Islamabad, Pakistan – A July 2026 report by the Center for Market Economy Policy Research (PRIME) indicates that Pakistan’s nascent macroeconomic recovery, which began in 2025, is currently faltering due to geopolitical obstacles and tensions.
The report notes that inflation, as measured by the Consumer Price Index (CPI), has returned to double digits, registering between 10.9% and 11.7% during the April-June period, before rising to 12.8% by June. The report asserts that these developments are directly contributing to a reduction in the monetary freedom available to individuals and businesses, particularly in an economy where the 2025 Labor Force Survey indicates that approximately 80.8% of the workforce operates in the informal sector.
Pressure on revenues and employee taxes versus the informal sector
Regarding fiscal and tax policies, the report indicated that public debt servicing and defense spending together consumed approximately 94% of net federal revenue, leaving only 6% to cover vital sectors including health, education, infrastructure, social protection, and other essential government functions. Adding to the tax gap, employees earning an annual income of 5 million rupees face an effective tax rate of 33.29% withheld at source, thus limiting opportunities for tax evasion.
In contrast, a shop owner with the same income pays only 0.5% under the estimated and fixed tax systems, while the 2026-2027 budget offered only limited relief to salaried taxpayers, including a reduction and complete elimination of the additional tax for companies that depend 80% or more on export revenues.
Index of Economic Freedom and Government Credit Challenges
Based on the Heritage Foundation’s Index of Economic Freedom, the report indicated that Pakistan fell into the “restricted” category with a score of 48.9. The report noted that some of the index’s scores—such as government spending and tax burden—misrepresent the true state of the Pakistani economy rather than accurately reflecting it.
Regarding bank credit, the report indicated that the volume of credit granted to the government sector amounted to 37.2 trillion rupees in May 2026, compared to only about 13.8 trillion rupees for the private sector, which confirms that government borrowing exceeds the business sector by almost three times.
Economic recommendations to enhance resilience and transparency
The PRIME Center concluded its report with a set of important economic recommendations, calling for a shift from reactive stabilization policies linked to the IMF program to a more flexible framework to ensure economic freedom. These recommendations included broadening the tax base by reducing effective tax rates and lowering the Goods and Services Tax (GST) to 15%.
The plan includes reducing the corporate tax rate to 25% while eliminating additional taxes, curbing government borrowing by implementing differentiated capital adequacy standards for banks, reforming customs tariffs by enacting legislation that caps duties at 15% within the National Customs Tariff Policy 2025-2030, and enhancing transparency by replacing the petroleum development tax with a unified goods and services tax to reduce consumer uncertainty.
