Pakistan’s economy has stabilized. Not its people. Inflation has fallen, reserves have improved modestly, another tranche from the IMF has arrived, and authorities are once again speaking the language of recovery.
However, beyond the official presentations and macroeconomic panels, the story is completely different: investment remains depressed, savings are among the lowest in Asia, exports are stagnant, companies are downsizing, unemployment is rising and millions of people have quietly fallen into poverty.
This is the defining contradiction of Pakistan’s economic management: the country repeatedly avoids collapse, but repeatedly fails to generate prosperity. Stabilization has become a substitute for strategy. For decades, Pakistan has operated under the same flawed economic formula: taxes without productivity, debt 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 growth collapses again. Pakistan has now entered its fourth consecutive year of stagnation. This is no longer a cyclical slowdown; reflects structural decay. The country is constantly losing competitiveness compared to the rest of the world.
The rot runs deeper than the tax figures. Pakistan’s tax system has become an instrument of extraction rather than expansion. Formal businesses face a suffocating web of corporate taxes, super taxes, turnover taxes, withholding taxes, GST, provincial levies and regulatory overreach. Even companies that make losses pay taxes. Working capital is tied up due to delays in reimbursements and early collections. Those who comply 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 borrowing is profitable and risk-free), while businesses, especially SMEs and startups, struggle to access affordable credit. The State has displaced the private economy for decades. Pakistan suffers from a dearth of incentives to remain productive, informed and ambitious. Without a doubt, the IMF program has reduced the immediate risk of default. However, Pakistan has entered IMF programs so repeatedly that temporary stabilization has become part of the economic model. This is not a criticism of the IMF; Their programs are designed primarily to prevent macroeconomic collapse, not to build competitive economies or initiate productivity revolutions. Countries that achieved major economic transformations eventually went beyond stabilization and adopted aggressive industrial, technological, and export strategies. Pakistan’s deepest failure is that its authorities have normalized firefighting as a strategy.
Meanwhile, the world is reorganizing itself around artificial intelligence, robotics, data and software-based productivity. Pakistan still governs its economy with the instincts of the 1980s. Therefore, the FY27 budget is more than a fiscal document; It is a test of whether Pakistan intends to continue managing decline or ultimately redesign its economic architecture for growth. The real question is not whether the FY27 budget satisfies the IMF. The real question is whether this will make 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. Top direct tax rates should fall to around 15%, while the GST should be reduced to 10%, with the goal being expansion of the tax base through growth and formalization, not further extraction from a shrinking formal economy.
Agriculture presents a different and delicate challenge. More than 95% of Pakistan’s farmers are smallholders with average holdings of less than ten acres, already pressured by the rising costs of diesel, fertilizer and electricity. Agricultural income above a reasonable threshold should be included in the net tax, but at a maximum rate of 15%. Imposing punitive taxes on this sector would discourage investment-oriented agriculture, suppress productivity and deepen rural hardship – 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 extract it prematurely.
The oil tax debate requires a different kind of reasoning and more political courage. Pakistan spends billions of dollars annually importing petroleum products, depleting foreign exchange reserves and perpetuating energy insecurity. A higher, well-calibrated oil tax is not simply a revenue measure; It is a strategic instrument. The rising cost of fossil fuel consumption creates significant incentives for households and businesses to opt for hybrid vehicles, electric vehicles, solar energy, and efficiency improvements. Countries that have successfully reduced dependence on fuel imports have used price signals, along with political support, to accelerate that transition. For Pakistan, an increase in oil taxes – if combined with targeted relief for low-income households and an investment in public transport – can simultaneously strengthen 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 higher pump prices.
More urgently, Pakistan needs a national digital transformation strategy focused on artificial intelligence, cloud infrastructure, financial technology, digital payments and export-oriented technology services. The FY27 budget should allocate a minimum of Rs 200 billion to the National Innovation and Venture Capital Fund to fund startups, AI companies and high-growth digital companies, along with very attractive incentives for private venture capital and angel investors. The next generation of wealth will not come from protected industrial empires; will emerge from AI-based industries, software exports and data-driven companies.
Fiscal discipline, however, cannot just mean higher taxes on the private sector while the state itself expands unchecked. Redundant ministries, departments and public agencies at the federal and provincial levels must be drastically reduced. Privatization of state-owned enterprises must move quickly, rather than remain hostage to committees and political vacillations. Every rupee consumed by unproductive state structures is capital diverted from innovation and private investment. Pakistan now faces a decisive economic choice. One path leads to perpetual stabilization: recurring IMF programs, rising taxes, weak investments, and continued misery for the majority of the population. The other calls for disruptive reform: lower taxes, smaller government, privatization, technological modernization and export competitiveness.
The first path can maintain the country’s solvency. The second is the only one that can make him prosperous.
The author is a former managing partner of a leading 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 writer and do not necessarily reflect the editorial policy of PakGazette.tv.
Originally published in The News
