Pakistan has stepped back from the edge of immediate default, yet it remains far from building an economy capable of generating durable power.
On January 7, Islamabad signaled just how exposed its flagship geoeconomic strategy has become by announcing plans for a dedicated police formation to shield Chinese nationals and China-Pakistan Economic Corridor assets after repeated militant attacks.
The message was unmistakable: protecting Chinese interests is no longer simply a diplomatic commitment but an internal security priority.
That decision, however, highlights a deeper problem. China’s backing can soften Pakistan’s financial stress, but it cannot cure the country’s underlying economic infirmities. Pakistan today is caught between multinational retreat, intensifying militant violence and a stabilization model sustained by IMF programs and harsh import compression.
Macroeconomic indicators may appear calmer, but beneath the surface, the country’s economic base is thinning, its investment climate is deteriorating and its strategic room for maneuver is narrowing.
From a geopolitical and geoeconomic vantage point, Pakistan increasingly resembles a state that can manage crises but cannot generate momentum. It has learned how to survive, but not how to grow in a way that compounds national strength.
Borrowing remains easier than building; rolling over debt remains simpler than constructing an export engine. The consequence is persistent dependence and declining autonomy.
This fragility now extends well beyond domestic economics. It is reshaping Pakistan’s external relationships, limiting its strategic choices and steadily hollowing out its ability to act as a consequential regional player. Terrorism, capital flight, chronic balance-of-payments stress and institutional stagnation are not isolated pathologies.
Together, they produce a single outcome: a country that global markets increasingly treat as structurally high risk.
Mirage of stabilization
Compared with the panic of 2022–23, Pakistan’s macro picture looks less alarming.
Growth has returned to low single digits. Inflation has cooled from extreme peaks. Foreign exchange reserves have inched upward. The World Bank estimates the economy grew 3% in the fiscal year ending June 2025 and projects it will expand at a similar clip in fiscal 2026. The IMF, meanwhile, forecasts the economy will grow 3.2% in 2026.
Yet this relative stability rests on a narrow foundation. It has been achieved primarily through spending cuts, tax increases, and tight controls on imports, rather than through productivity gains or competitive exports. Pakistan has essentially stabilized by squeezing itself.
Public debt hovering in the 70-80% of GDP range constrains policy space. More important than the headline figure is its composition: large short- to medium-term liabilities repeatedly refinanced through bilateral deposits, commercial borrowing and IMF-led programs.
This transforms economic management into a permanent refinancing exercise. Pakistan can keep rolling over obligations, but every rollover buys time at the cost of autonomy.
This approach buys time but not transformation. The country continues to earn too little foreign exchange, invest too little in productive capacity and integrate too weakly into global value chains. The growth engine remains shallow and externally fragile.
Collapsing competitiveness
Exports illustrate the depth of the problem. The World Bank notes that Pakistan’s export share has fallen from roughly 16% of GDP in the 1990s to about 10.4% in 2024. That slide signals a long erosion of industrial competitiveness.
For a country burdened with heavy debt repayments, large energy imports and substantial defense and internal security costs, such a narrow export base is strategically crippling. It locks Pakistan into a repetitive cycle: a short-lived recovery, a widening external deficit, emergency tightening and another turn to the IMF.
Underlying these cycles are chronic weaknesses — unreliable power supply, costly logistics, erratic policymaking, weak contract enforcement and governance deficits that deter long-term capital.
Pakistan’s reserve position has improved, but only superficially. State Bank reserves rose to about US$15.9 billion in December 2025. A meaningful share of that improvement, however, reflects deposits and loans from bilateral partners rather than export earnings or sustained private inflows.
The distinction matters. Reserves built on borrowing do not provide true insulation from shocks. They postpone crises; they do not eliminate them.
When buffers depend on rollovers, policy independence erodes. A spike in oil prices, a slowdown in remittances or renewed political turmoil can quickly revive balance-of-payments pressure. Pakistan remains one external jolt away from renewed instability.
Multilateral lending has become Pakistan’s primary stabilizing pillar. In December 2025, the IMF approved a program review that kept the $7 billion facility on track and unlocked about $1.2 billion under the Extended Fund Facility and the Resilience and Sustainability Facility.
Liquidity is not solvency. When reserves are built on deposits and rollovers, policy autonomy shrinks. Each shock — an energy price spike, a fall in remittances, a bout of political instability — can rapidly reopen balance-of-payments stress. The country remains one adverse turn away from another crisis.
When multinationals leave
Few indicators speak more clearly than corporate behavior. Over the past several years, Pakistan has witnessed a steady retreat of multinational corporations. In October 2025, Procter & Gamble announced it would shut down manufacturing and commercial operations in Pakistan and switch to a distributor-led model.
Other exits or divestments include Eli Lilly, Shell, Microsoft, Uber, Yamaha, Total and Telenor. Analysts cite high taxes, restrictions on profit repatriation and heavy regulation as immediate causes. The deeper signal, however, is eroding confidence driven by demand weakness and political risk.
The pharmaceutical sector illustrates the trend. Three decades ago, 48 multinational drug companies operated in Pakistan. Today, fewer than half remain. Many have transferred product registrations or operations to local firms, which now dominate the domestic market.
Local production is not inherently negative. But when localization results from foreign withdrawal rather than competitive upgrading, it reduces capital and technology inflows, managerial know-how and integration into global value chains. Pakistan loses access to higher-value segments of the global economy and undermines long-term industrial competitiveness.
Terror as economic tax
Militant violence now functions as a direct economic burden.
According to the Pakistan Institute for Peace Studies, 699 terrorist attacks were recorded in 2025, a 34% increase from the previous year. At least 1,034 people were killed and 1,366 injured. More than 42% of the fatalities were security and law enforcement personnel.
For investors, this means higher insurance costs, expensive security arrangements and constant risk reassessment. For the state, it means scarce resources diverted from development to containment. Terrorism has become a built-in risk premium on Pakistan’s economy — a cost multinational corporations are loath to manage.
Economic fragility now defines Pakistan’s geopolitical posture. A state locked into repeated refinancing cannot sustain long-term competition or shape regional outcomes through economic weight. Its influence is episodic, not structural.
Pakistan’s tragedy is the persistent confusion of short-term cash with long-term capacity. The result is not a dramatic collapse but something more corrosive: the slow, steady erosion of state capacity, with consequences that could prove disastrous across the region.
Vivek Y. Kelkar is a researcher and analyst focused on the intersection of geoeconomics, geopolitics and corporate strategy.