IN the wake of hostilities between the United States and Iran, a dominant narrative has emerged that downplays Pakistan’s internal issues of governance. It frames Pakistan’s economic challenges as being primarily driven by its capacity to extract ‘strategic rents’ from geopolitical relevance, an interpretation that is, at best, a significant oversimplification.
The argument is that strategic rents create complacency and delay reforms, reducing resilience in the face of shocks. As much as the government wants to shift the blame on external factors, Pakistan’s challenges owe more to internal mismanagement, where the binding constraint is less the turbulence outside and more the quality of steering within.
Recent estimates suggest that improving governance and reducing corruption alone could raise Pakistan’s gross domestic product (GDP) by up to 6.5 per cent. Projections tabled by international lending agencies also recommend structural changes, including the need to generate millions of jobs through productivity and human capital improvement. Research on aid effectiveness demonstrates that outcomes hinge less on the presence of external financing and more on institutional quality and policy regimes.
Countries, such as Egypt and Jordan, have similarly benefitted from geopolitical rents, but have maintained relatively stable macro-economic trajectories. Pakistan’s challenge, therefore, is not the rents themselves, but weak fiscal institutions, low tax capacity and a fragmented political economy.
In our context, domestic debt typically means borrowing from local banks, institutions and the State Bank of Pakistan (SBP) through various instruments. While it may seem safer than external debt, high domestic borrowing can crowd out private investment, raise interest costs and limit the central bank’s ability to manage inflation. Pakistan’s core fiscal problem is simple: the government consistently spends more than it earns. As such, to reverse this, it needs to increase revenue.
There is significant room to expand the tax base, particularly in terms of bringing the under-taxed sectors into the system. At the same time, spending must be better managed. This means reducing inefficient subsidies, limiting losses from state-owned enterprises, and prioritising essential development projects over any wasteful expenditure.
The National Finance Commission (NFC) Award entrenches a classic soft budget constraint issue at the intergovernmental level, where provinces rely heavily on federal transfers without corresponding incentives for revenue mobilisation. This reflects the state’s persistent inability to tax politically powerful sectors, which, combined with red-tapism, perpetuates recurrent fiscal crises. The fundamental issue is the structural inability to generate primary fiscal surpluses, forcing reliance on both domestic and foreign borrowing.
It is but obvious that fragmented elite coalitions spanning civil, military and business interests, combined with low bureaucratic insulation and a persistent lackof political commitment to broad- based taxation, have constrained reforms.
The problem and its remedy have long been known and understood, but elite resistance and the political cost of short-term adjustments have locked the system into a low equilibrium trap of borrowing and repeated bailouts.
Therefore, the actual constraint is the political will that is influenced by those who stand to benefit from the status quo.
Syeda Zainab Sabzwari
Paris, France
Published in Dawn, October 8th, 2026
