Pakistan found stability but growth did not appear

For much of Pakistan’s recent economic history, stability has been seen as the finish line rather than the starting point. In 2025, after years of instability characterized by sudden bursts of inflation, subsequent high interest rates, unstable exchange rates and recurring IMF programs, the country finally seemed to catch its breath.

Since the start of the year, inflation has eased, the exchange rate “appears” to be holding steady and foreign exchange reserves appear less fragile than before. The language around policy making has shifted from default to reforms. All this signals stability in the economy.

However, stability, while necessary, is not the same thing as growth. The central question of 2025 was never whether Pakistan could be stabilized. it did, but if that stability could translate into growth, jobs and better living standards. On this front, the year leaves behind uncomfortable lessons.

The distinction between stability and growth is essential here. If Pakistan had truly transitioned from stability to development, the messages would be clearer now. One would expect a visible recovery in private investment, followed by job creation and a recovery in real wages. Instead, growth remains low and uneven, suggesting that stability has not yet evolved into self-sustaining growth.

Economic activity has shown signs of recovery, but the pace remains hesitant. Investment remains weak and savings are low. Credit to the private sector increased this year. However, the evidence shows that this credit is mainly for short-term working capital rather than new investment. This is also supported by a low investment-to-GDP ratio, which remained at 13.8%, a relatively low figure compared to peers in the region, where it ranges from 25-30%.

Where the limits of macroeconomic improvement have become most visible is in human development. Despite easing inflation, unemployment remains elevated, echoed by the current Labor Force Survey, which shows unemployment rising from 6.3% in 2021 to 7.1% in 2025.

Similarly, according to the Human Development Index (HDI), Pakistan is ranked 168th out of 193 countries, with a score of 0.54. This is a worrying ranking because the country’s HDI did not improve, but rather declined over the course of the year.

For households, lower inflation does not automatically mean affordability when incomes are stagnant and jobs are uncertain. Lower inflation has benefited asset owners and those on relatively fixed incomes, but for middle-class salaried households and day wagers, purchasing power has not recovered substantially. High interest rates, meanwhile, have disproportionately squeezed small businesses and first-time borrowers.

This disconnect explains the conflicting messages emerging from business climate surveys. On the one hand, business confidence has improved significantly in 2025 after two shaky years, according to the Gallup Pakistan Q2 Business Confidence Survey. Expectations are better, risks are perceived to be lower, and there is moderate optimism about the future. On the other hand, Pakistan’s regional investment position continues to slip.

According to the OICCI survey, the country has fallen two places, from 7th to 9th, in the regional ranking for investment priority. While risk perceptions are easing, concerns about political stability, policy continuity and regional competition continue to weigh on long-term investment decisions.

The result is an economy that has stabilized, but not yet advanced. However, this does not mean that recent financial decisions have been misguided. Instead, stabilization was necessary after years of macroeconomic stress. But stability is only valuable if it becomes a development platform rather than a repeatable endpoint. Without reforms that increase productivity, encourage private investment, and protect households from repeated cycles of adjustment, the much-vaunted stabilization is not sustainable.

Now, as we move into the next year, it is time to realize that Pakistan needs to take bold economic steps to transition from stability to growth. Stability bought the country time. growth will require courage. The decision to move towards privatization of PIA is, therefore, a welcome message. This privatization will not magically fix public finances, but it will help policymakers recognize the hard truth that loss-making SOEs are a drain on fiscal resources. Therefore, we need similar privatization reforms in all SOEs, even if they entail short-term economic and political discomfort.

Equally critical are pro-growth tax reforms. Businesses do not respond to a marginal reduction in corporate taxes. What investors need now is clarity, commitment and competitiveness. Surtax, in particular, signals that the country is against wealth creation and should therefore be phased out rather than phased out.

Similarly, corporate taxes must also be brought down decisively to bring Pakistan in line with regional competitors and restore confidence in the investment climate.

The transition from stability to growth will not come from growth, but rather from reforms that are visible, bold and transformative.

The author is affiliated with the Political Research Institute of Market Economy as a Research Economist