As 2025 draws to a close, Pakistan’s economy looks more stable on the surface than it did during the crisis years of 2022–23. Growth has reportedly returned, inflation has eased into single digits, and immediate default fears have been pushed back by a new IMF programme and fresh multilateral inflows.

But this apparent calm sits atop record public debt, a punishing external repayment schedule, climate shocks, and unresolved governance failures. With 2026 less than three weeks away, Pakistan is not entering a new year with a clean slate; it is carrying forward a heavier, more complex load.

A stabilization story built on record debt

By the end of March 2025, Pakistan’s total public debt had already risen to PKR 76.01 trillion, split between roughly PKR 51.5 trillion in domestic debt and PKR 24.5 trillion in external obligations, according to the Pakistan Economic Survey 2024–25.

The subsequent Annual Debt Review 2025 shows that by the close of FY25, total public debt had climbed further to around PKR 80.5 trillion — about 70% of GDP — a 13% increase in a single fiscal year, driven mainly by a PKR 7.1 trillion federal fiscal deficit. The state is stabilising its finances by borrowing more, at high interest rates, in an economy that is still growing too slowly to outpace its debt.

The external side is even more daunting. For the current fiscal year (2025–26), which began on 1 July 2025, Pakistan faces external debt servicing of over USD 23 billion — a mix of repayments to multilaterals, commercial banks and bondholders. This is less a wall than a rolling mountain of obligations, coming due in a context of fragile investor confidence and limited access to international capital markets.

On paper, the macro story looks better than two years ago. The IMF projects real GDP growth of about 2.7% in 2025, and earlier in the year expected inflation around 4.5–4.7%. In reality, inflation has settled closer to 6% in recent months, ticking up again after October’s 6.2% reading, driven by food prices and supply disruptions following severe floods and border frictions.

The headline narrative is one of “stabilisation”. But it is a stabilisation underwritten by expensive borrowing and repeated official support, not by a decisive break with the structural habits that brought Pakistan to crisis in the first place.

The IMF anchor – necessary but not sufficient

The IMF has once again become the central anchor of Pakistan’s economic strategy. A staff-level agreement in October paved the way for the Executive Board’s approval in early December 2025 of about USD 1.2 billion in fresh disbursements — USD 1 billion under the Extended Fund Facility (EFF) and USD 200 million under the Resilience and Sustainability Facility (RSF).

This latest tranche brings total disbursements under the current arrangements to roughly USD 3.3 billion, with the IMF explicitly tying continued support to:

• Maintaining a tight, data-driven monetary stance
• Sustaining fiscal consolidation
• Reforming state-owned enterprises (SOEs), energy pricing and tax administration
• Advancing climate resilience after repeated flood disasters

One emblematic test is the long-delayed privatisation of Pakistan International Airlines (PIA). The government is attempting what could be the first major privatisation in nearly two decades, with bidding for a majority stake in PIA scheduled for late December 2025 — a core benchmark in the IMF-supported reform agenda.

The IMF programme has bought time, improved foreign-exchange reserve buffers, and helped cool inflation from the catastrophic levels of 2023. But it has not resolved the underlying vulnerabilities. Pakistan’s history with IMF arrangements is sobering: each programme is framed as a turning point; too often it ends as an interlude between crises.

Structural fault lines: why the stability still feels superficial

International financial institutions are unusually blunt about what ails Pakistan. The IMF and others consistently highlight:

• A narrow, distortionary tax regime riddled with exemptions and weak enforcement, allowing influential sectors to remain undertaxed while the burden falls on a narrow base of formal firms and salaried households.
• Chronic losses in SOEs, especially in energy and transport, which drain the budget and crowd out productive spending. PIA is only the most visible symbol of a wider problem.
• Governance and transparency deficits in procurement, budgeting and regulation, which deter private investment more effectively than any single tax rate ever could.
• Low-value, undiversified exports, still dominated by textiles and basic commodities, leaving the country vulnerable to price swings and demand shocks.

The climate dimension has become impossible to ignore. The floods and weather disruptions that hit parts of the country in 2025 — after the devastating floods of 2022 — damaged crops, displaced communities and fed back into inflation and fiscal pressure. Pakistan’s macro story is inseparable from its climate vulnerability.

In this context, the present “stability” feels fragile because it rests on continued programme discipline in a political environment that has repeatedly failed to sustain it.

The conditional upside – still real, still unclaimed

Despite the gloom, Pakistan’s medium-term potential is higher than its recent performance. The IMF and other multilaterals still see a scenario in which, with credible reforms, Pakistan could lift growth to around 5–6.5% over the next several years — enough to stabilise the debt ratio and generate meaningful job creation.

But that upside is explicitly conditional. It rests on:

1. Tax reform that bites, not just promises – broadening the base to include services, retail and real estate; cutting exemptions; and deploying digital tools to improve compliance.
2. A decisive shift on SOEs – not just announcements, but actual transactions, professional boards and hard budget constraints. The PIA sale will be read by investors as a signal: if the government can close this deal, it makes future reforms more credible.
3. Predictable policy for investors – especially in export-oriented IT, agro-processing and renewables, where Pakistan has comparative potential but inconsistent regulatory behaviour.
4. Smarter fiscal consolidation – protecting development and social spending while cutting wasteful subsidies and politically favoured but low-impact schemes.
5. A strategy for external financing beyond fire-fighting – graduating from rollovers and ad hoc deposits toward stable access to capital markets and longer-term instruments, including green and climate-linked bonds, which the authorities have already signalled interest in.

The window for this upside is narrow. The heavy external repayments in 2025–26 and beyond mean any loss of confidence could quickly turn today’s “stability” into tomorrow’s renewed crisis.

Politics, institutions and the cost of drift

Ultimately, Pakistan’s economic story is less a tale of missing technical knowledge and more one of political economy. The reform menu is well known. What has been missing, consistently, is a coalition willing to bear the short-term political cost of implementing it — and to resist the temptation to reverse course once the immediate pressure eases.

Several features of the system work against sustained reform:

• Short political time horizons, with governments focused on surviving the next year rather than shaping the next decade.
• Fragmented decision-making, in which key economic choices are influenced not just by elected institutions but also by a powerful security establishment and entrenched business lobbies.
• Weak administrative capacity, particularly at provincial and local levels, where many reforms must actually be implemented.

Against this backdrop, the IMF programme acts as both disciplinarian and scapegoat — useful for pushing through unpopular measures, but equally convenient to blame when social discontent rises. That dynamic has played out repeatedly over the past two decades.

A year ending on a knife-edge

As 2025 ends, Pakistan is not in free-fall. Panic over imminent default has eased; reserves are healthier; inflation, though ticking up, is far below the 2023 peak; and an IMF-backed framework is in place.

Yet the underlying picture is sobering:

• Public debt is at record levels and still rising.
• External repayments for 2025–26 are uncomfortably high relative to export earnings and market access.
• Growth is too low to absorb a young labour force, and reforms are progressing, at best, unevenly.

Pakistan, in other words, is no longer standing at the edge of a visible cliff — but it is still walking along a fault line. Whether 2026 marks the beginning of a genuine transition from fire-fighting to sustained growth will depend less on the IMF, “friendly countries” or global conditions, and far more on choices made in Islamabad:

• Does the government push ahead with tax and SOE reforms once the immediate crisis narrative fades?
• Are institutions strengthened to make policy more predictable than personalities?
• And is the inevitable social pain of adjustment cushioned by targeted, credible support rather than short-lived political giveaways?

The window for those choices remains open. But with the year ending and another heavy cycle of repayments looming, it is narrower — and more urgent — than at any point since the crisis first erupted.

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About Author:
Dr. Muhammad Shahid is an analyst and researcher based in Islamabad, Pakistan. He serves as In-charge of the MS/PhD program at the Riphah Institute of Media Sciences (RIMS) and as Editor Investigation for The Pakistan Narrative. His previous journalism experience includes roles at The News International, The Nation, Daily Times, Arab News, and The National.