Pakistan’s moment for structural reforms

After years of economic stagnation and firefighting to avert default, the government is finally pivoting towards long overdue structural reforms, buoyed by a markedly improved macroeconomic outlook.

Inflation, which had surged to 38% in mid-2023, has plunged to a six-decade low, prompting the central bank to slash interest rate from 22% to 11%. The exchange rate has stabilised around Rs280 per dollar, foreign currency reserves now cover nearly three months of imports and falling global oil prices have eased fiscal pressures. With this breathing space, the government is seizing the opportunity to take bold decisions and advance long-pending reforms.

Among the boldest reforms underway is the overhaul of Pakistan’s import tariff regime. The government has rolled out a five-year plan to transition from one of the most inward-looking and protectionist economies to a more open, export-oriented model akin to East Asian success stories. The reform sets an ambitious target: reducing the maximum tariff rate from over 100% to just 15%. This includes the complete removal of regulatory duties, currently ranging from 5% to 90%, and additional customs duties of up to 7%.

Pakistan’s current tariff structure is not only excessively high but also deeply fragmented, riddled with exemptions and privileges extended to favoured sectors and industries. These special treatments cost the government an estimated Rs550 billion annually, nearly half of all customs revenue. Removing such distortions will help level the playing field, especially for small and medium enterprises (SMEs) that form the backbone of the economy.

Lower tariffs will lower input costs for domestic manufacturers, enhance competitiveness and encourage firms to target export markets. A detailed analysis shows that these changes are likely to increase productivity, attract foreign investment and stimulate job creation. Consumers will also benefit through greater access to high-quality, affordable products. In short, this is not just a trade policy shift; it is a foundational move to unlock economic dynamism.

Complementing tariff reform is a drive to cut red tape. The government has finalised 63 regulatory reforms aimed at simplifying and digitising business procedures. These will be rolled out over the next 15 to 90 days, easing compliance and reducing the cost of doing business.

The power sector, long a major constraint on growth and fiscal stability, is undergoing significant reform. Following a review of independent power producer (IPP) contracts, a key breakthrough has been the approval of a financial restructuring plan to eliminate Rs1.275 trillion in circular debt through an agreement with commercial banks.

Electricity tariffs have been reduced by over 30% for industry and by more than 50% for 18 million protected households. Distribution companies (DISCOs) are now overseen by professional boards and improved governance has already cut losses by Rs140 billion in just nine months.

Debt management has seen a breakthrough with Pakistan’s first debt buyback programme. Debt worth Rs1 trillion has been repurchased, saving over Rs850 billion in interest payments under refinancing arrangements. Combined with fiscal consolidation and restrained development spending, the overall fiscal deficit has narrowed to 5.6% of GDP in FY2025, down from 6.9% in the previous year.

State-owned enterprises (SOEs), long a major fiscal drain costing over Rs1 trillion annually, are finally on the path to reform. Privatisation is gaining real traction: five serious investor consortiums have expressed interest in acquisition of Pakistan International Airlines (PIA), slated for privatisation in FY2025-26. Meanwhile, the process is advancing steadily for seven electricity distribution companies and two generation companies (Gencos).

Reforms in the pension system, a politically sensitive area, have also begun. These include linking pension increases to the Consumer Price Index (CPI), limiting pension duration to 10 years after a pensioner’s death (for spouses only), capping multiple pensions and requiring pensioners re-employed in the public sector to choose between a salary or a pension.

Budget 2025-26 Pakistan- All Stories

Pakistan now stands at a rare moment of opportunity. The economic fundamentals are stabilising, inflation is down, the rupee is steady and fiscal discipline is improving. At the same time, a coherent set of structural reforms is being rolled out, targeting tariffs, electricity, SOEs, debt and the business environment. These are not cosmetic changes, but deep, systemic shifts designed to make the economy more competitive, equitable and future-ready.

What matters now is persistence. Reforms will face resistance from vested interests, from inertia within institutions and from shifting political winds. But if this momentum can be maintained, Pakistan could finally escape the cycle of boom and bust and move towards sustained, inclusive growth.