Economy on a cliff edge
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AMID the US-Israel war on Iran, Pakistan earned global recognition for its diplomatic efforts to promote peace. Yet, even as Islamabad projected itself as a stabilising force, a situation emerged that nearly exposed its economic fragility. The UAE recalled $3.5 billion in deposits, which, together with an impending repayment of a $1.3bn Eurobond, created immediate pressure on Pakistan’s buffers painstakingly rebuilt over the past three years. The UAE had earlier assured the IMF it would maintain its exposure until September 2027, but strategic considerations evidently outweighed these commitments, underscoring the unreliability of bilateral support, and the imperative for regaining economic sovereignty.
In this moment, Saudi Arabia stepped in with a commitment of $3bn in additional deposits to help Pakistan maintain its foreign exchange reserves and avert a fresh external financing scare that could derail its Extended Fund Facility programme. It also indicated that its existing $5bn deposit would no longer remain subject to the earlier rollover arrangement, raising Pakistan’s liabilities to Riyadh to $8bn, highlighting deepening interdependence in both security and economic affairs.
While the Saudi intervention eased the immediate pressure, the UAE’s recall of deposits laid bare a deeper reality: Pakistan’s resilience remains heavily contingent on its partners’ goodwill rather than internal strength. It may be recalled that when the SIFC was established, it pledged to attract $100bn in investment from the GCC countries — an ambition yet to materialise. More importantly, the recent episode exposed the illusion of IMF-supported stabilisation. It raises a fundamental question: what have three back-to-back IMF programmes since 2019 delivered in terms of resilient economic security?
First, fiscal performance has improved. Pakistan posted a primary fiscal surplus of 1.3 per cent of GDP in FY25, with a cumulative primary adjustment of 5.6pc of GDP since 2022, the largest in its history. However, this consolidation was achieved through predatory taxation and unjust energy policies, placing the entire cost of adjustment on existing taxpayers and ordinary citizens. Government expenditure kept rising, with non-interest spending up 25pc in FY25 and development expenditure increasing sharply. Recent increases in the salaries and perks of ministers, legislators, judges and bureaucrats, alongside conspicuous public consumption contradict all claims of austerity.
Our economic challenges are rooted in poor governance and declining institutional quality.
Second, headline inflation is relatively contained but the policy rate has been kept well above inflation on the IMF’s advice. Excessively positive real interest rates, coupled with high energy costs, have eroded business competitiveness, discouraged investment and caused exports to stagnate. Pakistan remains in a low-investment, low-growth trap.
Third, Pakistan recorded its first current account surplus in 14 years in FY25, but this was achieved through tight foreign exchange controls that drove out a large number of foreign firms. The underlying vulnerabilities are reflected in the composition of the State Bank’s $16.3bn reserves of which $12.7bn comprise deposits from ‘friendly’ countries, all subject to periodic rollover.
Fourth, public debt rose to 70.8pc of GDP in FY25, from 67.7pc in FY24 driven by interest payments. Bringing it below the 60pc threshold mandated by the Fiscal Responsibility and Debt Limitation Act, 2005 would require a massive fiscal adjustment — a limit Pakistan has breached for many years.
Pakistan faces $89bn in amortisation between FY26 and FY30 — nearly $18bn annually. Interest payments alone have ballooned to 7.8pc of GDP and consume nearly three-quarters of FBR revenues. The $7bn IMF loan is barely sufficient to repay the $6.78bn owed to the Fund itself during the same period, meaning Pakistan is borrowing to repay previous loans. These arrangements may prevent default in the short term but have failed to resolve structural weaknesses. Instead, they have institutionalised dependency.
And finally, the IMF’s recent Governance and Corruption Diagnostic Assessment presented a grim picture of dysfunctional institutions unable to enforce the rule of law or safeguard public resources. It rightly concludes that corruption underpins an economic crisis driven by “state capture”, where policy is manipulated to benefit a narrow circle of political and business elites. The IMF warns that without dismantling these structures of “elite privilege”, economic stagnation will persist. Yet, its recommendations conveniently ignore the fact that IMF technical assistance and decades of World Bank/ ADB-funded tax, energy and governance reforms have already been tried. Pakistan’s percentiles rank of just 30.6 in the 2025 World Bank Governance Indicators reflects the result. Despite receiving over $50bn in official development assistance since 2000, it remains in the low human development category.
Pakistan’s economic challenges are rooted in poor governance and declining institutional quality. Economic mismanagement has led to a colossal waste of public resources. Between 2000 and 2025, average tax collection rate was about 9pc of GDP. Had Pakistan raised even 15pc — the lower range for comparable economies — it could have generated an additional Rs45 trillion. Unresolved energy sector inefficiencies have pushed circular debt beyond Rs5tr, while mismanaged SOEs roughly bleed Rs900bn annually. Better governance could have significantly reduced, if not eliminated, dependence on external assistance.
Without growth-enhancing reforms, export augmentation and genuine fiscal discipline — including drastically cutting the size of government and eliminating state-sponsored luxuries — Pakistan will remain trapped in stabilisation, shifting the debt burden to future generations. This is both unsustainable and immoral.
Weak domestic governance has produced a dependent foreign policy, shaped by the strategic interests of others. A system monopolised by elites and marked by cronyism and personalised and non-institutionalised governance, has weakened the state and diverted resources away from economic and human development. Reliance on IMF programmes, World Bank/ ADB loans, and bilateral support has failed to address the structural weaknesses; rather, it has become an incentive for poor governance.
In essence, Pakistan must put its house in order, choosing a long-term national vision over short-term political temptations. It has demonstrated its strength in security and diplomacy. The real challenge is translating that standing into economic resilience based on internal capacity. Without such a shift, the economy will remain on a cliff edge, sustained not by strength, but temporary reprieve.
The writer is a former senior adviser to the IMF and ex-chief economist of the State Bank of Pakistan. He holds a PhD in economics from the University of Cambridge.
Published in Dawn, April 25th, 2026
