Khyber Pakhtunkhwa stands at a pivotal point in its economic journey. Despite Pakistan’s significant strides in macroeconomic stabilisation, characterised by 2.68 percent GDP growth in FY2025, a historic primary surplus of 3.0 percent of GDP, and a dramatic fall in inflation to 0.3 percent in April 2025, KP’s economic potential remains unrealised, due mostly to structural regulatory inefficiencies.
According to Reforming Business Regulations in Khyber Pakhtunkhwa: A Path to Economic Growth, the business environment challenges are especially pronounced given KP’s role as a strategic gateway for regional trade.
The national macroeconomic outlook has become increasingly stable. The investment-to-GDP ratio at 13.8 percent, savings at 14.1 percent and per capita income has risen to $1,824. Private sector in the KP, however, continues to face fragmented, duplicative and often non-transparent regulatory requirements.
The report provides a granular view of regulatory challenges and disparities across both developed and underdeveloped regions. Notably, 87 percent of the businesses are sole proprietors, reflecting the high compliance costs and limited outreach of formalisation mechanisms at both provincial and divisional levels.
Pakistan has witnessed progress in women’s economic inclusion, with over 12,000 women-led startups supported by national incubation centres. Women-led businesses in KP, however, face a 6 to 13 percent higher regulatory burden than similar male-led businesses. This burden results from social mobility constraints, network exclusion and weak institutional facilitation. Intra-provincial disparities in infrastructure and service delivery are stark. There is higher formalisation in urban centres and persistent bottlenecks in more remote divisions.
Pakistan Bureau of Statistics data highlights a broad-based, though modest, recovery in industry and services, with industrial sector growth at 4.77 percent and services at 2.91 percent nationally. KP’s agriculture and manufacturing sectors are particularly vulnerable to local regulatory bottlenecks. Land acquisition, permit delays and infrastructure constraints disproportionately impact primary and secondary sectors. Services face high transaction costs due to inadequate digital payment and tax systems. This is compounded by slow national agriculture sector growth (only 0.56 percent), which reflects vulnerabilities that are magnified in KP’s less diversified economy.
Private sector credit expansion has improved at the national level, reaching Rs 767.6 billion in FY2025, up from Rs 265.2 billion the previous year. Digital financial inclusion is rising, with the IT sector posting $2.8 billion in exports and freelancers contributing $400 million. However, only 10 percent of the KP-based deposits are reinvested locally. Informality and lack of collateral keep most KP firms outside the financial mainstream. Digitalisation efforts, such as the Pakistan Single Window, offer potential, but their impact in KP remains limited due to connectivity and literacy gaps.
Institutionalising public-private dialogue by establishing formal regulatory review platforms at both divisional and provincial levels will ensure feedback from business leaders.
Pakistan’s current account surplus of $1.9 billion for July-April FY2025 and rising foreign exchange reserves, which reached $16.6 billion as of May 2025, reflect a stabilising external position. For KP, increased trade with Afghanistan and Central Asia represents a major untapped opportunity. Inconsistent customs procedures, banking incompatibilities and weak logistics networks, especially outside Peshawar, continue to stifle cross-border SME growth. National reforms like PSW and CAREC initiatives hold promise but require urgent localisation in the KP.
Pakistan’s fiscal consolidation, with the fiscal deficit down to 2.6 percent of GDP, rising investor confidence with the KSE-100 up 50 percent, and improved credit ratings with Fitch upgrading Pakistan to B-, provide a conducive backdrop for KP’s regulatory overhaul. The challenge lies in translating these national gains into provincial realities, particularly for lagging regions and excluded groups.
To drive economic transformation in the KP, it is essential to prioritise the creation of a provincial digital one-stop shop that brings all business approvals including registration, tax, utilities and environment onto a single, integrated platform. Such a digital infrastructure should align with national reforms but be tailored to KP’s unique regional and administrative realities. Alongside this, there is a pressing need for gender-responsive regulatory reform. This involves building on national momentum for women’s entrepreneurship by removing collateral constraints, expanding credit guarantees, and establishing dedicated provincial women’s business facilitation desks to ensure equitable access and institutional support for women-led enterprises.
Strategic, division-specific policy targeting must become a central tenet of KP’s regulatory modernisation. The newly available macroeconomic headroom should be used to direct public investment towards infrastructure and sectoral priorities in underperforming divisions, such as strengthening agriculture in southern KP and boosting tourism corridors like Malakand.
Financial inclusion, a persistent challenge, demands a policy shift mandating that a greater share of KP-based deposits be allocated to local lending. Expanding Shariah-compliant and digital financial products, as well as fostering partnerships between provincial business associations and financial institutions, can address the twin constraints of informality and limited access to finance.
Trade facilitation and improved border connectivity are also critical. Rapid localisation of national trade facilitation tools such as the Pakistan Single Window, along with banking reforms and logistics upgrades, is necessary in KP’s key border divisions to support SMEs and particularly women-led exporters. Finally, institutionalising public-private dialogue by establishing formal regulatory review platforms at both division and provincial levels will ensure ongoing feedback from business leaders, especially youth and women entrepreneurs, which is essential for responsive and adaptive policy reform.
The comprehensive coverage in Reforming Business Regulations in Khyber Pakhtunkhwa, the first diagnostic to capture regulatory realities across every KP division, including urban, rural, developed, and lagging areas, in such detail, provides a new evidence base for action. With macro-stability returning at the national level, the KP must act to translate stability into opportunity by enacting targeted, digital-first and inclusive regulatory modernisation. Only by closing the implementation gap and localising national gains can the KP transform from a region with potential to one that has achieved sustained, inclusive prosperity.
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