Reforms and Governance: Unlocking Pakistan’s Development Potential

Pakistan’s economic trajectory at the end of 2025 is defined by a strict but meaningful framework of discipline imposed by the IMF. Following the approval of the Expanded Fund Facility (EFF) of $7 billion in September 2024, the country has embarked on a 37-month stabilization journey that has begun to reshape the fundamental contours of the national economy.

While early indicators such as a cut in the policy rate to 11% and a forecast inflation rate of 4.1% suggest a macroeconomic recovery, the core of the challenge lies beyond simple fiscal arithmetic. It is based on governance. As the IMF’s November 2025 Governance and Corruption Diagnostic Assessment highlights, Pakistan’s ability to unlock its true growth potential depends not only on balancing the books but also on eliminating systemic inefficiencies that have long stifled competition and innovation. Stabilization measures implemented since late 2024 have produced unmistakable results, although the costs have been significant. According to the State Bank of Pakistan (SBP) Annual Report released in October 2025, the country’s foreign exchange reserves have stabilized around $18.3 billion, providing a necessary buffer against external shocks and currency volatility.

The SBP’s aggressive monetary tightening, followed by a calculated easing cycle starting in early 2025, successfully anchored inflation expectations, bringing the Consumer Price Index (CPI) down to single digits for the first time in years. However, this stability comes at a serious cost to industrial production and employment. Real GDP growth is forecast at a modest 2.7%, insufficient to absorb the country’s growing youth workforce. The constraint is clear: Pakistan cannot stimulate growth through traditional fiscal expansion without reigniting the twin deficits—fiscal and current account—that have historically plagued its economy. Instead, growth must now come from structural efficiency and export orientation.

A key element of the current economic strategy is the implementation of the IMF’s 15-point governance reform plan. Unlike previous programs that focused heavily on quantitative performance criteria, the current EDF explicitly links disbursements to qualitative governance reforms. The Governance and Corruption Diagnostic Assessment presents a stark picture of systemic failures in accountability and identifies critical areas for immediate correction. Key among them is the restructuring of the Public Procurement Regulatory Authority (REPRA). For decades, state-owned enterprises (SOEs) enjoyed preferential treatment in government contracts, effectively crowding out private competitors and inflating public costs.

The new framework imposes a level playing field, requiring state-owned enterprises to compete on a level playing field with the private sector. This is not just a procedural change. It is a fundamental shift in the state-led development model aimed at promoting a more competitive market environment. In addition, the report calls for unprecedented transparency from the Special Investment Facilitation Council (SIFC). While the SIFC has been crucial in fast-tracking investments in agriculture, IT and mining, ensuring its operations are aligned with standard regulatory frameworks is vital for long-term investor confidence. Requiring the IMF to publish an annual report detailing all investments, concessions and incentives is a necessary step to ensure that the push for foreign direct investment (FDI) does not jeopardize long-term fiscal sustainability or create new market distortions. This transparency is crucial to maintain the trust of multilateral partners and to ensure that economic benefits are widely shared rather than concentrated in specific sectors.

The FBR has shown signs of improvement, although structural weaknesses remain. Figures from the Annual Revenue Book 2024-25 indicate a major breakthrough: for the first time in over a decade, Pakistan achieved a tax-to-GDP ratio of 10.3%, collecting Rs 11.744 trillion in FY25. This represents a 26.3% year-on-year increase in revenue, suggesting that administrative measures, including the digitization of tax returns and mandatory data integration across all financial sectors, are beginning to bear fruit. However, a deeper analysis of these revenues reveals a continued reliance on indirect taxation, which disproportionately burdens the lower and middle classes. The 26.4% increase in sales tax collection contrasts with the slower pace of bringing high-net-worth individuals into the direct tax net.

To address this imbalance, the Treasury is empowered to publish a “tax simplification strategy” by May 2026. The aim is to reduce the complexity that facilitates tax evasion, while broadening the tax base to include chronically undertaxed sectors such as retail, real estate and large-scale agriculture.

The recent controversy over the 2025 Active Tax List (ATL) further highlights the friction inherent in these reforms. The FBR’s move to automatically extend filing deadlines to avoid mass disqualifications shows a pragmatic approach, but the core issue remains: compliance costs are too high and confidence in the tax machinery too low. Digitization is the tool, but rebuilding the social contract between the taxpayer and the state is the mission. Perhaps the most critical component of Pakistan’s economic woes remains the power sector’s cyclical debt. In September 2025, the government announced a historic settlement plan of Rs 1.225 trillion ($4.29 billion), in coordination with 18 commercial banks. This deal, which involves restructuring existing loans and securing new financing at reduced interest rates, provides temporary respite to the cash-strapped sector.

However, financial engineering alone cannot solve a structural problem. Nepra expressly warns in its State of the Industry Report that the industry is plagued by a crisis of idle capacity, with average utilization standing at just 34%. Consumers effectively pay capacity fees for electricity that is never produced, a burden that makes Pakistan’s exports regionally uncompetitive.

The respite provided by the debt restructuring should be used to carry out painful but necessary reforms, especially network modernization to reduce overhead line losses and privatization of distribution companies (DISCOs).

Moving beyond the management-contract model to actual disinvestment of inefficient DISCOs is essential to stop the bleeding of public funds. Without these structural fixes, cyclical debt will simply pile up again, threatening to derail the entire IMF program by year 27. The government’s commitment to these reforms is tested daily by the political cost of raising tariffs, yet the alternative – a return to unmanageable load shedding and fiscal insolvency – is far worse.

The bleeding of fiscal resources by loss-making state-owned enterprises has been a major driver of Pakistan’s fiscal deficit, and the privatization of Pakistan International Airlines (PIA) has emerged as a litmus test for the government’s commitment to reform. With accumulated losses exceeding $2.5 billion, the national carrier is financially unsustainable.

From November 2025, the prime minister directed the authorities to quickly and transparently complete the bidding process for the 75% stake in PIA. The success of this transaction will send a strong message to global markets. A transparent sale to a competent body will not only stop the fiscal bleeding but also demonstrate that Pakistan is open for business.

Conversely, another delay or murky transaction would seriously damage investor confidence and potentially breach the IMF’s structural benchmarks. Pakistan is currently on a “narrow path” to stability. The opportunities are tangible: a stabilized rupiah, a downward trajectory for inflation and a clear roadmap for governance reform. The revival of the Reko Diq copper and gold mining project, which is projected to generate $74 billion in free cash flow over its lifetime, and the continued development of Gwadar offer medium-term hope for foreign exchange generation. However, the risks are just as strong. Public “reform fatigue” due to high energy costs and taxation is a major risk to political stability. For policy makers, the year 2026 will be decisive. The focus must shift from stabilization to transformation, requiring the political will to enforce the governance plan, the technical capacity to execute energy reforms, and the wisdom to protect the most vulnerable. Only by following this strict course can Pakistan move from a cycle of crisis management to an era of sustainable and inclusive development.

The author is a member of PEC and has a Masters in Engineering