China’s decision to extend Pakistan’s $2 billion loan repayment by a year offers momentary relief to an economy grappling with external debt and foreign exchange constraints. This move ensures short-term stability, preventing immediate financial strain on the rupee and helping maintain foreign exchange reserves. However, policymakers in Islamabad must recognize that such rollovers are temporary solutions, not long-term fixes. Without structural reforms, Pakistan could once again find itself on the precipice of economic distress, as it did in 2022, when the specter of default loomed large.
The core issue remains unchanged: Pakistan’s economy continues to rely heavily on external financing rather than self-sustaining revenue generation. The $7 billion IMF bailout secured last year came with stringent conditions, including tax reforms and fiscal discipline. Yet, meaningful progress on these fronts has been slow. While external lenders like China and Saudi Arabia have extended financial support, Pakistan cannot indefinitely depend on goodwill. If the country is to break free from this cycle of economic vulnerability, the finance ministry must shift its focus from temporary fixes to enduring solutions.
The most critical among these is broadening the tax base. Despite years of recommendations from economic experts, Pakistan’s tax-to-GDP ratio remains among the lowest in the region. A narrow tax base means that only a small fraction of businesses and individuals shoulder the country’s fiscal burden, while vast portions of the economy remain untaxed or under-taxed. The government must introduce and enforce policies that ensure tax compliance, particularly among high-earning sectors that continue to evade their dues. Digital tax collection mechanisms and incentives for businesses to enter the formal economy could help bridge this gap.
Additionally, Pakistan must pivot toward export-led growth. A key weakness in the economy is its reliance on imports while failing to boost foreign exchange earnings through competitive exports. The government must actively support and incentivize industries with global market potential, particularly in the information technology (IT) sector. Pakistan has a large, young, and tech-savvy population that could be a driving force in the digital economy. With the right policies—such as tax incentives for IT firms, investment in digital infrastructure, and regulatory reforms to encourage freelancing and tech entrepreneurship—Pakistan could significantly boost its IT exports. Countries like India and Bangladesh have successfully leveraged their IT industries to strengthen foreign reserves; Pakistan must follow suit.
Manufacturing and agricultural exports must also be prioritized. Ensuring that local businesses have access to competitive financing, reducing bureaucratic red tape, and improving logistics infrastructure are essential steps in making Pakistani products attractive to global markets.
China’s financial support is a testament to its commitment to Pakistan’s stability, but it should also serve as a wake-up call. Rollovers, bailouts, and emergency measures will not sustain the economy in the long run. The real solution lies in making Pakistan a country that can stand on its own feet—one where revenue generation through taxation and a thriving export sector can replace reliance on foreign debt. Without urgent economic reforms, today’s relief will be tomorrow’s crisis, and Pakistan cannot afford to keep repeating this cycle.
