Is the economy looking up? The Pakistan Economic Survey (PES) for 2025-2026 (FY26) suggests an affirmative answer to the question. But this optimism is subject to some caveats. The first nine months of the outgoing FY26 saw 3.7 per cent overall economic (GDP) growth, up from 3.2 per cent a year earlier. The good news is that the growth is broad-based, as all three principal sectors of the economy registered expansion: services to 4.1 per cent from 3.1 per cent; agriculture to 2.9 per cent from 1.5 per cent; and manufacturing (part of the industrial sector, which grew 3.5 per cent) to 6.6 per cent from 2 per cent. Do these figures suggest an economic turnaround? To answer this question, we need to look at longer-range data.
Pakistan is a classic case of erratic economic growth. In recent years, from 6.2 per cent growth in FY22, the economy contracted 0.2 per cent in FY23 before expanding to 2.6 per cent in FY24. The sectoral growth followed a similar pattern. For example, the services sector, the largest sector of the economy, grew 6.7 per cent in FY22, remained flat (no growth) in FY23, then recovered to 2.3 per cent growth in FY24.
The reason is that whenever economic growth gathers momentum, it balloons up fiscal and trade deficits, forcing the government to resort to ‘stabilisation’ policies, which put the brakes on economic expansion. In FY22, the year of high growth, the trade deficit exceeded $80 billion, resulting in depletion of foreign exchange reserves and sharp depreciation of the rupee. In the end, the government had to negotiate a bailout package with the IMF. The following year (FY23), the trade deficit scaled down to $55 billion, but at the expense of economic growth.
The growth-stabilisation dilemma is rooted in persistently weak economic fundamentals. In FY26, the share of the commodity-producing sector (industry + agriculture) in the total economy has marginally come down to 41.58 per cent from 41.79 per cent in FY25. Even worse, manufacturing’s share of GDP is only 12.1 per cent. At Pakistan’s stage of economic development, the share of manufacturing in the economy should be at least 20 per cent. But thanks to premature deindustrialisation that began in Pakistan in the 1990s following two back-to-back IMF programmes, the manufacturing sector has never recovered.
The persistently low share of the manufacturing means that an increase in domestic demand on the back of economic growth is only partially met by the domestic output, thus stoking the propensity to import. On the other hand, exports remain stagnant or even fall from year to year. The logical outcome is a high trade deficit. The government’s export enhancement packages don’t address the root cause of the trade deficit and thus are ineffective.
Thus, in the first 10 months of FY26, the trade deficit rose to $26.9 billion from $21.3 billion in FY25, confirming the assumption that in Pakistan, even a marginal uptick in economic growth aggravates the trade imbalance. The $33.8 billion in workers’ remittances during FY26 (July-April) was instrumental in curtailing the current account deficit to only $252 million. For the last several years, income proceeds from the Pakistani diaspora abroad have anchored the economy. That said, remittances aren’t a measure of an economy’s strength, and the volatility in the Middle East, the principal source of remittances, has also called their sustainability into question.
Savings and investment are two other economic fundamentals. In Pakistan, savings and investment as a share of GDP have remained rather low. In FY26, domestic savings as a component of the GDP fell to 7.0 per cent from 7.9 per cent a year earlier, while investment as a component of the GDP remained flat at 14.4 per cent. When an economy invests more than it saves, it either draws on foreign savings or runs a current account deficit to finance the difference. Public debt remains a systemic economic issue primarily due to low domestic savings.
At any rate, Pakistan’s economy needs to grow at least 6.0 per cent, not once or twice every five years, but consistently for several years. This high growth rate is desirable for various reasons, at the top of which is our demographics. Given the massive youth bulge that we have, our labour force is ever-expanding. Per the Labour Force Survey 2024-25, the working-age population stands at 179.6 million, while the workforce strength is 81.1 million, with an average annual growth rate of 3.5 per cent. Currently, the number of the unemployed is 5.9 million and the unemployment rate is 7.1 per cent. Consistently high economic growth, particularly of labour-absorbing sectors, is the only credible way to generate enough jobs.
The ultimate beneficiaries of economic growth are supposed to be the people. Per the PES, per capita income has increased to $1,901 in FY26 from $1,693 in FY25. Yet Pakistan’s per capita income is the second-lowest in South Asia. Per the IMF, in 2025, per capita income in South Asia was this: Pakistan ($1,696), India ($2,813), Bangladesh ($2,911), Sri Lanka ($4,516), the Maldives ($19,464), Bhutan ($4,867), and Nepal ($1,548).
Another indicator of pro-people growth is the reduction in poverty. In FY25, the latest year for which data are available, 28.9 per cent of the adult population lived below the poverty line, compared with 29.5 per cent in FY14 and 21.9 per cent in FY19 (PBS data). Poverty is determined by monthly expenditure on essential consumption. In FY25, the threshold was Rs8,484. Any essential expenditure below the threshold would qualify an adult to be poor. In addition to poverty, income inequality has also risen. Pakistan’s Gini Coefficient, arguably the most credible measure of income inequality worldwide, in FY 25 was 32.7, up from 28.4 in FY19.
As a step towards economic stabilisation, FY26 saw a significant improvement in the fiscal deficit, which stood at 0.7 per cent of GDP compared with 2.6 per cent a year earlier. The lower the fiscal deficit, the lower the cost of debt servicing in the future, leaving more fiscal space for social expenditure.
In sum, economic growth continues to be on an upward trajectory. However, the economic fundamentals remain, by and large, weak, thus tempering optimism about a sustained economic turnaround.
The writer is an Islamabad-based columnist. He tweets/posts @hussainhzaidi and can be reached at: [email protected]
