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Pakistan’s fragile macroeconomic recovery, which began in 2025, is losing momentum amid growing geopolitical pressures, with inflation returning to double digits and economic conditions becoming increasingly difficult for households and businesses.
A July 2026 report by the private think tank Policy Research Institute of Market Economy (Prime) said the recovery is stalling because of external geopolitical obstacles. Consumer price inflation (CPI) rose to between 10.9 and 11.7 percent during April-June, while the Sensitive Price Indicator (SPI) climbed to 12.8 percent in June, eroding the purchasing power and monetary freedom of individuals and firms.
The report warned that the inflation surge is particularly damaging in an economy where about 80 percent of the labour force works in the informal sector and remains vulnerable to price shocks and income instability.
Prime said debt servicing and defence expenditures together consumed 94 percent of net federal revenue, leaving only six percent available for health, education, infrastructure, social protection and other essential public services.
According to the Labour Force Survey 2025, 80.8 percent of Pakistan’s workforce is employed in the informal economy. The report highlighted a significant disparity in the tax burden between salaried workers and other income earners.
A salaried employee earning Rs5 million annually faces an effective tax rate of 33.29 percent, with taxes deducted at source and limited opportunities for evasion. In contrast, a shopkeeper earning the same amount pays only about 0.5 percent under presumptive and fixed tax schemes.
Prime said the 2026-27 budget provided only limited relief for the salaried class and failed to address the widening gap between formal and informal taxpayers.
The think tank argued that Pakistan’s policy approach should move beyond the reactive stabilization measures required under the International Monetary Fund (IMF) programme and adopt a resilience-based framework focused on economic freedom.
It defined economic freedom as the ability of individuals to exercise control over their property and labour, including the freedom to work, produce, consume and invest according to their own choices.
Using the Heritage Foundation’s Index of Economic Freedom, the report said Pakistan scored 48.9 points, placing it in the “Repressed” category.
The index assesses countries across 12 quantitative and qualitative indicators grouped under four pillars: rule of law, government size, regulatory efficiency and open markets.
Prime concluded that without structural reforms to broaden the tax base, reduce fiscal pressures and improve the business environment, Pakistan’s recovery could remain vulnerable to both domestic imbalances and external geopolitical shocks.
