Positive indicators & challenges ahead

Business Recorder

2 days ago

The recent indicators of Pakistan's economic performance point to a cautious but welcome recovery, signaling a phase of renewed optimism for future. The economic growth rate of 2.68 percent for fiscal year (FY) 2025 although modest, is a marked improvement over the contraction of the previous fiscal year. Inflation has dropped dramatically to 4.5 percent from an alarming average of 23.4 percent last year, a development that reflects the positive outcomes of tighter monetary policy, fiscal consolidation, and relative currency stability.
The country's foreign policy has witnessed some fine-tuning, with Islamabad actively engaging global powers and regional allies to forge partnerships that support both its diplomatic relevance and economic aspirations. The government has strategically managed its relations with the United States, China, Russia, Saudi Arabia, and Iran in recent months, maintaining a careful balance that is essential in a rapidly shifting geopolitical environment.
With the United States, Pakistan has resumed structured dialogues on trade, security, and climate. With China, ties remain robust through continued collaboration under the China-Pakistan Economic Corridor (CPEC), which is slowly shifting focus from infrastructure to industrialization and digital connectivity. Engagements with Russia have seen improvement, particularly with energy cooperation and regional security dialogues.
Strengthening of economic and political relations with Saudi Arabia—marked by investment pledges in refinery and mining sectors—and a reset with Iran on border security and energy trade represent a strategic shift that aligns Pakistan with multiple economic axes. These relationships are not only symbolic but also open doors to investment, trade facilitation, and technology transfer, all of which are critical for economic rebound.
Sustaining these strategic partnerships will require reinforcement of institutional stability, ensure consistency in policies thus providing economic certainty to international stakeholders. The sanctity of contracts, transparency in regulatory frameworks, and efficient dispute resolution mechanisms must become hallmarks of Pakistan's investment environment.
The country must also foster its diplomatic agility, engaging in multilateral platforms while retaining the sovereignty of its economic and political decisions. A sustained engagement strategy can further leverage these international relationships into tangible economic benefits such as enhanced FDI, concessional financing, technology sharing, and access to diversified markets.
Pakistan's internal economic challenges remain formidable, especially with lingering issues related to energy sector payments. A contentious dispute between the Power Division and the State Bank of Pakistan (SBP) over repatriation of Rs. 431 billion owed to Chinese power sector projects has revealed institutional friction that could undermine investor confidence. The Chinese coal-fired projects like Port Qasim and Sahiwal have been pressing the Ministry of Finance for clearance of long-standing dues.
While SBP maintains that no directives have been issued to delay payments, and only a US$26.5 million profit payment is pending with one commercial bank, the Power Division contests this narrative, claiming substantial non-energy payments have remained stuck in the system for years. Depreciation of the rupee has only exacerbated the situation by diminishing the dollar value of repayments.
During a recent sub-committee meeting on reforms, chaired by the Petroleum Minister, this matter took center stage. The divergence between SBP and Power Division made it impossible to issue clear recommendations, particularly in the absence of NEPRA's inputs. The committee rightly emphasized core investment principles, such as legal sanctity, contract enforcement, and policy consistency, which remain essential for attracting foreign capital. The situation with the Chinese power companies not only highlights the need for institutional harmony but also underscores the urgency of reforms in financial governance.
In a more forward-looking development, the Board of Investment (BoI) has embarked on promoting six Special Economic Zones (SEZs) to Chinese investors. The plan includes showcasing success stories and offering developed land with basic amenities to entice investment. 3,000 acres are ready for development at Pakistan Steel Mills (PSM) and 700 acres at Allama Iqbal Industrial City (AIIC), while other SEZs also hold substantial potential.
Establishing Service Level Agreements (SLAs) to define clear timelines and expectations is a step in the right direction. If implemented effectively, this can create a predictable investment climate and reduce bureaucratic delays that often frustrate investors.
BoI's push for regulatory simplification is equally noteworthy. Its Business Facilitation Center (BFC) initiative, regulatory guillotine, and updates to Companies Act, 2017 are commendable. Approval of two reform packages by the Cabinet Committee on Regulatory Reforms (CCoRR) has reportedly reduced the cost of doing business by Rs 250 billion, while three more packages are in the pipeline. These steps indicate seriousness in removing hurdles for domestic and foreign investors alike.
By integrating 20 departments with SECP and streamlining food standards and medical device approvals, BoI is beginning to address one of the most deeply rooted challenges in Pakistani economy — overregulation and poor coordination between federal and provincial agencies.
Improvement in port operations and cold chain logistics, as reported by the Ministry of Maritime Affairs, presents a new frontier for trade facilitation. Reduction in consignment clearance times by up to 48 hours is notable, although lack of precise data on cold storage costs requires consideration.
The recommendation to shift vetted consignments to the green channel, along with establishment of one-window operations, grievance redressal mechanisms and Service Legal Agreements (SLAs) at ports, can dramatically reduce transaction costs and improve competitiveness in the export sector. However, challenges remain in governance.
The long-standing vacancy for the Chairman of Karachi Port Trust (KPT) is an example of administrative inefficiency that needs urgent attention. High-performing economies do not operate with leadership gaps in critical institutions, and Pakistan must prioritize merit-based appointments and institutional continuity to ensure smooth functioning of its trade infrastructure.
Prime Minister Shehbaz Sharif's directive to eliminate bureaucratic and institutional impediments within the Federal Board of Revenue (FBR) reflects a recognition that meaningful reform must begin at the heart of the revenue machinery. His satisfaction over increase in tax-to-GDP ratio is justified, as it signals an emerging fiscal stability.
The Prime Minister has called for the continued implementation of structural changes and emphasized technology integration to modernize customs clearance, increase transparency by abolishing FBR-owned Pakistan Revenue Automated Limited (PRAL) within six months, and reduce inefficiencies. FBR's initiatives, such as the launch of Urdu-language income tax return form, establishment of digital enforcement stations and a faceless customs system, indicate a transition towards a modern revenue ecosystem.
The implementation strategy is reportedly advancing in line with established targets, aided by strong coordination between federal and provincial governments. Emphasis on public engagement through the Ministry of Information and Broadcasting is also timely. Involving the public in reform discourse builds trust and increases voluntary compliance. Rollout of a Centralised Assessment Unit (CAU) represents a shift from conventional, often arbitrary practices to data-driven assessments that are vital for fairness and efficiency.
The broader macroeconomic indicators further validate that Pakistan's economy, while still vulnerable, is turning a corner. Fiscal deficit for FY2025 has been curtailed to Rs 6.16 trillion, or 5.4 percent of GDP, down from previous year's 6.8 percent. A remarkable achievement was the primary surplus of Rs 2.7 trillion, reflecting tighter control over non-development expenditure and improved revenue mobilisation.
Equally notable is the contribution of provincial governments, which posted a combined surplus of Rs 921 billion—almost double the previous year. This intergovernmental cooperation shows increasing maturity in fiscal management providing the federal government greater room to allocate resources towards development spending and social programmes.
On the external side, current account surplus of US$ 2.1 billion is a milestone—the first annual surplus in 14 years and the largest in 22 years. This reversal from a US$ 17.4 billion deficit just a few years ago speaks volumes about the effectiveness of external financing discipline and the critical role of remittances.
Remittance inflows grew by nearly 26 percent, reaching US$ 38.3 billion, proving to be a cornerstone of Pakistan's foreign exchange stability. This inflow reflects the resilience and confidence of the Pakistani diaspora, a resource that must be engaged more systematically through diaspora bonds, investment windows, and real estate opportunities.
The dramatic reduction in inflation from 23.4 percent to 4.5 percent has not only eased household pressures but also helped restore consumer and business confidence. This success underscores the value of monetary discipline, stable exchange rates, and resilient supply chains. Nevertheless, sustaining this low-inflation environment will depend heavily on prudent fiscal policies, resilience against external shocks, and climate-proofing agricultural and industrial supply chains.
To transform this emerging stability into long-term growth, Pakistan must broaden its tax base through reforms that promote equity and efficiency. Tax policy must shift from regressive indirect taxes towards direct taxation of high-income earners, property, and non-filers. Strengthening digital footprint of economy through integration of NADRA, SECP, and utility data can bring informal sector into the net without increasing harassment.
To attract meaningful investment, the country must institutionalize ease-of-doing-business reforms beyond paperwork and focus on implementation. Investment promotion must be sector-specific, targeting agro-processing, renewable energy, IT exports, and value-added textiles—sectors where Pakistan holds comparative advantages. Clear land titles, industrial zoning, access to finance, and skilled labor are all prerequisites for such investment to materialize.
Required growth will only come from a policy environment where consistency, transparency, and accountability form the core of economic governance. Political stability and continuity of reform, even across governments, will build long-term investor confidence. If Pakistan can stay on this course of fiscal consolidation, institutional strengthening, and external engagement strategies, it will not only recover from past turbulences but also establish a more resilient, inclusive, and globally competitive economy.
(Huzaima Bukhari & Dr Ikramul Haq, lawyers and partners of Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer)
Copyright Business Recorder, 2025