Pakistan has entered into a new economic phase where the central challenge is no longer simply recognising the need for reform but sustaining the political and institutional commitments required to implement it.
Over the past few years, the economy has been largely defined by the economic crisis. The lingering effects of Covid-19, global supply-chain disruptions, exchange-rate volatility, and headline inflation reached 38.0 per cent in May 2023, the highest level in the country’s history, while declining foreign exchange reserves of roughly $13 billion in mid-2023 and prolonged negotiations with the International Monetary Fund (IMF) pushed economic policymaking into survival mode.
The national debate narrowed around immediate stabilisation rather than long-term growth. That phase now appears to be easing. Compared with 2023, Pakistan’s macroeconomic position looks considerably more stable. Headline inflation has fallen from a record 38.0 per cent in May 2023 to around 6.0 per cent-7.0 per cent. The exchange rate has stabilised around Rs278–280 per US dollar after reaching nearly Rs307 per US dollar in the interbank market during 2023; foreign exchange reserves have recovered from about $13 billion in mid-2023 to around $22.7 billion; and the current account has shifted from persistent pressure to a broadly contained position.
The IMF’s recent review of Pakistan’s Extended Fund Facility acknowledged progress in macroeconomic stability; fiscal performance has been strong, with a primary surplus of 1.6 per cent of GDP expected to be achieved in FY26. Subsequently, Gross reserves stood at $16 billion, and headline inflation increased to 7.3 per cent in March as higher commodity prices began passing through domestic energy prices, while stressing that sustaining these gains depends on structural reform rather than continued short-term stabilisation.
Structural reforms are politically costly because they reshape institutions, markets and incentives, but they could boost near-term output by up to 3.0 per cent and medium-term output by almost 6.0 per cent, with relatively large returns to governance and the external sector, including financial openness reforms. This explains why successive governments have recognised the need for tax, governance and export reforms but have struggled to sustain implementation.
If Pakistan is to break this cycle, the current period of stability must be used to deepen fiscal discipline, strengthen energy governance, reform state-owned enterprises and improve export competitiveness. Pursued consistently, this reform path can boost investment, productivity and long-term resilience. However, Pakistan’s reform record has repeatedly been undermined by policy reversals, political transitions and weak administrative capacity. The resulting uncertainty discourages long-term planning and weakens investor confidence, while fiscal constraints, a narrow tax base, energy-sector inefficiencies and slow productivity growth continue to limit competitiveness.
The first is a reform path in which current stability is used to deepen fiscal discipline, expand the tax base, improve energy-sector governance, reform state-owned enterprises and strengthen export competitiveness. If pursued consistently, this path could improve investor confidence, attract private investment, raise productivity and reduce dependence on external support. In this scenario, macroeconomic stability becomes a foundation for long-term transformation rather than a temporary pause between crises.
The second path is more familiar: reform momentum may fade as economic pressure eases. Political priorities could shift back to short-term relief, fiscal discipline may loosen, and institutional reforms may be delayed due to electoral pressures or resistance from entrenched interests. This route may reduce immediate political discomfort, but it would preserve the structural weaknesses that have repeatedly limited Pakistan’s growth. The result may not be an immediate crisis, but a slow weakening of resilience that leaves the country exposed to the next shock.
The third path is one in which external pressures shape the outcome more than domestic policy as Pakistan remains vulnerable to international energy price volatility, tighter global financial conditions, geopolitical tensions, climate-related disasters, and disruptions to global trade. These shocks can quickly affect inflation, fiscal balances and external accounts even when domestic policy is relatively stable. The difference lies in preparedness.
Countries that use periods of stability to pursue structural reforms are better able to absorb external shocks than those that delay reform until crisis returns. In this sense, structural reform is not only a growth strategy but also a form of economic insurance.
However, implementation will remain the key challenge; Pakistan’s reform record has repeatedly been undermined by policy reversals, political transitions and weak administrative capacity. The resulting uncertainty weakens investor confidence, while fiscal constraints, a narrow tax base, energy-sector inefficiencies, limited export diversification and slow productivity growth continue to constrain long-term competitiveness. What Pakistan needs is a governance framework that protects reform from political interruption, ensures policy continuity and strengthens institutional capacity.
Pakistan should therefore treat the current period of stability not as the end of the crisis, but as the beginning of a disciplined reform cycle. Sustained fiscal discipline, broader and fairer taxation, stronger public institutions, better energy governance, export diversification and private-sector-led growth must become long-term policy priorities rather than crisis-driven responses.
Ultimately, Pakistan’s greatest challenge is no longer identifying what needs to change but maintaining the political and institutional commitment to stay the course. If today’s stability is used to sustain reform, Pakistan can build a more productive, competitive and resilient economy. If not, the current recovery may prove to be only another pause in the country’s recurring cycle of stabilisation and crisis.
The new normal, therefore, must be reform as a continuous practice of governance, not a reluctant response to economic distress.
The writer is a research assistant at the Sustainable Development Policy Institute (SDPI), Islamabad. She can be reached at: spogmay_khan@sdpi.org
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