KARACHI:
To begin with, let’s take a look at the landscape across a few different measures.
Oil prices, remittances and investor confidence
The last two weeks have been pivotal for Pakistan’s economic outlook. The country has started to benefit from the global trade war, particularly through lower oil prices. While the middle class has yet to see direct relief, largely because savings have been diverted to subsidise power tariffs and accelerate development in Balochistan (which should proceed regardless of oil trends), investor confidence has soared.
This is supported by a credit rating upgrade and a remarkable remittance boom. Monthly inflows of $4.1 billion in remittances are no small feat. These inflows now form a critical pillar of Pakistan’s macroeconomic stability.
A dollar deficit covered by diaspora
Since 1998, Pakistan’s global competitiveness has steadily declined. Exports of goods and services have fallen from 16% of GDP ($10 billion/year) to 11% ($38 billion/year). During this period, the gap was filled by remittances, which grew from 1.9% of GDP ($1 billion/year) to 10% ($36 billion/year). These inflows have kept the economy afloat – an extraordinary contribution by overseas Pakistanis.
Unfortunately, this cushion has led to policy complacency. Instead of fixing structural weaknesses, we’ve grown reliant on low growth, high emigration, and brain drain, while failing to build globally competitive sectors at home. Now is the time to leverage remittances for real economic transformation.
A rare $18-20b opportunity
If oil prices sustain at $5060/barrel over the next four years, Pakistan could save $6-8 billion cumulatively. Additionally, a surprise remittance inflow of $37 billion in FY26 (versus $34 billion expectation) could yield another $3 billion in upside per year. Altogether, policymakers have a potential $18-20 billion pool to restructure the economy and build resilience. To ensure these gains translate into long-term value, the following steps are essential:
Don’t pass oil price declines to consumers: Petrol prices in Pakistan ($0.95/litre) are already lower than Bangladesh ($1.03), the Philippines ($1.15), India ($1.21), Sri Lanka ($1.28), and Kenya ($1.50). This offers ample space to maintain stable prices or marginally increase them in USD terms. The dollar savings from low oil should be channelled to productivity-enhancing uses, not consumer subsidies. Public awareness campaigns can help educate citizens on the long-term benefits.
Maintain a healthy interest rate differential: Reducing interest rates to single digits will re-ignite an import-driven consumption bubble. Between 2015 and 2018, interest rates fell to 6-7%, when the US was near zero. Today, the US 10-year bond yields are at 4.5%. Pakistan should maintain a 7-8% differential, implying domestic rates should bottom out at 11-12% – a level sufficient to support demand without overheating the economy.
Tight control over imports: Import growth must be tightly regulated. Imports should be allowed primarily for capital goods, raw materials, and intermediate goods essential for exports and import substitution industries. Final goods should be discouraged. Luxury imports (eg, cars) that generate tax revenue can be tolerated, with the proceeds reinvested into social and infrastructure development for the middle and lower-income segments.
Policies must also aggressively support large-scale investments in downstream industrial capacity – naphtha crackers, refineries, semiconductors, textile, smelters – that can displace final goods imports and yield substantial dollar savings, job creation, and tax revenue.
Use savings to reduce external debt: With annual growth of 4%, the external debt-to-GDP ratio could decline from 37% ($130 billion/ $350 billion GDP) to 26% ($110 billion/$410 billion GDP) by FY29. This is achievable by using the $20 billion cushion to reduce external borrowings. Doing so would improve Pakistan’s sovereign risk profile and could help restore the country to its mid-2000s credit ratings (S&P B+, Moody’s B1) and enable geopolitical leverage to take independent policy-making decisions.
Stay prudent, avoid pre-election populism: Resist the urge to push GDP growth beyond 4% in the final years of the electoral cycle. A controlled, sustainable growth path of 3.5-4% will lay the foundation for the next phase of domestically led growth through IT, minerals, agriculture exports and fiscal reforms. The government must tackle deadweight enterprises (Pakistan International Airlines, Pakistan Steel, Sukkur Electric Power Company, Peshawar Electric Supply Company, Quetta Electric Supply Company), invest in ML-1 rail, and harness the water storage of Dasu and Bhasha Dams to boost agricultural output.
Population control must also be embedded in welfare disbursements – the Benazir Income Support Programme recipients should be limited to families with two children to enforce sustainable demographic growth.
Incentivise real investments over speculative capital: Returns of 15-25% should be exclusive to export-oriented or import-substituting projects. Speculative real estate investments should be capped at 5-10% returns and heavily taxed. This will redirect capital towards globally competitive industries and encourage a new class of entrepreneurs whose fortunes are tied to Pakistan’s economic strength, not rent-seeking or money laundering.
Preparing for a polarised global economy
As the world enters a new phase of geopolitical and economic fragmentation, smaller economies will be forced to pick sides. Pakistan must act now to build FX buffers, reduce dependence on bilateral rollovers, and stand independently – economically and strategically.
Critical forums like the Special Investment Facilitation Council must mobilise investments and policy coherence across government to fast-track reforms in education, skills, value addition, and dollar-earning sectors. Failing to act now risks turning a brain drain into a generational lost opportunity. But if we play our cards right, this remittance-powered era could mark the true beginning of Pakistan’s brain gain.
THE WRITER IS AN INDEPENDENT ECONOMIC ANALYST
