Rebounding inflation, fiscal pressures threaten recovery

• Think tank says govt’s increasing reliance on borrowing from banking sector crowding out private investment• Seeks policy shift to economic freedom, from reactive ‘stabilisation’ required by International Monetary Fund

ISLAMABAD: Pakistan’s nascent macroeconomic recovery, which began in 2025, is stalling due to the geopolitical situation, leading to rising inflation and reducing the monetary freedom of individuals and firms in an economy where around 80pc of the labour force operates in the informal sector.

“The macroeconomic recovery that began in 2025 is stalling due to geopolitical obstacles. CPI inflation re-entered double digits at 10.9-11.7pc between April and June, with the SPI climbing to 12.8pc by June, reducing the monetary freedom of individuals and firms,” said the Policy Research Institute of Market Economy (Prime), a private think tank, in its report for July 2026.

It stated debt servicing and defence consumed 94pc of net federal revenue, while in recent years defence spending had increased further, leaving just six per cent of revenue for health, education, infrastructure, social protection and all other essential government functions.

Prime highlighted that the Labour Force Survey 2025 reported that 80.8pc of the labour force was employed in the informal sector. A salaried individual earning Rs5 million faces an effective tax rate of 33.29pc, with tax deducted at source, leaving little scope for tax evasion. By contrast, a shopkeeper with the same income pays just 0.5pc under presumptive and fixed tax schemes. The Budget 2026-27 offered limited relief to the salaried class and did nothing to bridge this gap.

The report suggested........

© Dawn Business