Breaking the cycle

THE World Bank’s latest Pakistan Development Update sets out what faster reforms could deliver for the economy. If policies and institutions matched those of an average middle-income country, it estimates, annual growth could reach 6.2-6.9pc, enough to reach Vietnam’s current income level, and incomes would triple by 2050.

The distance from here is long. Real GDP growth rose to 3.65pc in FY26 and the primary surplus reached 2.9pc of GDP. But per capita income is currently growing at only about 1.6pc, which means the economy has been put in better financial order without making most people better off.

The country’s return to macroeconomic stability is widely appreciated by international lenders and credit agencies. However, it is not the same thing as a solid foundation for rapid growth. Much of this stability has come from holding the economy down. High interest rates, fiscal tightening, and costly energy have dampened demand and squeezed imports, easing pressure on the external account.

Workers’ remittances have helped the current account and rebuilt reserves, and continued external borrowing has bought time. But none of this builds capacity. Borrowing defers the bill, remittances bring in dollars without adding to domestic output, and compressed imports can fix the external balance while leaving exports no more competitive.

The stability that results depends on inflows continuing and on the government keeping up its restraint. That is why any real push for growth can be risky. It would mean more imported machinery, fuel, industrial inputs, and consumer goods. If exports and productivity do not keep pace, the current account slips, reserves fall, and policymakers enforce tightening again.

We have been through this cycle many times. Breaking it means changing what the economy produces and sells, not just how fast it is allowed to grow. The obstacles are well known: unreliable and costly energy, a narrow tax base, cumbersome regulation, weak competition, and a poorly skilled workforce. Policy keeps changing, which deters long-term investment.

Tax reform must bring undertaxed sectors into the net, instead of increasing the burden on those already compliant. Energy reform has to cut system costs rather than shift them between consumers and the budget. And exports need a policy that works beyond incentives. Macroeconomic stability cannot carry the economy much further without better productivity.

The World Bank’s numbers are best read as a reform target. Reaching Vietnam’s income level will take sustained spending on education, health, infrastructure, and technology, and institutions that can be trusted. It will also take growth that creates more than just better headline figures.

If the government does not use the present breathing space to raise productivity, boost exports, and complete lasting energy and tax reforms, the next growth push could bring back the crisis Pakistan has just come out of.

Published in Dawn, October 24th, 2026