Pakistan’s economy stands at a precarious crossroads, grappling with dual shocks that threaten its fragile recovery and long-term stability. The imposition of steep reciprocal tariffs by the United States and a notable retreat of foreign investment from treasury bills have compounded the challenges for policymakers already struggling to navigate a complex economic landscape. These developments, coupled with ongoing privatization efforts and tax reforms, demand a critical evaluation of their implications for the country’s economic trajectory.

Sending a delegation to Washington for negotiations, will help to prevent some of the damage, and highlight the need to diversify export markets 

But most recently, the United States’ recent tariff hike is bad news for Pakistan’s export sector, especially on textiles, which form the mainstay of Pakistan’s trade with the US. The US was Pakistan’s largest single country export market where they imported goods worth approximately $6bn a year under the Generalized System of Preferences (GSP) where 4-5 per cent duties were reduced. Yet, this preferential status has now turned to tar: 29% penalty on April 9, 2025. Such a move will hurt the price competitiveness of Pakistan in the American market and put its competitors such as India and Turkey, paying lower tariff barriers at an advantage. Millions are part of the textile industry, which is a huge contributor to Gross Domestic Product, and it is now confronted by an existential threat as orders drop and profit margins diminish. But in a government response, sending a delegation to Washington for negotiations, will help to prevent some of the damage and highlight the need to diversify export markets and reduce reliance on razor thin and volatile trade relations.

At intraday trading, the association plunged over 8,600 points and then finally recorded 3.27 percent decline, sending investors into a panic

These tariffs have continued to reverberate on the Pakistan Stock Exchange (PSX) as the latter experienced a historic crash on April 7, 2025. At intraday trading, the association plunged over 8,600 points and then finally recorded 3.27 percent decline, sending investors into a panic. This collapse has been blamed by analysts on escalating fears of a global recession on account of fiercer trade wars. Automatic circuit breakers had momentarily stopped trading, but the mood was still bleak. Pakistan has long been vulnerable to such outside economic shocks and this crash points to the necessity of having strong financial safety nets in place to safeguard its domestic markets against global volatility.

Net inflows remain positive but at a mere $148.2 million for FY2025, and the trend serves as a somewhat grim portent for Pakistan’s economic stability 

On top of it, foreign investment in treasury bills (T-bills) is retreating. Although reserves have improved, waning investor confidence is underlying, and the country is currently seeking IMF support, and has withdrawn nearly $1 billion thus far for the current fiscal year. While the State Bank of Pakistan has reduced interest rates, a move intended to rev up economic growth, this has worsened T-bills’ appeal to foreign investors in an untargeted fashion. Net inflows remain positive but at a mere $148.2 million for FY2025, and the trend serves as a somewhat grim portent for Pakistan’s economic stability and its ability to hold onto foreign funds when it is hemorrhaging so much debt.

As a result of these crises, the government has been speeding up effort to privatise state owned entities (SOEs), including Pakistan International Airlines (PIA) and Pakistan Railways. Privatization is meant to decrease fiscal deficits and increase the efficiency of loss – making entities that, for a long time, have been draining public resources. This approach fits well with IMF guidelines and provides a short term fiscal reprieve but depends first on a transparent process and good oversight. Privatization of profitable entities carries the warning of critics that it could break the revenue stream on the long term if not well handled.

Further signals of the government’s attempt to stabilize revenues under pressure came from tax reforms announced in Finance Bill 2024. The new measures also include higher tax rates on non salaried individuals and corporations, with the highest rate of 55 percent for those individuals and corporations who make incomes above Rs.500 million annually. However, these changes tend to increase tax base and deal in fiscal imbalance, but, they can place a considerable burden on the middle class, already stretched thin, and cripple entrepreneurship through criminalization.

Inflation has stabilized modestly (-0.7% monthly), but this moderation does not yet help much to offset powerful systemic risks.

Nevertheless, structural problems continue. Long term, they face struggling exports, falling foreign investment and annual debt service payment of more than $25 billion. Inflation has stabilized modestly (-0.7% monthly), but this moderation does not yet help much to offset powerful systemic risks.

To effectively deal with these crises, Pakistan must adopt a multi faceted approach. It is necessary to diversify export markets away from traditional partners such as the US to reduce trade relationship dependence on volatile ties. With targeted subsidies and investment in infrastructure, local industries will strengthen their position to satisfy demand in the global markets. Also, investors may need to be made confident in return to stop fleeing capital with consistent policies and transparent governance.

The potential danger of failure — and failure to act swiftly could undermine the economy and propel it deeper into turmoil while global uncertainties are raised — is high

Thus,  privatization must be managed in such a way that it fulfills the national interests in addition to delivering sustainable economic benefits. Likewise, tax reforms should be impartial and not dissuade other important segments of the society.

Ultimately, Pakistan’s economic resiliency hinges on its ability to move quickly and reconfigure through a dysfunctional system that has held growth back for so long. To empower industries and attract investment, long term strategies ought to be prioritized which will in turn stabilize the fiscal conditions instead of pandering to political expediency. The potential danger of failure — and failure to act swiftly could undermine the economy and propel it deeper into turmoil while global uncertainties are raised — is high.

Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.