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Islamabad Diary

Crisis Within Crisis

Pakistan’s economy has achieved stabilization, but not recovery

By Asif Javed | May 2026

The latest staff-level agreement between the International Monetary Fund (IMF) and Pakistan, expected to unlock around $ 1.2 billion, was intended to consolidate a fragile economic recovery. Instead, it has unfolded at a moment of intensifying global and domestic strain. Rising geopolitical tensions, volatile energy markets, and deep structural weaknesses have converged, creating what can only be described as a crisis within a crisis.

Recent assessments suggest that Pakistan has stepped back from the brink of immediate default. Inflation has declined significantly from its earlier highs, external balances have improved, and foreign exchange reserves are gradually rebuilding. Yet this stabilization is narrow and conditional. Economic growth remains subdued, hovering around 3-3.5%, barely keeping pace with population growth and offering limited improvement in living standards.

This reveals a critical reality: Pakistan has achieved stabilization, but not recovery. The IMF programme has played a major role in this outcome. Through tight monetary policy, reduced subsidies, and constrained demand, inflation has been brought under control. However, these same measures have suppressed economic activity and limited job creation. Unemployment remains elevated, and the economy’s capacity to generate broad-based growth remains weak. According to the recent Labor Force Survey, unemployment has reached 7.1% in FY 2024-25, the highest in 21 years.

This tension, between stabilization and growth, lies at the heart of Pakistan’s current predicament.

Compounding the challenge is an increasingly volatile external environment. The ongoing Middle East conflict has driven uncertainty in global energy markets, exposing Pakistan’s dependence on imported fuel. Rising oil prices threaten to reverse gains in inflation control and widen the current account deficit. The IMF projected 8.4% inflation for the next fiscal year due to the Middle East crisis. As noted during IMF review discussions, such an external shock directly affects Pakistan’s balance of payments and financing needs.

Domestically, fiscal constraints remain severe. A central IMF demand is the continuation of fiscal consolidation, anchored in primarily surpluses and reduced deficits. Pakistan is expected to maintain a primary surplus of around 2-2.5% of GDP while gradually narrowing its fiscal deficit. At the same time, public debt remains high, hovering around 70% of GDP, leaving little room for policy error.

Within this framework, the issue of fuel subsidies has become particularly contentious. The IMF has urged Pakistan to phase out broad-based energy subsidies, arguing that they are fiscally unsustainable and distort market signals. Yet, politically, the pressure to shield citizens from rising fuel costs is immense. Energy prices have a cascading effect across the economy, influencing transport, food, and household expenditures. The government thus faces a difficult choice: provide immediate relief at the cost of fiscal stability or enforce discipline at the risk of public backlash.

The recommended path forward, target social protection, offers a compromise, but not an easy one. Expanding the cash transfer program can mitigate the impact on vulnerable populations, yet it requires administrative efficiency and political commitment.

Beyond subsidies, the deeper structural issue remains revenue mobilization. Pakistan’s tax-to-GDP ratio is persistently low, reflecting a narrow and inequitable tax base. For the first nine months of the current fiscal year (July-March), the Federal Board of Revenue missed its revenue collection target by Rs. 612 billion. The IMF has repeatedly emphasized the need to bring under-taxed sectors into the formal system. Without this, fiscal consolidation risks relying disproportionately on indirect taxation and expenditure cuts, both of which carry social and economic costs.


At the same time, the broader growth model remains constrained. Pakistan’s current trajectory reflects what experts describe as ‘low-growth equilibrium,’ a pattern of modest expansion insufficient to absorb labor force growth or significantly raise incomes. The IMF itself projected only gradual improvements in growth, suggesting that the current policy framework prioritizes stability over rapid expansion.

Unemployment in Pakistan has reached 7.1% in FY 2024-25, the highest in 21 years

This raises a fundamental question: Can Pakistan achieve sustainable growth without undermining economic stability? The answer depends on structural transformation, shifting from consumption-driven growth to productivity, exports, and investment. Yet, such a transition requires reforms that are politically difficult and slow to yield results.

Meanwhile, fiscal pressures continue to mount. Defense spending, debt servicing, and social expenditures all compete for limited resources, further constraining the government’s ability to maneuver. In such an environment, prioritization becomes not just important but essential.

Encouragingly, there are areas of progress. Pakistan has met several IMF performance criteria and demonstrated a commitment to implementing reforms, even as some structural benchmarks lag behind. This suggests that while progress is uneven, it is not absent.

Still, the margin for error remains extremely narrow. Pakistan’s economic management is no longer simply about meeting IMF conditions; it is about navigating trade-offs under pressure. Can fiscal discipline be maintained while protecting vulnerable populations? Can subsidies be replaced with targeted support without triggering instability? Can growth be revived without reigniting inflation and external imbalances?

These are not abstract policy questions; they are immediate, consequential choices. The IMF agreement provides a framework, but not a guarantee. In a context where global shocks amplify domestic vulnerabilities, outcomes will depend on execution, sequencing, and political resolve.

Pakistan’s challenge, ultimately, is strategic. It is not just about avoiding crises, but about escaping the cycle of stabilization without transformation. Whether this moment becomes a turning point or another episode in a recurring pattern will depend on the government’s ability to prioritize wisely, act decisively, and sustain reform in the face of competing pressures. In this crisis within a crisis, the cost of hesitation may be as great as the cost of error.

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