Pakistan’s Economy: Challenges and Way Forward (2025)

Pakistan’s Economy 2025: Challenges & Solutions

Explore Pakistan’s 2025 economic issues and actionable strategies for progress. Understand growth barriers and reforms to ensure stability

Introduction

In 2025, Pakistan stands at a crossroads of economic survival and growth. Faced with inflation, debt, unemployment, and political instability, the economy struggles to meet public expectations. The current inflation rate has soared to 28%, and foreign debt now exceeds $130 billion. Economic reform is not optional anymore; it is urgent. This essay discusses the major challenges and proposes a clear way forward.

Key Economic Challenges in 2025

1. Rising Inflation

Prices of essential items such as wheat, electricity, and petrol have skyrocketed. Middle and lower-class families struggle daily to afford necessities. Wheat prices remain volatile and well above last year’s rates, severely straining household budgets. As of June 2025, a 40 kg bag costs between PKR 2,600–2,880 in Punjab (e.g. Faisalabad: PKR 2,600–2,820) and PKR 2,680–2,900 in Sindh.
With the elimination of federal Minimum Support Price (MSP) in early 2025 and only Punjab retaining a PSP of PKR 2,900 per 40 kg, many farmers have been forced to sell below cost, with cultivation expenses averaging PKR 3,200–3,400.
This shortfall has sparked protests, particularly in Gilgit-Baltistan, where locals rallied against surging wheat prices in early 2024.
Electricity
Power tariffs have fluctuated sharply under IMF-guided reforms. Tariffs peaked at PKR 38.37–40.60/kWh before recent cuts. In April–June 2025, NEPRA reduced rates by another PKR 1.71/kWh. Still, government plans for July 2025 include removing subsidies, a 10% debt surcharge, and full quarterly tariff rebasing — potentially reversing recent relief. Meanwhile, electricity consumption fell 3.6% in FY 2024–25 to 111,110 GWh — households down 1.3 TWh, industry down 3.3 TWh.
Petrol & Diesel
A new PKR 5/litre carbon levy is scheduled from July 2025, atop existing “fuel and petroleum adjustment” mechanisms. Though global oil prices have eased, the levy will offset these improvements and likely feed into rising transport and commodity costs nationwide.
Human Impact
Inflation, once hitting 38.5% in May 2023, has dropped below 10% by early 2025, but essential prices still far outpace income growth. For middle and lower-income households, the average monthly electricity bill consumes a disproportionate share of earnings, while wheat price surges force families to cut food intake or skip meals. Farmers are accumulating losses of PKR 20,000–30,000 per acre, making wheat cultivation potentially unsustainable.

2. Unemployment

In early 2025, Pakistan’s youth unemployment rate crossed 9%, raising serious concerns for the country’s future. With over 65% of the population under 30—around 156 million people—the lack of job opportunities is becoming a national crisis. More than 3 million individuals aged 15 to 24 are unemployed, and every year, an additional 3 to 3.5 million youths enter the job market. The economy’s current pace of job creation cannot absorb this growing labor force.

The problem is worsened by a mismatch between education and market demands. Most young people lack practical, job-ready skills, and opportunities for apprenticeships are extremely limited. The situation is even more difficult for women, with only 22% participating in the labor force compared to 81% of men.

Economic instability, low investment, and inflation have slowed private sector growth, reducing the number of available jobs. If this trend continues, the country risks wasting its youth potential, leading to frustration, brain drain, and long-term stagnation.

To turn this crisis into an opportunity, Pakistan must invest in skills training, expand apprenticeship programs, support startups, and create an inclusive job market. Empowering youth is essential for economic stability and long-term national growth.

3. Foreign Debt Crisis

In early 2025, Pakistan’s total public debt soared to approximately Rs 72 trillion (USD 260 billion)—about 67% of its GDP. Its external debt burden reached around USD 133 billion, including USD 87 billion owed by the government and public enterprises. In the first half of FY 2025 (July–December), Pakistan serviced USD 6.1 billion in external debt, covering USD 4.23 billion in principal and USD 1.88 billion in interest. The second quarter alone saw USD 4.2 billion spent on external public debt servicing. The government allocated nearly Rs 8.2 trillion (almost 47% of the federal budget) for debt servicing in FY 2025–26, squeezing funds for essential services and development.

4. Political Instability

Frequent changes in government and inconsistent economic policies have created an unstable business environment in Pakistan. This unpredictability discourages both local and foreign investors, who seek policy continuity and economic stability for long-term planning. Sudden shifts in taxation, trade regulations, and investment laws make it difficult for businesses to operate with confidence. As a result, potential investors either delay decisions or divert their capital to more stable markets. This loss of investor confidence limits job creation, slows economic growth, and increases reliance on external borrowing. For sustainable progress, Pakistan must ensure political stability and maintain clear, consistent economic policies.

5. Poor Tax Collection

In Pakistan, only 1.5% of the population pays income tax, creating a massive gap between national needs and available public funds. This limited tax base severely restricts the government’s ability to invest in critical development projects such as education, healthcare, and infrastructure. As a result, the state increasingly relies on external borrowing and indirect taxes, which disproportionately affect lower-income groups. The lack of a broad and fair tax system not only hinders economic progress but also increases inequality. Expanding the tax net and improving compliance are essential steps to strengthen Pakistan’s fiscal capacity and achieve long-term sustainable development.

Major Economic Sectors in Trouble

• Agriculture: Faces water shortages and low productivity.
• Textile Industry: Suffers due to high energy costs and low exports.
• Construction: Slowed down due to rising material costs.

International Comparisons

• Bangladesh has surpassed Pakistan in exports and GDP growth. Its stable textile sector and economic planning are key.
• Vietnam attracts more FDI due to transparent policies and low corruption.

The Way Forward

1. Stabilize Inflation

Strengthen State Bank independence and control money printing. Reduce reliance on imports by boosting local production.

2. Boost Exports

Offer tax incentives and subsidies to exporters. Focus on value-added products rather than raw materials.

3. Tax Reforms

Broaden the tax base. Use digital systems to track income and spending. Reward honest taxpayers.

4. Youth Employment Programs

Promote freelancing, digital skills, and vocational training to reduce joblessness.

5. Public-Private Partnerships (PPP) Encourage collaboration in infrastructure, transport, and education for shared benefits.

Conclusion

The economic crisis in Pakistan requires collective responsibility and timely action. We need honest leadership, strong institutions, and clear policies. Without reforms, we risk economic collapse. With them, Pakistan can become a rising economy in South Asia.