Beyond stabilization: The next challenge for Pakistan’s economy

As the new year dawns, there is finally some good news on the economic front in Pakistan. Celebrating Pakistan’s economic turnaround, Prime Minister Shehbaz Sharif recently told the nation that the economy was finally “out of the woods.”

All major macroeconomic indicators demonstrate that the economy has come a very long way in the last three years when most analysts believed that an economic default was not a question of ‘if’ but when.

A quick review of major economic indicators provides evidence that the government has finally stabilized the economy. Going by official data that compares the economic performance, inflation, despite a slight uptick since July, was hovering at 6.1 percent at the end of November 2025, a huge improvement since inflation hit a historic high of 38 percent in May 2023.

To be sure, a major component of inflation experienced by Pakistani consumers was imported, meaning that an international commodity supercycle as well as a rapidly depreciating exchange rate brought about the price surge. Thankfully, in the last couple of years, a downward trend in international energy prices have certainly assisted in bringing inflation down. The price of oil (Brent crude oil) that had climbed to 97 dollars in September 2023, is now hovering around 62 dollars – a reduction of almost 36 percent— and is expected to be range bound through 2030.

Some credit is due to the State Bank of Pakistan, which, under Governor Jameel Ahmad, withstood tremendous pressure and “leaned against the wind” by maintaining a tight monetary policy thereby reining inflation in through anchoring expectations. The SBP’s formula for setting interest rates— Taylor Rule— also seems to account for changes in the US interest rates, an important consideration for ensuring stability in the exchange rate. Thus, it was only after the US Federal Reserve cut interest rates unexpectedly, did the SBP surprise the market by delivering a reduction of 50 basis points in the most-recent monetary policy statement.

In order to unleash the economic potential of young Pakistanis, Pakistan’s policymakers may want to look at how Saudi Arabia through its Vision 2030 was able to put its economy on a growth trajectory.

-Dr. Aqdas Afzal

On the external front, Pakistan ended the fiscal year with a current account balance of two billion dollars (0.5 percent of GDP)— best performance in 14 years— a stark contrast from FY22 when this balance was 17.5 billion in the negative. As a result, Pakistan’s foreign exchange liquid reserves had reached almost 16 billion dollars as opposed to February 2023 when they alarmingly dipped below 3 billion.

On the fiscal front, Pakistan’s constructive engagement with the IMF seems to be bearing fruit as the fiscal position has steadily been gaining strength. In the last fiscal year that ended in June, fiscal deficit came out at -5.4 percent of GDP, an improvement of almost about 2.5 percent of GDP over FY22. It was also heartening to see that Pakistan actually ended the year with a primary fiscal surplus of 2.4 percent. Primary fiscal surplus is necessary to reduce debt-to-GDP ratio over time, especially when nominal GDP does not exceed the interest rate on debt.

All said and done, Pakistan’s economic policymakers deserve kudos for this hard-earned economic stability. Nevertheless, the present economic situation can best be described as an “unstable stability,” meaning that another economic shock could quickly take us back to the days when the economic future of the country appeared bleak.

Despite economic stability, economic growth— and thus job creation— still eludes Pakistan. Pakistan’s Planning Commission calculated earlier this year that given the addition of almost 5 million people in the country’s population, the economy needs to generate almost 1.5 million jobs every year.

In the next year, Pakistan’s economic policymakers must consolidate their gains by creating fiscal and foreign exchange buffers, while keeping a needle-sharp focus on economic growth. Pakistan’s economic policymakers will have to come up with an implementable strategic economic vision that puts the country’s young population at the center. One way to do this to encourage more and more young people toward entrepreneurship as the economy simply cannot create the required number of high-quality jobs in the medium term.

In order to unleash the economic potential of young Pakistanis, Pakistan’s policymakers may want to look at how Saudi Arabia through its Vision 2030 was able to put its economy on a growth trajectory. Saudi Arabia heavily invested in entrepreneurs. It created support systems for small businesses, modernized education to focus on science and technology and launched skills training programs.

Pakistan’s hard-won economic stability, achieved through disciplined policy and favorable external conditions, is an important foundation. The policy imperative now is to decisively transition from rescue to a new era of resilient and inclusive growth.

- The writer completed his doctorate in economics on a Fulbright scholarship. X: @AqdasAfzal