The ‘Know Your Region’ series is designed to support unit and individual professional military education on the Indo-Pacific region. It’s important for all serving members of our military to have a foundational knowledge of the countries and issues in the Indo-Pacific.

On this page:

  • Summary
  • A short history of Pakistan’s economy
  • Pakistan’s Economic Crisis
  • Energy Crisis
  • Inflation
  • Agriculture and Water Crisis
  • Trade Relations and Future Outlook

Summary

Pakistan's economy is one of the largest in South Asia. As of 2023, Pakistan’s GDP was around $375 billion, yet it is still considered a developing economy with serious challenges. Some of these include high inflation, a large fiscal deficit, and rising debt. Agriculture, which employs over 35% of the labour force, remains vital to the economy with major crops like wheat, rice, cotton, and sugarcane contributing to both domestic consumption and export revenue.

The manufacturing sector, particularly textiles, is also a key industry, making up approximately 60% of all exports. Pakistan is one of the world’s largest producers of cotton and apparel, serving markets in Europe, North America, and China. Despite there being no shortage in demand, economic instability caused by political turmoil, inconsistent policy reforms, natural disasters, and the COVID-19 pandemic have dampened growth and led to a recurring balance-of-payment crisis, forcing Pakistan to seek multiple bailouts from the International Monetary Fund (IMF).

A short history of Pakistan’s economy

After gaining independence in 1947 Pakistan’s new government adopted an already struggling economy. Over 65% of the population were farmers, there was little in the way of manufacturing, the poverty rate was high, and the literacy rate was around 10%. Over the next two decades, Pakistan grew its manufacturing and agricultural sectors at a steady pace, despite internal and external conflicts redirecting funds towards the military. In the early1970s, high inflation and a growing national debt became a major issue with prices increasing by an average of 15% per annum between 1972 and 1977. Trade imbalances continued to grow with imports far exceeding exports.

A return to democracy in the 1980s created much-needed stability. The government abandoned the nationalisation policies of the 1970s in favour of privatisation and increased foreign investment. GDP began to grow at an impressive rate, with poverty and unemployment on a downward trend. However, this good fortune was reversed during the 1990s, which saw inflation once again on the rise, as well as unemployment. While the country’s GDP continued to slowly grow, sanctions imposed by the West in response to Pakistan’s nuclear program threatened the government’s ability to meet its debt obligations.

By the early 2000s, poverty was still at 34% and literacy rates for adults was at 55%. Growth remained steady, although it was short term, driven largely by consumer spending. By 2008, the economy was going backwards, and the outlook was grim. The situation again took a turn for the worst when in 2010, Pakistan experienced widespread flooding that affected an estimated 14-20 million people. Nearly 1.1 million homes were damaged or destroyed and nearly 11 million people were left homeless. The impact on agriculture and the rural population was profound with entire crops destroyed. A decade later, just as the economy was showing signs of recovery, it was once again decimated by the COVID 19 pandemic. In FY19 the growth rate declined to 0.99 and in FY20 it was recorded at 0.38.

Pakistan’s Economic Crisis

Pakistan’s economic situation has declined further in recent years, with soaring inflation, a widening fiscal deficit, and unsustainable debt levels. In 2022, another major flood caused widespread damage, effecting 33 million people and costing the country close to US30 Billion in damages. In 2023, the Pakistan trade deficit was around US $27.55 billion, largely driven by rising energy costs and a depreciating rupee. At the same time, exports – primarily textiles – have failed to grow due to inefficiencies in the industrial sector, outdated infrastructure, and energy shortages. The mismatch between high import costs and limited export earnings has led to a depletion of Pakistan’s foreign reserves.

In July 2023, Pakistan secured a bailout from the International Monetary Fund (IMF) to stabilize the economy and avert a potential default. At the time, the country’s foreign reserves had plummeted to around USD $4 billion, barely sufficient to cover a month of imports. The IMF deal (USD $7 billion in total) came with stringent conditions such as raising taxes, cutting subsidies, and increasing energy tariffs. While these measures were crucial for fiscal stability, they have exacerbated the burden on ordinary citizens already struggling with economic hardship. At the end of June 2024, the country’s external debt was US $131 billion.

Energy Crisis

Energy shortages have been a major constraint on Pakistan’s economic growth. Frequent power outages have affected businesses and households alike, placing further pressure on the economy. The country's energy mix is heavily reliant on imported fossil fuels, particularly oil and gas, which has increased its vulnerability to global price fluctuations. While Pakistan has significant potential for renewable energy – including hydropower, wind, and solar – these resources remain underdeveloped. In recent years, the government has taken steps to expand its power generation capacity and improve infrastructure. However, without a reliable source of income, foreign investors are understandably nervous.

Inflation

Since the Covid 19 pandemic, inflation has surged to record highs. In mid-2023, Pakistan's inflation rate spiked to over 38%, one of the highest in its history, with food prices rising at an unprecedented rate. The cost of basic commodities such as wheat, sugar, and cooking oil skyrocketed, putting immense pressure on household budgets. Fuel and electricity prices have also soared. With unemployment high and wages stagnant, the public’s purchasing power has sharply declined, leading to widespread discontent. Although the IMF program offers some immediate relief, deeper structural problems – such as tax evasion and corruption – remain unaddressed. Without tackling these underlying issues, Pakistan’s economic crisis is likely to persist and stall its long-term recovery.

Agriculture and the Water Crisis

Pakistan's agricultural sector, which is the backbone of the economy, faces an existential threat due to water scarcity. The country is highly dependent on the Indus River system which has sustained civilisations throughout the ages. However, climate change, population growth, expanding agriculture, contamination, and poor water management have led to a severe water shortage. This crisis has disproportionately affected different segments of society. For example, wealthy plantation owners upstream have suffered little while poorer villages downstream have paid a heavy price. The situation in the cities is also grim with a thriving black market. Pakistan is one of the most water-stressed countries in the world, and its water availability per capita has been steadily declining.

Water shortages are affecting crop yields, especially in key regions like Punjab and Sindh, where much of the country’s food is grown. Tensions with India over water-sharing agreements, particularly under the Indus Waters Treaty, have also added a geopolitical dimension to Pakistan's water issues. While a move away from cash crops that require large amounts of water would lessen the crisis, there is as yet no incentive for wealthy landowners to adapt.

Trade Relations 

Pakistan’s trade relations are pivotal to its economic future. The country maintains strong trade ties with China, which is its largest trading partner and a significant source of foreign direct investment (FDI). Under the China-Pakistan Economic Corridor (CPEC) initiative, China has invested billions of dollars in infrastructure, energy, and transportation projects – positioning Pakistan as a key player in China’s Belt and Road Initiative (BRI). Pakistan also has important trade relations with the US, EU, and Middle East. In 2022, the top exports were textiles, rice, and refined petroleum; while the top imports were refined petroleum, crude petroleum, petroleum gas, palm oil, and raw cotton.

For more information on Pakistan's economy, see resources below: 

Videos

Articles