Economists warn high costs, weak exports threaten Pakistan’s economy in 2026

KARACHI – (Special Correspondent / Web Desk) – Pakistani economists and business leaders on Wednesday called on the government to lower elevated production costs, control inflation, and boost exports to make the most of the country’s economic progress in 2025 as it heads into the new year.

Prime Minister Shehbaz Sharif recently pointed to key economic improvements achieved over the past two years, noting that inflation has dropped sharply from 29.2 percent to 4.5 percent, while foreign exchange reserves have risen from $9.2 billion to $21.2 billion.

Despite these gains — including relatively stable inflation, a $100 million current account surplus in November, and a strong stock market performance — experts say Pakistan still faces significant challenges. Economist Sana Tawfik stressed that meaningful structural reforms remain essential to tackle underlying economic weaknesses.

“When we talk about stability and growth, we cannot deny that there are challenges in the economy,” Tawfik, head of research at Arif Habib Limited, told Arab News. “High energy tariffs, interest rates and the broader cost of doing business need to be addressed if Pakistan wants to sustain growth, boost exports and attract foreign investment.”

Pakistan reported consumer inflation at 6.1% in November, saying it was projected to remain within the moderate 5.5-6.5% range in December.

Muhammad Rehan Hanif, president of the Karachi Chamber of Commerce and Industry (KCCI), agreed that high power tariffs were eroding the effectiveness of Pakistan’s exports.

“Our interest rate is still 10.5%, while the region is at six or seven percent,” Hanif lamented. “[While] electricity costs around 12 cents per unit here, compared to about nine cents in Bangladesh.”

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The KCCI president also pointed to the country’s poor infrastructure, particularly that of its commercial capital Karachi, as a major challenge for the year ahead.

He said dilapidated roads, poor drainage and poor industrial conditions were damaging Pakistan’s image for visiting buyers and diplomats, discouraging investment.

“Infrastructure is the biggest challenge the industrialists in Karachi are facing,” he explained.

More troubling for Pakistan is the fact that foreign direct investment (FDI) inflows fell by more than 25% to $927 million during the July-November period, as per data from the central bank. Pakistan’s FDI inflows have never surged beyond $3 billion in nearly 20 years.

Economists say high energy costs along with interest and taxation rates are responsible for low FDI in the country.

Hanif stressed the importance of increasing Pakistan’s exports to ensure macroeconomic gains in 2026.

“Exports are our lifeline,” he said. “When 7 to 8 million Pakistanis abroad can generate $37 billion [in remittances], why are 250 million people here exporting only $32 billion?“

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Tawfik agreed, saying that shifting to an export-driven economic model was essential for long-term sustainability.

“It is about time that we move from an import-driven economy to an export-driven one,” she said, adding that macroeconomic stability was a prerequisite for restoring investor confidence and attracting FDI.

Meeting the International Monetary Fund’s benchmarks, ensuring timely inflows from creditors and continuing reforms such as privatization of state-owned enterprises (SOEs) will also be critical in 2026, she added.

Despite these challenges, financial experts recognized that 2025 marked a clear improvement for Pakistan compared to the previous two years.

“The year 2025 can be described as a year of macroeconomic stability and overall, we saw some improvement in different macroeconomic indicators,” Tawfik said.

She noted that inflation, which had surged to a record 38 percent in May 2023, had been reduced to single-digit figures in 2025.

Pakistan’s Finance Adviser Khurram Schehzad said this week the Pakistan Stock Exchange has delivered 50 percent-plus returns in US dollar terms since January 2025, making it one of the “best markets in Asia.”

Tawfik said 2026 could see “positive” developments if the government maintains macroeconomic stability.

The economist said she expected growth at around 3.7%, inflation to remain within the central bank’s five to seven percent target range and a relatively stable exchange rate with modest depreciation.

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However, she cautioned that without addressing high energy costs, easing business conditions and boosting exports, the government could risk squandering its hard-won macroeconomic gains.

“It is important to take all stakeholders on the same page and work in the same direction for overall economic betterment.”