Pakistan’s economy has stabilized. This is not the case with his people. Inflation has eased, reserves have improved slightly, a new tranche from the IMF has arrived, and policymakers are once again speaking the language of recovery.
Yet outside of official presentations and macroeconomic dashboards, the picture is quite different: investment remains depressed, savings are among the lowest in Asia, exports are stagnating, businesses are shrinking, unemployment is rising, and millions of people have quietly slipped into poverty.
This is the fundamental contradiction of Pakistan’s economic management: the country repeatedly avoids collapse, but repeatedly fails to build prosperity. Stabilization has become a substitute for strategy. For decades, Pakistan has operated under the same flawed economic formula: taxation without productivity, borrowing without transformation, consumption without competitiveness. Every crisis produces the same recipe: raise taxes, cut imports, tighten monetary policy, cut development spending, negotiate an IMF program, and declare temporary stability a success.
Then growth collapses again. Pakistan has now entered its fourth consecutive year of stagnation. It is no longer a cyclical slowdown; this reflects structural degradation. The country is gradually losing competitiveness compared to the rest of the world.
The rot goes deeper than the budget figures. Pakistan’s tax system has become an instrument of extraction rather than expansion. Formal businesses face a stifling web of corporate taxes, super taxes, turnover taxes, withholding taxes, GST, provincial levies and excessive regulations. Even loss-making companies are taxed. Working capital is blocked due to delays in repayments and advance collections. The complacent are punished precisely because they are visible.
The consequences are predictable: investments fall, informality grows, entrepreneurship weakens and capital migrates elsewhere. Meanwhile, banks lend comfortably to the government – sovereign borrowing is profitable and risk-free – while businesses, especially SMEs and startups, struggle to access affordable credit. The state has crowded out the private economy for decades. Pakistan suffers from a lack of incentives to remain productive, documented and ambitious. The IMF program has undoubtedly reduced the immediate risk of default. Yet Pakistan has participated in IMF programs so often that temporary stabilization itself has become part of the economic model. This is not a criticism of the IMF; its programs are designed primarily to prevent macroeconomic collapse, not to build competitive economies or spark productivity revolutions. Countries that achieved major economic transformations ultimately moved beyond stabilization to aggressive industrial, technological, and export strategies. Pakistan’s most profound failure is that its policymakers have normalized firefighting as a strategy.
Meanwhile, the world is reorganizing around AI, robotics, data and software-driven productivity. Pakistan continues to govern its economy with the instincts of the 1980s. The FY27 budget is therefore more than a fiscal document; it is a test of whether Pakistan intends to continue managing decline or finally rethink its economic architecture for growth. The real question is not whether the FY27 budget satisfies the IMF. The real question is whether this makes investment, savings, exports and productivity attractive again.
Pakistan needs to simplify and significantly reduce tax rates. In developing economies, broad, low-rate systems almost always outperform narrow, high-rate systems. Maximum direct tax rates should fall to around 15%, while GST should be reduced to 10% – the objective being expansion of the tax base through growth and formalization, not further extraction from a declining formal economy.
Agriculture presents a distinct and delicate challenge. More than 95% of Pakistani farmers are smallholders with an average of less than ten acres of land, already constrained by the rising costs of diesel, fertilizer and electricity. Agricultural income above a reasonable threshold should be taxable, but at a maximum rate of 15%. Punitive taxation of the sector would discourage investment-driven agriculture, suppress productivity and worsen rural distress – an outcome no government can afford in a country where agriculture still employs nearly 40% of the workforce and ensures food security. The goal should be to gradually formalize and document agricultural income, not extract it prematurely.
The oil tax debate requires a different kind of reasoning – and more political courage. Pakistan spends billions of dollars each year importing petroleum products, draining its foreign exchange reserves and perpetuating energy insecurity. A well-calibrated and higher oil tax is not simply a revenue measure; it is a strategic instrument. The increasing cost of fossil fuel consumption is providing a strong incentive for households and businesses to turn to hybrid vehicles, electric vehicles, solar energy and improved energy efficiency. Countries that have successfully reduced their dependence on fuel imports have used price signals, alongside policy support, to accelerate this transition. For Pakistan, higher oil taxes – if combined with targeted relief for low-income households and investments in public transport – can simultaneously boost tax revenues, reduce the import bill and advance the country’s energy transition. The long-term gain in energy security far outweighs the short-term discomfort of rising prices at the pump.
Most urgently, Pakistan needs a national digital transformation strategy focused on AI, cloud infrastructure, fintech, digital payments and export-oriented technology services. The FY27 budget is expected to allocate a minimum of Rs 200 billion to the National Venture Capital and Innovation Fund to finance startups, AI companies and high-growth digital businesses, along with highly attractive incentives for private venture capital and angel investors. The next generation of wealth will not come from protected industrial empires; it will emerge from AI-based industries, software exports and data-driven businesses.
However, fiscal discipline cannot only mean increasing taxes on the private sector while the state itself grows unchecked. Redundant ministries, departments and public agencies at the federal and provincial levels must be significantly reduced. The privatization of public enterprises must progress quickly, rather than remaining hostage to committees and political hesitations. Every rupee consumed by unproductive state structures is capital diverted from innovation and private investment. Pakistan is now faced with a decisive economic choice. One path leads to perpetual stabilization: recurring IMF programs, rising taxes, low investment and continued poverty for most of the population. The other requires disruptive reforms: lower taxation, smaller government, privatization, technological modernization and export competitiveness.
The first path could allow the country to remain solvent. The second is the only one that can make it prosper.
The author is a former managing partner of a major professional services firm and has done extensive work on governance in the public and private sectors. He tweets/posts @Asad_Ashah
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the editorial policies of PK Press Club.tv.
Originally published in The News
