resources. Thus, we need similar privatisation reforms across SOEs, even if they entail short-term economic and political discomfort.
Equally critical are pro-growth tax reforms. Businesses do not respond to a marginal reduction in super and corporate taxes. What investors need now is clarity, commitment and competitiveness. The super tax, in particular, signals that the country is against wealth creation, and thus it should be abolished rather than gradually brought down.
Similarly, corporate taxes also need to be brought down decisively to align Pakistan with regional competitors and restore confidence in the investment climate.
The transition from stability to growth will not come from incrementalism, but rather reforms that are visible, bold and transformative.
The writer is affiliated with the Policy Research Institute of Market Economy as a Research Economist
