The global uncertainties and fuel crisis are continuously worsening the economic troubles of Pakistan. Recently, Pakistan’s National Assembly’s Standing Committee on Finance expressed its grave concern about the fact that the country’s combined circular debt in the electricity and gas sectors has climbed to an alarming Rs. 5.1 trillion, with the total external debt currently standing at $137.56 billion. Amidst the Middle East crisis, the circular debt stock has increased massively from Rs. 3.5 trillion last year. Due to heavy dependence on foreign borrowings, Islamabad’s external debt has risen by $4.98 billion, as per the data from the first ten months of FY2025-26. Overall, the economy lingers in ‘unstable stability’, with a highly fragile economic path. Any temporary relief and stability in the economy over the last few months post the IMF subsidy, were ephemeral. This is due to the structural weaknesses, which are sticky, in the backdrop of the energy crisis and financial pressure on the economy.
However, Pakistan’s crisis is not purely exogenously determined. The external economic shocks are just the aggravators of the already ailing economic conditions, caused by the endogenous factors. The elite capture in Pakistan has been understood as a major causal factor for its current situation. The perverse incentive problem, along with policies missing the intended targets, stems from severe policy mismanagement. The country’s wealthy elite are absorbing significant state subsidies instead of driving national growth. Billions of dollars obtained through IMF programs ultimately benefited only about a few wealthy individuals through targeted gas and tariff subsidies and export-led growth incentives, rather than helping the general public. The government relies heavily on indirect taxes and petroleum levies and doesn’t bring any structural change to broaden the actual tax base. Besides, the National Finance Commission (NFC), responsible for distributing financial resources between the federal government and the provinces, remains a body only on paper, with six of the eight working groups lying absolutely dormant since their first meeting in December 2025. The groups were supposed to meet monthly. This is yet another indication of the policy inertia and lack of will at the top level.
A major tranche of foreign borrowing was credited in April 2026, amounting $4.47 billion. This amount includes a $2.5 billion loan tranche from the International Monetary Fund (IMF), which played a key role in boosting monthly inflows. Currently, Pakistan has engaged in multiple bilateral as well as multilateral borrowings. While the UAE asked for the loan repayment, Saudi Arabia put forth around $1 billion worth of oil on deferred payment arrangements in addition to the deposits of $3 billion in Pakistan’s central bank to aid its foreign exchange reserves.
With the GDP growth projected between 3.5 and 4.5 percent for FY27, the double-digit inflation already at 10.9 percent in April 2026, is expected to reach 12 percent. The Federal Board of Revenue (FBR) has failed to meet its tax collection targets, with a shortfall exceeding Rs. 680 billion in the first 10 months of the fiscal year.
Without the IMF intervention, Pakistan is prone to default and bankruptcy, while the government is busy seeking a massive Rs.1,500 billion tax break from the IMF rather than focusing on cutting government expenditures. Besides, the political parties are busy exercising political monopolies over the creation of new provinces instead of actually devolving financial powers to local governments.
The standing committee has urged the government to abandon short-term fixes and prioritize long-term inclusive growth with fiscal transparency and structural reforms in the upcoming FY27 budget, along with the need to reduce heavy taxation on digital services to protect freelancers and the youth. However, knowing the political inertia in Pakistan’s leadership, the actual execution of the suggestions seems a distant dream. The goal of sustainable economic recovery and fiscal stability is difficult to achieve for Pakistan, unless it makes structural changes by targeting universal improvements in standards, and creates employment opportunities.
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