Budget 2026-2027 is here and debate is again revolving between these phrases: higher taxes, IMF conditions, circular debt, deficits, NFC and debt servicing. Yet despite IMF instructions of heavy taxation, Pakistan’s economy remains stuck in balance-of-payments crises, weak exports, deindustrialisation and diminishing investor confidence. Raising taxation has failed to deliver any real economic transformation and this is because we are facing structural crises.
Over the last 25 years, Pakistan has gradually evolved into an economy in which taxation has substituted for productivity, devaluation has undermined competitiveness and speculation has replaced industrialisation. Since 2000, FBR revenue increased from around Rs362 billion to almost Rs12 trillion. Yet during the same period, the US dollar appreciated from roughly Rs52 to nearly Rs288 per dollar. In dollar terms, tax collection increased from around $7 billion in 2000 and about $16 billion in 2008 to only approximately $42 billion as of today. Much of this apparent growth, therefore, reflected inflation, devaluation and indirect taxation rather than real productivity development.
Our exports remain as stagnant as our growth, reflecting the worst structural failure. For instance, Pakistan’s exports stood at $9 billion in 2000, reached approximately $29 billion in 2017 and in 2025 are still hovering around $32 billion. We had 25 years of devaluations under various IMF programmes and tax drives produced export growth of just $23 billion. During the same time period, Indian exports exceeded $438 billion, Chinese exports exceeded $3.7 trillion, Germany’s exports were around $1.7 trillion and Bangladesh, which was once economically behind Pakistan, is now exporting approximately $55 billion annually, made possible through focused industrial and garment-sector transformations.
The above comparison challenges one of the most persistent policies in Pakistan’s economic discourse – that currency devaluation automatically creates competitiveness. Since 2010, the Pakistani rupee has moved from Rs65 to Rs280 per US dollar, losing almost 331 per cent of its value since 2010, whereas the Indian currency has moved moderately from INR60 to INR88 per US dollar, and Bangladesh’s taka has moved from BDT78 to BDT116. Both India and Bangladesh, despite far smaller depreciations, considerably expanded exports and industrial capacity. Meanwhile, Pakistan absorbed the inflationary pain of currency depreciation without having export-led growth. This is because our export base remained narrow, low-value and insufficiently diversified beyond textiles and commodities.
The policy of devaluation benefits only economies with resilient industrial ecosystems, affordable energy and institutional stability. Pakistan, unfortunately, lacks these fundamentals, as our manufacturing base remains narrow with high energy costs across the region, and policy unpredictability discourages long-term investment.
This structural weakness is also visible in our FDI figures. In 2025, FDI inflows in the USA were $279 billion, in China around $116 billion, in the UK around $89 billion, in India around $47 billion and in the UAE approximately $46 billion. Pakistan attracted only $1.8 billion, the lowest in South Asia. These are not just financial statistics but a collapse of institutional confidence. FDI rewards predictability, legal reliability and policy continuity while avoiding uncertainty and arbitrary regulation.
Pakistan’s taxation structure functions as an anti-investment regime, as our corporate tax, super tax, workers’ welfare contributions, dividend taxation and multiple levies collectively impose an actual burden approaching 45 per cent on many formal, documented businesses. Corporate tax in India stands at 25 per cent, Bangladesh 27 per cent, while GCC deliberately built low-tax and investor-friendly systems to attract global capital and FDI. The UAE transformed itself into an attractive commercial hub through simplicity, stability and administrative efficiency.
The deeper distortion is our behaviour, perhaps, reflected in the allocation of our national capital over the last two decades. Real estate has become one of the most tax-advantaged sectors in the economy, diverting capital from manufacturing, exports and technology. Pakatan’s real estate, a non-productive asset, highly speculative though, generated higher returns than a productive enterprise. Our manufacturing’s share of GDP reduced from 18 per cent in 2005 to nearly 11 per cent in 2024, whereas services now account for approximately 60 per cent of GDP, much of it undocumented and consumption-driven rather than export-oriented.
Remittances, therefore, became the principal external stabiliser of our macroeconomic stability, as overseas Pakistanis send more foreign exchange than the entire export ($32 billion) sector generates. Pakistan received remittances of approximately $6.5 billion in 2008, and by 2025, the figure exceeded by $38 billion annually. The remittances also expose a dangerous imbalance, as we are increasingly exporting labour rather than products.
Pakistan’s trade figures reveal another serious structural weakness: imports are around $65 billion and exports are around $32 billion. This trade deficit makes us vulnerable to many external shocks and to repeated dependence on the IMF. Many countries like China, Germany and the UAE have built robust export systems through industrial depth and logistics, whereas we remain dependent on imported fuel, machinery and intermediates and fail to move toward diversified manufacturing exports.
Perhaps the vicious circle of the energy crisis and circular debt is to blame, as energy sector liabilities will continue to threaten fiscal stability and economic growth. Circular debt of electricity and gas surged to Rs5.2 trillion in 2026, due to costly capacity payments, inefficienciesthough and reliance on imported energy. This makes our industrial electricity regionally uncompetitive, even recurring depreciations failed to boost exports.
The federal budget itself reflects the structural exhaustion of the state, with the FY2025-26 budget at approximately Rs17.6 trillion. The federal government has no fiscal space to spend on growth or industrial transformation, because 47 per cent (Rs8.2 trillion) of the entire budget is consumed by debt servicing alone; moreover, Rs3 trillion on defence expenditure amid heightened regional tensions, Rs900 billion on the Benazir Income Support Programme, while the federal PSDP remains around Rs1 trillion.
The NFC Award further exacerbates structural imbalance in our fiscal system, as around 57.5 per cent (Rs8.2 trillion) of divisible pool revenues go to provinces, leaving the federal government with limited fiscal space after debt and defence needs. This has created a cycle in which the federation relies on indirect taxation and borrowing, while provinces rely on federal transfers rather than developing sustainable revenue capacity. In strong federations, usually provinces drive taxation and service delivery, whereas in Pakistan, provinces largely remain consumption-oriented administrative units rather than engines of productivity.
Our budget priorities are therefore reflecting the cumulative consequences of decades of weak structural reform. We spend more servicing old debt than building future productivity, as our education and health allocations remain extremely low compared to population needs and regional competitors. Debt servicing and defence together consume well over half of total budgetary resources, whilst development spending remains constrained.
Pakatan cannot achieve high growth sustainably unless it invests in its human capital and industrial modernisation. In contrast, China progresses through industrialisation, South Korea through education and exports, Singapore by developing institutional efficiency and India through globally competitive industries. Meanwhile, Pakistan remains stuck in frequent stabilisation cycles and short-term fiscal firefighting amid a balance-of-payments deficit.
Pakistan is also confronting institutional challenges, as its bureaucracy was designed for administrative control rather than economic facilitation. Investors face multiple redundant regulations, inconsistent taxation, and excessive red tape, while successful economies have transformed systems through one-window operations and faster decision-making.
We need a new growth model built on productivity, industrialisation and institutional trust, with stable taxation, currency stability, and investment in manufacturing, technology and exports. Provinces must become active economic partners in this transformation rather than mere recipients of NFC. The federation, together with provincial governments, must facilitate and reform governance by simplifying regulation, digitising taxation and improving economic management.
Above all, our economic policy must facilitate investment at both the domestic and international levels, thus promoting trust and confidence in the economy. Investors must be given assurance that the Pakistan government will uphold contracts, respect enterprise and reward productivity rather than speculation and administrative regulatory overreach.
Pakistan is trapped in a low-productivity equilibrium shaped by institutional distrust and policy inconsistency, but we can prevail. We have strategic geography, entrepreneurial talent, a large youth population and substantial diaspora networks. This is only possible when growth replaces taxes, productivity replaces devaluation and production outpaces consumption.
The writer is a political economist, public policy commentator and advocate for principled leadership and regional cooperation across the Muslim world.
