IN recent months, the economy has offered some welcome signs of stability: inflation has slowed sharply, reserves have climbed above $14bn, the current account is in surplus, and the fiscal deficit has been reined in.
These improvements — achieved mainly through IMF-prescribed austerity policies — have prompted global rating agencies to lift Pakistan’s sovereign rating, hinting at a restoration of market confidence in its economy. But the weaknesses are still obvious. Large-scale manufacturing shrank by 0.74pc last year, missing even the government’s modest growth target of 3.5pc.
This is not an isolated setback. Big industry has been stuck in a cycle of low growth or contraction for three years on the trot. That LSM, which contributes around 8pc to GDP, has failed to achieve sustainable momentum for three years running should set off alarm bells for policymakers as it is yet another reminder of the structural weaknesses weighing on the fragile national recovery. The year-on-year growth of 4.14pc in LSM output in June — the fourth straight month of positive numbers — offers hope.
Yet, the simultaneous month-on-month decline of 3.67pc underscores the brittleness of this recovery. This volatility indicates deeper, unresolved issues: higher than regional energy prices, weak investment on elevated borrowing costs, high tax burden on the corporate sector, policy unpredictability and ‘informal’ curbs on imports, including raw materials, due to a dollar liquidity crunch. The recent positive spurts in big industry output, therefore, should not be mistaken for a turnaround. The slower growth in LSM output mirrors the overall low growth of GDP, which expanded by just 2.7pc last year after swinging between contraction and modest growth in the previous two fiscal years.
In its last monetary policy statement, the State Bank rightly underlined the need for steadily executing structural reforms to consolidate recovery, deepen macroeconomic stability and achieve sustainable growth. The recent macro improvements — reflected in lower inflation thanks to a global drop in oil and commodity prices, reduced fiscal deficit achieved largely through curtailed development spending and austerity measures and a build-up of foreign exchange reserves supported by debt rollovers by friendly countries, modest multilateral inflows, rising remittances and strict import controls — are fragile at best.
These improvements depend on external and temporary support, such as debt rollbacks, limited multilateral financing, remittances, etc, rather than durable fiscal and productivity reforms, leaving the economy only a small shock away from crisis. That Pakistan’s rating remains in speculative territory despite the upgrade from rating agencies is a reminder that markets still view the risks as high.
The question is: can policymakers use this breathing space to push through reforms that improve productivity, cut energy costs and attract investment? Without this, the economy will remain where it has been for years: underperforming, vulnerable and dangerously reliant on stopgap measures.
Published in Dawn, August 18th, 2025
