Pakistan’s Budgets Perpetuate Economic Stagnation |
Pakistan’s recent stabilisation has bought time. Reserves have improved. Remittance flows remain resilient. But stabilisation without transformation merely postpones the next crisis. The underlying growth model has failed.
The coming budget is therefore not merely a fiscal document. It is a test of the will and intention of the current government to reform Pakistan’s political economy.
Merchandise exports fell by more than 6 percent in the first ten months of FY2026, while the trade deficit widened by roughly 20 percent to around $32 billion. Goods exports stood at approximately $25.8 billion and services exports near $8.3 billion in Jul–Apr FY2026, placing annualised total exports of goods and services at roughly $41 billion—far below the repeatedly advertised ambition of $100 billion exports by 2030. Inflation climbed back into double digits at 10.9 percent in April 2026. Real per capita incomes remain below levels reached more than a decade ago.
As the federal budget for FY2026–27 approaches, Pakistan stands at a perilous crossroads. Pakistan’s average real GDP per capita growth has fallen in the current cycle to its lowest level since the 1960s—and lower than any decade since the country’s breakup in 1971. Preliminary estimates for FY2025–26 indicate subdued real GDP growth of around 3.7 per cent, with per capita growth remaining close to extremely low levels once population expansion is taken into account.
This follows a broader pattern in which growth between 2020 and 2024 averaged just 0.4 percent annually, compared with 2.6 percent in the 1970s (excluding 1971–72), 4.1 percent in the 1960s, and between roughly 1–3.5 percent in subsequent decades depending on the cycle. In per capita terms, the economy is now barely expanding in real terms, signalling structural stagnation rather than cyclical slowdown.
A young and rapidly expanding labour force is being absorbed into an economy that is not generating sufficient productive employment. At the same time, workers’ remittances remain the key external stabiliser, rising to around $33.8–34 billion in the first ten months of FY2026 according to State Bank data, but momentum is no longer uniformly accelerating: monthly inflows have shown volatility and a slight moderation in sequential growth after earlier double-digit expansion, even as they remain historically strong.
This resilience is increasingly important in a context where geopolitical tensions in the Gulf—particularly the Iran-related escalation and its impact on energy prices, shipping risk premia, and labour market uncertainty—pose a non-trivial downside risk to inflows from key corridors such as Saudi Arabia and the United Arab Emirates.
Pakistan is also confronting a severe demographic and employment imbalance: a rapidly expanding youth cohort is entering the labour force in an economy that is not generating sufficient productive jobs. With nearly 2.5 to 3 million young people joining the labour market every year, Pakistan needs to create roughly 25–30 million jobs over the next decade simply to prevent rising unemployment, outward migration, and social stress. As World Bank President Ajay Banga warned during his visit, this is a “generational challenge” where job creation is the North Star; failure to align growth with employment risks turning the youth bulge into instability rather than a dividend.
Meanwhile, the state’s fiscal structure is becoming increasingly unbalanced. In the current federal budget of Rs17.57 trillion, nearly Rs8.2 trillion—almost 47 percent—is consumed by debt servicing alone. Defence spending exceeds Rs2.5 trillion. Pensions have crossed Rs1 trillion. Current expenditure stands above Rs16 trillion, while the federal Public Sector Development Programme is only around Rs1 trillion. Even after record taxation, the state continues borrowing heavily simply to sustain itself. Pakistan is no longer primarily financing development; it is financing accumulated obligations from past failures.
This is not economic recovery. It is stagnation dressed up as stabilisation.
The deeper crisis is not simply macroeconomic. It is structural and political. Pakistan’s budget-making process has become captive to a narrow coalition of vested interests that profit from extraction, exemptions, speculation, and state patronage, while the productive economy is squeezed harder each year. At the same time, public discourse is repeatedly populated by narratives of future windfalls—from untapped mineral wealth to transformative trade corridors—that are presented as imminent game-changers.
Yet the underlying realities of geology, geopolitics, investment horizons, infrastructure deficits, and governance constraints suggest that any material gains from these areas, even under optimistic assumptions, are likely to be incremental and slow to materialise over the next decade, rather than delivering the step-change in growth often implied in official narratives.
Every budget claims to broaden the tax base. Yet the same pattern repeats itself: organised lobbies negotiate protections before the finance bill is even unveiled, politically connected sectors preserve exemptions, and the burden falls again on salaried households, documented businesses, exporters, consumers, and urban industry. Retail trade remains undertaxed. Agricultural income taxation remains largely........