Pakistan’s economy has stabilized. Its people have not. Inflation has subsided, reserves have improved modestly, another IMF tranche has arrived and politicians are once again speaking the language of recovery.
But outside of official presentations and macroeconomic dashboards, the story is markedly different: Investment remains depressed, savings are among the lowest in Asia, exports are stagnant, businesses are shrinking, unemployment is rising, and millions have quietly slipped into poverty.
This is the crucial contradiction in 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, suppress imports, tighten monetary policy, cut development spending, negotiate an IMF program and declare temporary stability a success.
Then the growth collapses again. Pakistan has now entered its fourth consecutive year of stagnation. This is no longer a cyclical slowdown; it reflects structural decay. The country is steadily losing competitiveness with the rest of the world.
The advice goes deeper than financial figures. Pakistan’s tax system has evolved into an instrument of extraction rather than expansion. Formal businesses face a suffocating web of corporate taxes, super taxes, sales taxes, withholding taxes, GST, provincial levies and regulatory overreach. Even companies with losses are taxed. Working capital is tied up due to delayed repayment and advance collections. The compliant are punished precisely because they are visible.
The consequences are predictable: investment falls, informality expands, entrepreneurship weakens and capital migrates elsewhere. Meanwhile, banks comfortably lend to the government – sovereign debt is profitable and risk-free – while businesses, especially SMEs and start-ups, struggle to access affordable credit. The state has supplanted the private economy for decades. Pakistan suffers from a lack of incentives to remain productive, proven and ambitious. The IMF program has undoubtedly reduced the immediate risk of default. Yet Pakistan has entered IMF programs so repeatedly that temporary stabilization itself has become part of the economic model. This is not a criticism of the IMF; its programs are primarily designed to prevent macroeconomic collapse, not to build competitive economies or ignite productivity revolutions. Countries that achieved major economic transformations ultimately moved beyond stabilization toward aggressive industrial, technological, and export strategies. Pakistan’s deeper failure is that its policymakers have normalized firefighting as a strategy.
Meanwhile, the world is reorganizing around artificial intelligence, robotics, data and software-driven productivity. Pakistan still manages its economy with the instincts of the 1980s. The FY27 budget is therefore more than a fiscal policy document; it is a test of whether Pakistan intends to continue dealing with decline or finally redesign its economic architecture for growth. The real question is not whether the FY27 budget satisfies the IMF. The real question is whether it makes investment, savings, exports and productivity attractive again.
Pakistan must simplify and drastically reduce tax rates. Broad, low-rate systems almost always outperform narrow, high-rate systems in developing economies. Maximum direct tax rates should fall to around 15%, while GST should be reduced to 10% – the aim is to expand the tax base through growth and formalisation, not further extraction from a shrinking formal economy.
Agriculture presents a distinct and delicate challenge. Over 95% of Pakistan’s farmers are smallholders with an average land holding of less than ten acres, who are already under pressure from rising costs of diesel, fertilizer and electricity. Agricultural income above a reasonable threshold should be included in the tax net, but at a maximum rate of 15%. Punitive taxation of this sector would discourage investment-oriented agriculture, suppress productivity and exacerbate rural distress – an outcome no government can afford in a country where agriculture still employs nearly 40% of the workforce and underpins food security. The goal should be to gradually formalize and document agricultural income, not to withdraw them prematurely.
The petroleum tax debate requires a different kind of reasoning – and more political courage. Pakistan spends billions of dollars annually importing petroleum products, draining foreign exchange reserves and perpetuating energy insecurity. A well-calibrated, higher petroleum tax is not just a revenue measure; it is a strategic instrument. Raising the cost of fossil fuel consumption creates meaningful incentives for households and businesses to switch to hybrid cars, electric cars, solar power and efficiency improvements. Countries that have successfully reduced dependence on fuel imports have used price signals along with policy support to accelerate this transition. For Pakistan, higher petroleum taxation – if paired with targeted relief for low-income households and investment in public transport – can simultaneously boost tax revenues, reduce the import bill and promote the country’s energy transition. The long-term gain in energy security far outweighs the short-term discomfort of higher pump prices.
More urgently, Pakistan needs a national digital transformation strategy centered on AI, cloud infrastructure, fintech, digital payments and export-oriented technology services. The budget for FY27 should allocate at least Rs 200 billion National Venture Capital and Innovation Fund to fund startups, AI ventures and high growth digital companies 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 come from AI-enabled industries, software exports and data-driven businesses.
However, fiscal discipline cannot only mean higher taxes on the private sector, while the state itself expands unchecked. Ministries, departments and redundant public bodies at the federal and provincial levels must be dramatically reduced. The privatization of state-owned enterprises must proceed quickly in order to remain hostage to committee and political hesitation. Every rupee consumed by unproductive state structures is capital derived from innovation and private investment. Pakistan now faces a crucial economic choice. One path leads to perpetual stabilization: recurring IMF programs, increasing taxation, weak investment, and continued misery for most of the population. The second calls for disruptive reforms: lower taxation, smaller government, privatization, technological modernization and export competitiveness.
The first way can keep the country solvent. The other is the only one who can make it prosperous.
The writer is a former managing partner of a leading professional services firm and has done extensive management work in the public and private sectors. He tweets/posts @Asad_Ashah
Disclaimer: The views expressed in this piece are the author’s own and do not necessarily reflect Pakinomist.tv’s editorial policy.
Originally published in The News
