Pakistan: An economy on life support, strained by debt and weak reforms

Faces shaky recovery amid renewed tensions with India, surging debt, IMF dependence, weak reforms, and chronic structural and governance failures. SHIKHA CHATURVEDI & JAYANT PANKAJ explain

Pakistan is currently teetering on the edge of a fragile economic recovery, weighed down by tensions with India and deepening fiscal dependence on international lenders. 

Hostilities with India reignited following a terrorist attack on April 22 in Jammu & Kashmir’s Pahalgam, in which 26 people, mostly tourists, were killed. India has since appealed to international financial institutions to reassess their support for Pakistan, citing Islamabad’s complicity with terrorist groups. These renewed frictions have intensified scrutiny over Pakistan’s economic management and its recurring reliance on bailouts from the International Monetary Fund (IMF).

  Pakistan’s latest conflict with India has emerged amid its persistently turbulent economic backdrop. Despite a modest rebound, core indicators remain weak. In FY24 (July 1, 2023–June 30, 2024), Pakistan’s gross domestic product (GDP) stood at $373.08 billion, while general government gross debt reached 70.1 per cent of GDP. By FY25, debt had edged up to 73.6 per cent of GDP, even before factoring in $2.4 billion in IMF-approved loans — including a new bailout tranche and funding for climate-related initiatives — cleared on May 9.

  The country’s foreign exchange reserves remain volatile, while high energy import costs, a narrow export base, and structural inefficiencies across agriculture and industry continue to exert pressure.

  To avert a full-blown default, Pakistan once again turned to the IMF. In September 2024, the Fund approved a 37-month Extended Fund Facility (EFF) totalling Special drawing rights (SDR) of 5.32 billion (roughly $7 billion). Following an initial disbursement of SDR 760 million ($1 billion) in 2024, a second tranche of equal size was released in May 2025. Cumulatively, IMF disbursements to Pakistan from 2008 to 2025 have now surpassed SDR 16 billion — a striking indicator of the country’s long-standing dependence on external financial assistance.

  These recent disbursements were accompanied by the launch of an IMF-backed 28-month climate resilience programme valued at SDR 1 billion ($1.4 billion), reflecting the Fund’s growing focus on sustainability in economies vulnerable to environmental shocks. However, familiar conditionalities remain: Cuts to energy subsidies, reforms of state-owned enterprises, and expansion of a chronically shallow tax base.

  The IMF’s latest approval came despite India formally registering its protest by abstaining from voting at the Board meeting.

Notably, India has not sought structural adjustment loans from the Fund since 1991.

  While Pakistan has seen some short-term gains — including inflation easing to single digits after peaking at 38 per cent in May 2023, and GDP growing 2.4 per cent in 2024 following a 0.6 per cent contraction in 2023 — its structural weaknesses persist. External debt exceeded $130 billion in 2024, with roughly 22 per cent owed to China, largely for infrastructure under the China-Pakistan Economic Corridor (CPEC).

  This is not a new story for Pakistan. The country first received IMF assistance in 1958, following the Partition and subsequent conflicts with India, including wars in 1965 and 1971. The loss of East Pakistan (now Bangladesh) further entrenched its dependence on external aid.

  From the 1980s through the 2000s, successive civilian and military regimes entered structural adjustment programmes aimed at liberalisation and fiscal restraint. Yet weak institutions and endemic corruption repeatedly undercut reforms.

  By 2007, Pakistan’s external debt had reached $43 billion. The post-9/11 security landscape accelerated further borrowing. Between 2008 and 2010, the IMF disbursed SDR 2.07 billion, 2.10 billion, and 1.06 billion, respectively. Just ahead and during the Covid-19 period, inflows included SDR 1.04 billion in 2019, 1.02 billion in 2020, and 1.64 billion in 2022.

  The pattern is entrenched: Debt inflows rise, austerity measures follow, and growth falters. With general government debt now approaching three-quarters of GDP, and only incremental reform efforts visible, Pakistan risks prolonging its economic stagnation unless fundamental governance, regulatory, and industrial overhauls are undertaken.