- Policymakers must adopt growth-oriented strategy including export diversification, investment climate and productivity
As Pakistan approaches 2026, economic stability has become a central theme in policy discussions. Recent data show that consumer price inflation declined to 5.6 per cent in December 2025 after exceeding 30 per cent during 2023. This reduction followed strict monetary tightening and fiscal adjustment measures. While easing inflation has reduced immediate pressure on the economy, Pakistan’s economic history clearly shows that stability alone has never ensured sustained growth, employment generation or long-term development.
During fiscal year 2024–25, Pakistan’s gross domestic product grew by approximately 3.0 per cent. Although this marked an improvement compared to earlier contraction, it remained insufficient for an economy with population growth exceeding 2 per cent annually. With an estimated population of nearly 255 million, per capita income remains close to 1,700 dollars, reflecting limited improvement in living standards. These figures indicate that stabilisation has not yet translated into broad-based economic progress for most households.
Over the past three decades, Pakistan has experienced repeated stabilisation phases, often under international financial support programmes. Inflation declined, fiscal deficits narrowed and exchange rate volatility eased during these periods. However, each phase was followed by renewed balance of payments pressure and economic slowdown. Between 2000 and 2024, Pakistan’s average annual growth rate remained close to 3.8 per cent, far below the level required to absorb new labour market entrants and raise real incomes meaningfully. This recurring pattern highlights the limits of focusing solely on stabilisation without addressing growth fundamentals.
Investment trends further illustrate the challenge. In the early 2000s, Pakistan’s investment-to-gross domestic product ratio approached 20 per cent. By 2024, it declined to nearly 14 per cent. Public investment weakened as debt servicing costs rose, while private investment remained constrained by high interest rates, elevated energy costs and policy uncertainty. In 2024, public debt exceeded 70 per cent of gross domestic product, limiting fiscal space for development spending. Without sustained investment, economic stability cannot support future growth.
Industrial performance has also remained weak. Large-scale manufacturing growth frequently turned negative during stabilisation periods. In fiscal year 2024–25, industrial output showed only modest recovery, while agriculture growth remained below 1 per cent despite favourable climatic conditions. These sectoral outcomes suggest that stabilisation policies have not strengthened the productive capacity of the economy or improved competitiveness.
Labour market indicators present further evidence. Unemployment remained above 8 per cent in 2025, with youth unemployment considerably higher. Pakistan adds more than 2 million individuals to its working-age population each year, yet job creation remains insufficient. A large proportion of workers continue to be engaged in informal and low-productivity activities. Even during periods of falling inflation, real wages have struggled to recover due to weak labour demand and limited productivity growth.
Human capital constraints continue to limit economic potential. Although school enrolment has improved over time, skill mismatches persist across sectors. Employers regularly report shortages of trained workers, particularly in technical and digital fields. Labour productivity growth in Pakistan remains lower than that of regional peers, reflecting limited skills development, weak industry–academia linkages and slow adoption of technology.
Structural inefficiencies also undermine economic performance. The energy sector remains burdened by financial losses and inefficiencies, resulting in high electricity costs for households and businesses. Circular debt has re-emerged repeatedly despite reform efforts, placing sustained pressure on public finances. Similarly, Pakistan’s tax revenue remains close to 13 per cent of gross domestic product, well below regional averages. This narrow revenue base restricts public investment in infrastructure, education and health.
Looking towards 2026, the macroeconomic outlook presents both opportunity and risk. Inflation near 5 to 6 per cent provides short-term relief and greater predictability for economic decision-making. Foreign exchange reserves have stabilised due to external financing support and improved current account management. However, global economic uncertainty, commodity price volatility and geopolitical tensions continue to pose significant risks. Past experience shows that without strong domestic growth drivers, external shocks can quickly reverse stabilisation gains.
To move beyond crisis management, Pakistan must adopt a growth-oriented economic strategy. Sustainable growth requires export diversification beyond traditional sectors, an improved investment climate, support for small and medium enterprises and stronger economic institutions. Evidence from comparable economies shows that productivity-led growth and private sector expansion are essential for long-term stability.
Economic stability should therefore be viewed as a foundation rather than an end goal. Pakistan’s experience demonstrates that controlling inflation and fiscal deficits without generating employment and raising productivity leads to stagnation. As the country moves towards 2026, policymakers must prioritise structural reform, human capital development and private sector-led growth. Without these changes, stability will remain temporary and economic vulnerability will persist.
The author is an accomplished academic and management professional, currently serving as an Assistant Professor in the Department of Business Administration at the HANDS Institute of Development Studies, Karachi.