As the budget nears amidst India’s continued abeyance regarding water-sharing under the Indus Water Treaty, it seems evident that Pakistan must remain on guard lest the present somewhat calm environment worsen again.

Maintaining military readiness against external threats while countering foreign-sponsored terrorism requires substantial economic resources. The government has already sanctioned an 18 per cent increase in defence expenditure — a figure that may grow further depending on domestic security challenges and potential Indian aggression.

These additional allocations will likely come at the expense of development spending, potentially compromising Pakistan’s medium-to-long-term economic stability. This underscores the urgent need to consolidate recent macroeconomic gains and accelerate structural reforms for sustainable resilience.

Pakistan’s recent macroeconomic improvements — declining inflation, a current account surplus, and growing tax revenues — present a deceptively positive picture. While these indicators suggest stability, they mask deeper structural weaknesses that threaten long-term sustainability. The falling inflation rate owes more to sluggish economic growth than effective monetary policy, revealing an economy operating below its potential.

The current approach of relying on temporary measures and external financial support merely postpones the inevitable reckoning with deep-seated economic challenges

Similarly, the current account surplus has been achieved through exceptional remittance growth at a time when import restrictions artificially suppressed demand. This imbalance cannot be sustained indefinitely, as remittances, while valuable, are no substitute for robust export performance. A healthy economy should generate current account surpluses primarily through trade competitiveness, with remittances playing a supplementary rather than primary role.

The growth in tax revenues, though consistent, fails to keep pace with government expenditures due to several systemic issues. Fiscal leakages, excessive government spending, and the ever-increasing burdens of debt servicing and defence allocations continue to strain public finances. The situation calls for urgent reforms in expenditure management, particularly in curbing wasteful spending and improving governance efficiency.

More fundamentally, Pakistan must address its debt sustainability challenge by restructuring loss-making state enterprises that drain billions annually from the national exchequer. Privatisation of these entities could significantly reduce the debt burden, freeing up resources for productive development spending and strategic defence needs.

A healthy economy should generate current account surpluses primarily through trade competitiveness, with remittances playing a supplementary rather than primary role

These structural problems cannot be resolved through short-term fixes or external borrowing. The solution lies in implementing genuine reforms that enhance export competitiveness, rationalise government spending, and improve the efficiency of state-owned enterprises. Only by addressing these foundational issues can Pakistan achieve stable, sustainable economic growth that benefits all segments of society.

The current approach of relying on temporary measures and external financial support merely postpones the inevitable reckoning with these deep-seated challenges. The time for half-hearted measures has passed; what Pakistan needs now is a comprehensive, sincere commitment to structural transformation.

Despite mounting pressure on the rupee — even after receiving the $1.1 billion International Monetary Fund (IMF) tranche — the currency avoided speculative attacks during the May 7-10 confrontation with India, owing largely to the State Bank of Pakistan’s (SBP) stringent supervision.

The rupee’s ongoing depreciation reflects genuine demand pressures, driven by rising imports and the SBP’s decision to lift restrictions on multinational firms’ profit repatriation.

However, stabilising the rupee will grow increasingly challenging from July 1 as the new fiscal year begins. Pakistan faces a staggering $19bn external financing gap — a formidable hurdle. Maintaining a current account surplus appears particularly untenable, especially if military tensions with India resurge.

The economic outlook worsens considering the IMF’s demands for dismantling both tariff and non-tariff import barriers. The government has already signalled its intent to reduce average import tariffs, making exchange rate stability contingent on two improbable scenarios: dramatic export volume growth and sustained double-digit remittance increases. Without these, rupee stability seems increasingly elusive.

While the SBP’s liquidity injections provide short-term financial stability, their long-term implications warrant scrutiny. The central bank has been conducting massive weekly open market operations, sometimes exceeding Rs 12.4 trillion — equivalent to 38.4pc of total banking deposits (Rs32.3tr as of April 2025).

These interventions aim to maintain banking sector liquidity and regulatory compliance. However, their unprecedented scale reveals deeper structural weaknesses. With constrained external financing options and persistent fiscal deficits, the government has become increasingly dependent on domestic bank borrowing. This has immobilised significant banking sector liquidity in government securities, rendering the financial system reliant on perpetual SBP support.

Published in Dawn, The Business and Finance Weekly, May 26th, 2025