The statement of a federal minister regarding the collapse of the system has been a topic of discussion in the print and electronic media as well as in offices, bus stops, tea rooms, etc.
Though the statement itself lacked specificity about the issues, it has been interpreted in a variety of ways by different stakeholders. To some, it has been seen as sarcasm about the political system of the country, while to others, it has a serious connotation, referring to the fiscal sustainability of the state or the economic deprivation of the youth.
As I understand it, since the statement was made in front of business persons, I interpret it in an economic context, with a strong reference to economic security. I would like to expand on this by emphasising that economic security is a key ingredient of national security and that national security cannot be attained or sustained without achieving economic security.
Economic security has been defined as “the ability of a nation to achieve and sustain its economic growth and stability combined with inclusivity by strengthening its resilience against internal and external threats”. It implies that national security, comprising economic security and military security, can only be achieved or sustained if the country achieves economic security.
To put it differently, economic fragility causes military fragility, which, in turn, weakens overall national security. Key factors contributing to economic fragility include the inability to achieve and sustain a decent level of economic growth, lack of fiscal sustainability, persistent deficits in external accounts and inflationary pressures. Given this framework, where do we stand? What is our economic situation vis-a-vis our requirements for sustainable economic security?
As far as economic growth is concerned, growth in the outgoing fiscal year (2025-26) has been recorded at 3.7 per cent, compared to 3.1 per cent in the last financial year (2024-25), showing a limited increase in the size of the pie. The same is true of projections for FY2026-27, which range from 3.5 per cent to 4.1 per cent, depending on the stakeholder.
Weak growth contributes to a higher unemployment rate (7.1 per cent in the outgoing fiscal year) and a higher incidence of poverty (44.7 per cent middle-income poverty rate in 2025). Likewise, it causes limited fiscal space for development spending, including on the provision of social services such as education, health, youth development and other development projects.
If we take the last four years as a whole, the annual growth rate averages only 2.3 per cent, indicating an inability to grow in per capita terms, given the population growth rate of 2.55 per cent. In addition to its static repercussions, it also increases our vulnerability over time through fiscal imbalances, lower export capacity and, consequently, current account deficits, limited reserves, deteriorating creditworthiness of the country and, hence, pressure on the rupee.
In terms of the fiscal framework, the government has been able to bring down the fiscal deficit to 3.7 per cent of GDP, a 21-year low, amid IMF tightening and the consequent macroeconomic prudence. However, this achievement might not be attributable to the resolution of structural bottlenecks; rather, it has been achieved through IMF conditionalities – austerity measures, frequent adjustments of utility prices, over-reliance on the Petroleum Development Levy (PDL) and the State Bank of Pakistan (SBP)’s share of profit to the federal government. For instance, PDL receipts stood at Rs1.47 trillion in FY2025-26, with a target of Rs1.7327 trillion for FY2026-27, reflecting a 17.6 per cent increase in the target. Likewise, the SBP’s share of profit to the federal government stood at Rs2.4 trillion.
To put it differently, structural issues such as the high debt-to-GDP ratio (70 per cent), frequent shortfalls in FBR revenue, skyrocketing tax expenditure and a faulty tax apparatus remain unresolved. The revenue shortfall in FY2025-26 stood at about Rs1 trillion. Likewise, tax expenditure, which includes exemptions, zero-rating and other concessions, is estimated at Rs3.8792 trillion for FY2025-26, with sales tax at Rs2.8587 trillion, income tax at Rs477 billion and customs duties at Rs543.5 billion. This total accounts for around 30 per cent of total tax revenue, which is huge. Instead, measures such as generating additional revenue streams, rationalising or simplifying the tax system, documenting the economy, enhancing the tax base and rationalising excessive public spending are still far from realisation.
With regard to the external accounts, the government is celebrating bringing down the current account deficit (CAD) to $139 million in FY2025-26, with reserves rising to $18.4 billion as of the end of June. This, again, does not reflect an improvement in export earnings, as the trade deficit in goods and services is still $35.5 billion in the outgoing fiscal year.
Meanwhile, remittances stood at $41.6 billion, providing a significant cushion to the external accounts and the foreign exchange market. However, a significant fraction (54 per cent) of remittances originates from Gulf Cooperation Council (GCC) countries, which could be threatened if the ongoing US-Iran conflict is prolonged. For instance, remittances from Saudi Arabia stood at approximately $9.8 billion, while those from the UAE stood at $8.8 billion in FY2025-26. However, both countries are directly affected by the conflict, which might threaten the flow of remittances to Pakistan.
In the same way, oil supply chain disruptions combined with volatility in global oil prices might increase our total import bill, as oil imports account for roughly one-third of the total import bill. It not only makes the external accounts vulnerable but also exacerbates inflationary pressures, which might disturb the social fabric. Inflationary pressures are adversely affecting the common man’s purchasing power. Even though inflation dropped to 9.2 per cent in July 2026 from 11.10 per cent in June, daily grocery, utility and fuel expenses have been on the rise, owing to greater volatility in fuel prices amid the US-Iran conflict and frequent adjustments in utility prices.
So, in a nutshell, weak economic growth, structural bottlenecks to the sustainability of the fiscal framework, persistent deficits in trade in goods and services, combined with fuel-price-driven inflationary pressures, make our economic security fragile and susceptible to shocks, particularly external ones, as is shown by the recent US-Iran conflict.
Our system, as the federal minister has characterised it, is a system of broken promises, in which economic fragility precedes political and physical security fragility. It needs to be completely revamped, with economic security, which is an integral part of national security, prioritised. Once we achieve economic security, it will enhance our affordability and sustainability of strong defence, which, in turn, constitutes another crucial component of national security.
Likewise, with greater economic security, we will be better able to absorb our youth bulge by providing them with opportunities in the job market. Similarly, it will enhance our fiscal space to invest in turbulent regions like Balochistan and the newly merged districts in Khyber Pakhtunkhwa to bring dissidents into the formal structure and, thereby, ensure national security.
The writer is associate professor at the Pakistan Institute of Development Economics (PIDE), Islamabad.
