RECENT external developments have been quite favourable for Pakistan — some of them unexpected. Pakistan’s emerging importance after the May skirmishes with India, President Donald Trump’s soft pronouncements coupled with a warm welcome to the top leadership, the souring of US-India ties, a reasonably good deal on reciprocal tariffs, the upgrading of credit ratings, prospective investment in ‘massive’ oil reserves and minerals, etc, have led to euphoria.
However, this exuberance should be tempered by the experience of past relationships with major powers, which have been transactional and not permanent. High-wire acts carry risks. We should not allow the feel-good factor to intoxicate us. Our policymakers should not project life as being easy going forward, as if they were no longer obligated to carry out the onerous task of building a strong economy through stabilisation and deep reform. In short, there is no room for complacency as we are far from overcoming our domestic vulnerabilities, which are accentuated by adverse external conditions.
De-globalisation, inward-looking industrial policies, onshoring and nearshoring of supply chains, disruptive and exorbitant tariffs hindering international trade and openness, the likely slowing down of the US economy, climate change risks and AI penetration have made it difficult for emerging economies to repeat the exceptional progress made in 1990-2015. Domestically, the drivers of competitiveness — industrial and agricultural productivity through diffused innovation, a less skilled workforce, dysfunctional governance institutions, political instability, an inequitable and distortive taxation structure, overregulation, the deep intrusion of state agencies in the market, an outdated model of energy pricing and the SOEs’ continuing losses — are stumbling blocks to generating jobs, expanding exports, reducing poverty and attracting investment.
Digitisation, financial inclusion and the absorption of emerging technologies are still in their infancy and yet to permeate transaction structures. The debt burden has not yet reverted to the legal benchmark of 60 per cent of GDP, and the rollover risk of short-term deposits by friendly countries remains high. Foreign exchange reserves are inadequate for the growing needs of a buoyant economy and as a buffer for unanticipated future shocks. Continuity and consistency of economic policies are yet to be tested when faced with politically unpopular decisions that end the privileges of rent-seeking classes, including those defying formalisation and documentation.
We should not allow the feel-good factor to intoxicate us.
Many reforms resulting in stabilisation, deregulation of wheat prices and non-essential drugs, the Pakistan Single Window, automation and data integration of FBR taxes with third-party databases, the phasing out of regulatory and additional duties and reduction in rates and slabs, right-sizing of the federal government, privatisation of PIA and the Discos, civil service reform, and introducing a competitive market for the energy sector have been initiated. They should be brought to a successful culmination. Other planned reforms such as targeted subsidies and training of women through BISP, the repair of provincial finances by raising outcome-based investment in social sectors, developing employable skills for youth, the efficient use of irrigation water and drought- and heat-resistant seeds, boosting industries providing intermediate inputs such as steel, petrochemicals, active pharmaceutical ingredients, electronics and export facilitation have yet to see the light of day.
Delivery of basic public services has suffered since directly elected, fully empowered and well-resourced local governments were dissolved. Stiff resistance by MNAs and MPAs, who fear losing their clout, has prevented the completion of devolution. There’s no realisation that dissatisfaction with the government of the day will dwindle once local communities take charge of their own affairs, and mobilise and allocate resources for what they see as priority needs in their areas. Surveys show that citizens with complaints have easier access to local councillors who can address their grievances than they do to their MPAs and MNAs. The Lahore, Karachi and Islamabad metropolitan corporations will no longer be dependent upon the provincial or federal governments, who can then allocate more resources to backward districts.
Underpinning the agenda of socioeconomic revival is an improved internal security situation. Continuous instability in Balochistan and KP’s merged districts has kept foreign and domestic investors from exploring our mineral resources. The Chinese, who helped us with the CPEC projects, are now reluctant to come to Pakistan for fear for their lives and property. America’s recent interest in these sectors can only be actualised if the security situation improves. That requires local communities to have a say in and control of the projects designed to benefit them in the form of jobs, contracts, services, roads, internet connectivity, skills training, support to SMEs or other economic activities suited to their endowments.
The present approach, whereby the provincial and federal governments maximise their returns at the expense of neglecting local communities, must be reversed. The security situation is likely to improve over time as trust and credibility are established, and genuine representatives, rather than handpicked electables, are elected to the assemblies. Over time, youth unemployment would recede; literacy, enrolment levels and social indicators, and infrastructure would catch up with those in the developed districts, and the temptation to join or implicitly support militants would be suppressed.
Pakistan’s favourable geostrategic position would be strengthened if we don’t have to rush to the IMF and friendly countries for bailouts each time a crisis erupts or to adopt stringent administrative measures to restrict imports of raw material, machinery and components, thus hurting sustained growth. We have to walk a tightrope around foreign policy by not alienating our long-term friend China while maintaining healthy ties with the US — our major trading partner. It is heartening that we are moving in that direction, but this has to be sustained. We have to put in our best effort to improve relations with our neighbouring countries, including India. A prosperous South Asia would be a precursor of regional peace and the welfare of the two billion people living in the region.
In sum, Pakistan is fortunate to have a confluence of favourable circumstances, but this should not lull us into complacency, which deviates from the path of inclusive and sustained growth. We have to consolidate the reforms initiated, undertake planned ones and reorient our foreign policy.
The writer is a former governor of the State Bank of Pakistan.
Published in Dawn, August 7th, 2025
