When economy experiences stabilisation, reforms and rising poverty together, economic growth is missing
ISLAMABAD:
Pakistan’s economic outlook in 2026 reflects two contrasting trends. On the one hand, there is stabilisation, improvement in macroeconomic indicators and reform initiatives; on the other, there is deterioration in social indicators and a decline in real incomes for nearly 80% of households, as documented by the latest Household Integrated Economic Survey (HIES).
In nominal terms, average monthly household income has nearly doubled since 2018, rising faster in urban areas (from Rs53,010 to Rs96,767) than in rural areas (from Rs41,545 to Rs82,179). Household consumption also grew by 113%, led by housing, energy, clothing and transport, with faster growth among higher-income groups.
However, once inflation is taken into account, real incomes have declined for most households. During this period, Pakistan experienced the highest inflation in the last 50 years, which eroded the savings of the majority of households.
According to the HIES, income inequality is more pronounced in urban areas, where rich households earn above Rs146,920 while the poorest remain below Rs42,412. Since 2018-19, income increased by 119.25% in the fifth (top earners) quintile, compared with 80.45% in the first quintile, indicating faster gains for higher-income households.
This is not surprising, as top earners have a deeper asset base, including financial assets. Inequality itself is not necessarily problematic as long as overall real incomes are rising, which is currently not the case.
The share of household income from remittances increased from 4.96% in 2018-19 to 7.77% in 2024-25, consistent with the higher levels of emigration observed in recent years. More people are now seeking opportunities outside Pakistan, even though the traditional labour market in the Gulf region is also constrained. When the economy is simultaneously experiencing stabilisation, some reforms and rising poverty, the primary reason is evident: economic growth is missing.
Real GDP growth rates between the two HIES reports tell the story. Growth was -0.47% in 2019-20, 3.98% in 2020-21, 5.97% in 2021-22, 0.29% in 2022-23, 2.38% in 2023-24 and 2.68% in 2024-25. These figures translate into an average GDP growth of just 2.47%.
This is barely in line with population growth, which stands at around 2.55%. This has two implications. First, the only growth we are witnessing is largely population-driven, with little contribution from productivity, which is sadly declining. Second, in per capita terms, the economy has effectively stopped growing. As Nadeemul Haque recently wrote, “Growth is the only durable exit: it raises revenues without raising rates, creates foreign exchange without borrowing, and turns stabilisation from a recurring emergency into a permanent solution.”
So, what shift do we need? Historically, Pakistan has relied on demand-side policies and state capitalism to induce growth. In its early years, the country adopted infrastructure investment and licensed businesses to kick-start growth, which yielded some dividends. However, nationalisation reversed these gains, effectively crippling the private sector.
In the past decade, Pakistan again adopted a demand-side approach by leveraging Chinese investment and presenting it as a “game changer”. The underlying philosophy was the same: infrastructure investment in transport and energy would create sufficient incentives for the private sector to invest, produce and export. That vision has failed, as the data clearly show.
Supply-side economics, by contrast, suggests that the key to higher levels of sustained economic growth lies in the reduction of tax rates, ease of doing business, reduced government spending, sound money, free trade and privatisation.
While the government is taking measures on some fronts, such as tariff reforms and privatisation, it is not adopting a comprehensive approach. In particular, excessive taxation and regulation are weighing heavily on businesses. As a result, the government itself, which depends on tax revenues, is struggling despite progress on several fronts.
In Pakistan’s case, an additional supply-side constraint must be addressed: energy. A decade ago, the problem was the absence of reliable energy; today, it is the surplus of expensive electricity. In both cases, the outcome is the same. Large industrial users cite energy costs as a major obstacle to competitive production. While the solar revolution is benefiting households, small businesses and farms, large-scale industrial units still require cheap and reliable grid electricity.
If Pakistan continues to rely on demand management alone, it will remain dependent on macroeconomic tools that can deliver stabilisation but not growth. By carving out a coherent supply-side economic policy, we can unlock productivity, wealth creation and prosperity, laying the foundation for long-term and sustainable economic growth.
THE WRITER IS FOUNDER AND CEO OF THE POLICY RESEARCH INSTITUTE OF MARKET ECONOMY (PRIME), AN INDEPENDENT ECONOMIC POLICY THINK TANK
