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Inflation down, poverty up 7 points, every root reform deferred—how the Economic Survey's press conference obscures what the statistical annex reveals.
The Pakistan Economic Survey arrives each June in two registers. The first is the press conference: growth is back, inflation has been beaten. The second is the statistical annex, which records, without adjectives, what actually happened—and this year it describes a stabilisation, real, hard-won, and worth defending. Except that it has so far fixed none of the things that made stabilisation necessary in the first place.
We have been here before—in 2000, in 2016, in 2019; the difference this time should be what we do next. Four root problems run through the tables: a tax system that collects too little and distorts what it touches; an exchange rate we manage for comfort rather than competitiveness; an industrial policy that keeps backing the wrong horses; and a fiscal federalism model that has quietly broken. The Survey documents all four.
The machine, in two paragraphs
Take one object and keep it in view: a Faisalabad textile exporter’s invoice. The price on it is in dollars. Almost everything behind it is paid in rupees (this refers to the gas, wages, taxes withheld along the way, the cotton). The rate at which those rupees convert decides whether the shirt behind the invoice is competitive in Hamburg or priced out by one stitched in Ho Chi Minh City. When the rupee holds still while our costs rise faster than our competitors’ costs, that shirt becomes more expensive without anyone announcing anything. Most of what this article describes, taxes, interest rates, subsidies, transfers between Islamabad and the provinces, eventually lands somewhere on that invoice.
One more tool and the toolbox is complete: most numbers in this article come in two flavors. Nominal numbers are counted in today’s rupees. Real numbers strip inflation out. After years of double-digit inflation, an entry in the budget (or a budget line in bureaucratspeak) can grow every single year in rupees while shrinking every single year in what it actually buys. Where the difference matters, the figures show both.
Start with what the government can rightly claim. Pakistan posted primary surpluses (revenues exceeding all spending except interest) in both FY2024 (+0.9 per cent of gross domestic product) and FY2025 (+2.4 per cent), the first back-to-back primary surpluses in roughly two decades.
What a primary surplus is, and why it is the test that matters
Take the government’s finance books and isolate one line that says: interest on past debt. If what remains is in surplus, today’s state is paying for itself; the red ink that remains is the bill for yesterday’s borrowing, not a new hole being dug. That is why creditors watch this number above all others. It separates a government living beyond its means from one carrying old debts while living within them.
Whatever one thinks of how the adjustment was distributed, the adjustment happened, and it is why default stopped being a question we worried about every day.
Inflation fell from a 29.2 per cent annual average at the FY2023 peak to 6.2 per cent over July–April this year. The monthly path deserves a wary eye rather than alarm. April’s reading was back in double digits year-on-year, at 10.9 per cent, and May’s (published after the Survey went to print) came in at 11.7. But both prints sit on exceptionally low bases from last spring, with the Gulf conflict’s energy pass-through arriving on top, and single months are unreliable witnesses: base-period comparisons shift sharply month to month, and administered-price adjustments can dominate the signal in any one reading. Whether disinflation has merely paused or genuinely ended is a question the next quarter will answer, and it is the single number we will be watching.
The disinflation we did get was food-led. Food inflation collapsed from over 20 per cent to under 4, while non-food has stayed sticky in the 7–8 per cent range.
Falling food prices are a blessing, but they are weather and global markets, not institutional capacity; they can also be a curse, because they point towards increased vulnerability among farmers and others who rely on farm earnings.
Reserves, meanwhile, have been rebuilt to about four and a half months of goods imports—the most comfortable position since FY2016, though, as the data clearly shows, we continue to oscillate in a narrow band far below the world average of around nine months of import cover (and the gap is wider than it looks: the world figure counts goods and services imports, a basis on which our own coverage falls below the headline four and a half).
Stabilisation, then, is genuine. The question the rest of the Survey answers is what we bought with it.
The bill arrived in the Social Protection chapter, in a single row of Table 16.1: 28.9 per cent of Pakistanis below the national poverty line in 2024-25, up 7.0 percentage points from 21.9 per cent in 2018-19—the largest reversal in the published series, with inequality rising alongside (the Gini index, a standard 0–100 measure, went from 28.4 to 32.7).
This is the government’s own household survey, its own cost-of-basic-needs line (Rs 8,484 per adult equivalent per month — roughly $3.50 a day at 2021 purchasing-power-parity rates, below the World Bank’s own $4.20-a-day lower-middle-income standard), endorsed by its own technical committees. More than a decade of poverty decline was undone in six years of crisis and stabilisation. Ensuring that poverty surveys come back to their historical once-in-two-years cadence is of the highest importance: the government and country need to monitor those who have suffered most from our economic stagnation and ensure prompt action for those below critical thresholds.
Having paid such a heavy toll for the short-termism of successive governments, the engine that would reverse the situation has not restarted. Total investment stands at 14.4 per cent of GDP—barely off the FY2024 trough of around 13 per cent, the lowest since the early 1970s, and down from about 17 per cent as recently as FY2018.
The celebrated external balance is largely this weakness in disguise: we are balanced because we do not invest, not because we export. The financial system enforces the pattern: government paper now absorbs roughly 72 per cent of banking-system domestic credit, the private sector’s share has slid from about 35 per cent in FY2016 to 21 per cent, banks lend out a historic-low 37.5 per cent of their deposits, and private credit stands at about 8.7 per cent of GDP — among the shallowest in Asia.
Crowding out, from the borrower’s side of the desk
A bank holding a deposit has a choice: lend it to a business, with all the risk and paperwork that entails, or hold a government security that pays well and cannot default in rupees. When the government borrows this heavily, the second option wins by default. Our Faisalabad exporter feels it as a working-capital loan that is slow, scarce, and expensive — not because a banker judged the business weak, but because the business was never really in the running against a treasury bill.
No crisis, no headline; just no credit for anyone without a sovereign guarantee.
Why does every stabilisation land on the same rocks? Begin with revenue. The Federal Board of Revenue’s collection crossed 10 per cent of GDP in FY2025 — a fifteen-year high that is still far below what a state with our obligations requires.
The composition is the deeper problem (though the direct-tax share has genuinely risen, to 49.3 percent of FBR collection): the burden concentrates on the formal wage earner, the compliant firm, and the import stage, while agriculture, retail, and property remain lightly touched. Our exporter’s invoice carries withholding at the bank, levies on the energy in the yarn, and advance tax on the machinery — while the wholesaler two streets over, undocumented, carries none of it. A system like this does not merely under-collect; it actively rewards informality and punishes the documented. Until the base widens, every fiscal target will be met — when it is met — by squeezing the same narrow set of taxpayers harder. The Finance Bill announced today softens the squeeze in one place and tightens it in another: salaried taxpayers got restructured slabs and the abolition of the 9 per cent surcharge, while the advance tax on exporters was raised from 1 to 1.25 per cent — and of the forty-one reform proposals we tracked into this budget, the Bill is silent on twenty-seven.
If taxation is how we underfund the state, the exchange rate is how we misprice everything the state’s economy sells. Pakistan’s exchange-rate policy has alternated between two errors: letting the rupee get overvalued by running reserves down or the policy rate up, then crashing. The Survey’s dollar-denominated good news should be read against that history. Per-capita income at $1,901 is a record — but decompose the change, and price effects (low inflation, a stable rupee) did roughly twice the work of real growth; and last year’s figure was quietly restated from $1,824 to $1,751 ($7 of national-accounts revision, $66 from adopting the 2023 census population).
Dollar incomes, in other words, are partly an artifact of where the rupee currently sits.
The same is true of the debt ratio. Every deferred adjustment eventually presents its bill in points of debt-to-GDP, dated the morning of the next depreciation — FY2018-19 paid FY2017’s. To demonstrate this, I built a counterfactual: revalue the external debt each year at the exchange rate implied by a real effective exchange rate (REER — the trade-weighted, inflation-adjusted value of the rupee) of exactly 100. The mechanism is sobering across the whole arc since FY2008: at the peak of the last defended peg, in FY2017, the rupee’s 22 per cent real overvaluation under Ishaq Dar was hiding more than four points of GDP worth of debt; the FY2023 crash then went the other way, mechanically adding roughly two and a half points overnight; today’s mildly strong rupee subsidizes the headline ratio by about half a point.
How to read the counterfactual
The Real Effective Exchange Rate or REER asks one question: against the currencies of everyone we trade with, after everyone’s inflation, is the rupee expensive or cheap? A reading of 100 means neither. Our exercise replays the last eighteen years with the rupee held at exactly 100—no defended pegs, no crashes—and recomputes the debt ratio each year. The gap between that line and the actual one is the part of our debt story that exchange-rate management wrote.
What three decades of this cycle have cost us is visible in the export base: exports of goods and services have shrunk from about 17 per cent of GDP in the mid-1990s to roughly 10 per cent, while Bangladesh moved past us around FY2000 and kept going. Every episode of the dear-rupee comfort settled silently onto invoices like our exporter’s, and orders moved to Dhaka.
The gap is papered over by remittances — a record $38 billion in FY2025, over 9 per cent of GDP, more than covering the goods deficit.
There are at least two problems with financing trade through remittances. First, relying this much on remittances means that we are vulnerable to events and policy decisions outside our country: at least half of these inflows (likely closer to three-fifths) come from two Gulf economies whose economic cycles and policies we have no control over. Second, and perhaps more important still, using remittances to keep the dollar cheaper than the trade balance justifies, and biasing imports towards consumption, means that we fail to develop an export sector that connects to global value chains and helps inject international talent and training into the country. Import-substitution industries, by their very nature, are far less likely to do this. Remittances are a transfer from Pakistanis we failed to employ; treating them as an export strategy is the policy equivalent of calling emigration a jobs program.
There is a better use for these inflows than financing a comfortable exchange rate. The State Bank should be buying more of them — building reserves toward the import cover we visibly lack — and sterilising the rupee consequences, rather than letting the inflows price our exporters out (the central bank has been purchasing dollars under the program’s reserve targets; the argument here is about scale and intent). Sterilisation carries a fiscal cost — the gap between what reserves earn and what mopping up the rupees pays — but it is insurance priced well below the cost of the next crash, and it converts a vulnerability into a buffer.
Industrial policy is supposed to pick winners. Ours picks incumbents. The Survey’s manufacturing tables show where growth actually came from this year — and how little it owes to the sectors we protect most expensively.
Textiles, holding the largest weight in large-scale manufacturing at 18.2 per cent, grew 0.75 per cent; the chapter does not connect this to the collapse of its raw material, but the agriculture tables do: cotton production is at roughly half its FY2015 peak, and its sown area had fallen by a third before the 2022 floods ever arrived. The cotton on our exporter’s invoice, once Punjab’s, increasingly arrives by ship and is paid for in the same dollars the invoice is supposed to earn.
What took cotton’s land? Sugarcane — water-hungry, politically protected, and expanding through three consecutive years in which the Survey’s own irrigation section reports surface water 10–13 per cent below average. Meanwhile, cement capacity nearly doubled over the past decade — from about 46 million tonnes in FY2016 to 85 million today — while domestic demand stagnated, leaving utilisation near 60 per cent. Tariff walls for autos, support prices for sugarcane, energy subsidies for whoever lobbies best — and the one unambiguous success story, information-technology exports pacing toward their first $4 billion year, grew up largely outside the protection racket (official figures likely understate it — earnings retained abroad by freelancers and firms mean the $4 billion is a floor, not a ceiling).
The result of all this selection is the absence of stabilisation’s purpose: structural change. Agriculture, industry, and services hold essentially the same shares of our economy as they did thirty years ago — agriculture’s share, about 23 per cent, has not fallen at all.
We have churned policy, burdened our people with debt, and let them slide into deeper poverty without transforming structure.
Nowhere is the churn more institutionalised than in the federation’s own finances. Two days before this budget, the National Economic Council froze provincial development programs at what provinces actually spent this year — with Punjab’s plan, per reporting from the meeting, nearly halved against its previous budget.
At first glance, the mechanism is arithmetic, not malice: the International Monetary Fund program requires a consolidated primary surplus of 2.5 per cent of GDP this year, and the IMF’s program document sets the provincial contribution at Rs 1,464 billion this fiscal year — about 59 per cent above the Rs 921 billion surplus the provinces actually managed in FY2025, rising to Rs 1,937 billion by FY2027 — and since salaries and pensions cannot move, development is the only line that can.
The NFC award, in one paragraph
The National Finance Commission award is the formula that splits the big federal taxes between Islamabad and the provinces. Since 2010, the provinces’ share has been 57.5 per cent, and the Constitution does not allow it to fall below that. The Center or federal government keeps the debts, the interest bill, and Defence—and can fund nothing else without borrowing. The provinces hold the schools, hospitals, and police that decide whether poverty falls. The annual budget fight is, at bottom, an argument over who agrees not to spend.
But step back and ask why the federation needs its provinces to not-spend their constitutionally promised transfers. The answer is in the expenditure tables: federal interest payments rose from 3.8 per cent of GDP in FY2017 to 7.8 per cent in FY2025 — about 37 per cent of all consolidated spending, and a 70 per cent increase in real, inflation-adjusted terms in the five years from FY2020.
The Center borrows, the Center pays interest—92 paisas of every rupee the Center retains after NFC transfers in FY2025, down from 97 paisas the year before. The provinces receive more than a third of federal revenue as formula transfers, return a growing share as compulsory surplus, and are being asked to raise that surplus by nearly 60 per cent next year. Nobody in this system has a reason to mobilise the revenue that would actually change the arithmetic.
The deeper problem is not the accounting, it is the incentives. In any fiscal system, the entity that keeps the marginal rupee of revenue effort is the one with reason to try. Pakistan’s arrangement, fixed since the 7th NFC Award in 2010, gives provinces a formula-determined 57.5 per cent of the divisible pool regardless of whether they tax agriculture, property, or services (all provincial subjects). The marginal rupee of a province’s own revenue effort earns it roughly one rupee; the marginal rupee of federal effort earns the provinces collectively 57.5 paisas on the divisible pool — with no exertion of their own. There is no residual claimant — nobody keeps what better performance would create. The same disconnect repeats inside each province: district services are run by center-appointed administrators with no stake in outcomes, funded by capitals that keep the lion’s share. China’s local growth engine in the 1980s and early 1990s ran on exactly the opposite design — a fiscal-contracting system under which localities that generated revenue above their quota kept most of what they raised, and competed to raise it.
Strip out the macro and the question is what the state delivers per person. Education spending has fallen 23 per cent in nominal terms since its FY2023 peak — Rs 1,251 billion then, Rs 962 billion in FY2025, on the same consolidated series — before counting a single point of inflation; in real per-capita terms it has roughly halved from its FY2019 peak.
Health spending stands at 0.8 per cent of GDP and falling, with the COVID-era bump fully reversed. Even capital’s own scoreboard tells the real-terms story: the stock market’s record nominal highs deflate to a market capitalisation 4 per cent below its FY2013 level.
The energy transition we advertise is additive rather than substitutive — clean sources now supply half our electricity, but thermal generation is flat in absolute terms, so the capacity payments roll on.
And the labour market is not absorbing the population: over the latest survey window the workforce grew by 11.3 million but employment by under 10 million, unemployment rising from 6.3 to 7.1 per cent even as participation improved — a demographic dividend, two-thirds of us under thirty, with no industrial structure to collect it.
Stabilisation was the precondition for fixing all of this. It is not the fix. The Survey, read honestly, is a list of the reforms we have deferred — taxation, the exchange rate, industrial selection, the federation’s fiscal architecture — together with a precise accounting of what each deferral now costs. Today’s budget will tell us whether we have noticed.
Note: All data is from the Pakistan Economic Survey 2025-26
English (US) ·