Pakistan urged to shift from stabilisation to growth-focused reforms

Pakistan’s economy has recorded its strongest fiscal performance in more than two decades, but experts warn that the country’s sharp reduction in development spending could undermine long-term growth prospects.

According to recent fiscal data, Pakistan ended FY25 with a budget deficit of 5.4 per cent of GDP, while the primary surplus reached 2.4pc. The country also posted its first current account surplus in 14 years, and foreign exchange reserves exceeded $21 billion. During the first nine months of FY26, the fiscal deficit further narrowed to 0.7pc of GDP, accompanied by a 3.2pc primary surplus.

Despite the improvement in macroeconomic indicators, analysts say the gains have largely come through aggressive fiscal tightening and reduced public spending. Federal development expenditure was reduced to just above 1pc of GDP and later revised downward from Rs1 trillion to Rs837 billion, significantly lower than historical levels.

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Economic experts argue that stabilisation measures have come at the expense of growth-generating sectors. Banks continue to invest heavily in government securities instead of extending credit to private businesses, while several state-owned enterprises remain heavily loss-making. Official figures show 25 state-owned entities collectively recorded losses of Rs832 billion last year.

Analysts have proposed a series of reforms for the upcoming FY27 budget, including a binding fiscal rule to control non-interest expenditure, faster restructuring and privatisation of state-owned enterprises, and reductions in untargeted subsidies and pension liabilities.

Concerns have also been raised about rising external risks, particularly due to instability in the Middle East and high global oil prices. Pakistan imports most of its crude oil through the Strait of Hormuz, making the economy vulnerable to regional disruptions.

Experts say the next federal budget presents an opportunity to shift from short-term stabilisation policies toward investment-led growth while maintaining fiscal discipline and economic stability.