ISLAMABAD:

Year 2026 could be a defining period for Pakistan’s economy. After the hard-won stabilisation of 2025, the country faces a clear test: whether stability can be converted into lasting progress.

For more than a decade, GDP growth has barely kept pace with population growth, leaving incomes stagnant and widening the gap with regional peers. If stabilisation fails to deliver jobs and rising incomes, public support for reform will inevitably weaken. The central challenge of 2026, therefore, is to pivot from stabilisation to inclusive, accelerated growth and turn fragile stability into broad-based prosperity.

Encouragingly, a narrow but meaningful window of opportunity exists. Low international commodity prices, particularly petroleum, have helped contain inflation. Record remittances are supporting the current account and easing external vulnerabilities. At the same time, strong stock-market performance reflects improved investor sentiment and ample domestic liquidity. The task now is to channel these favourable conditions into sustained growth that reaches households across the income spectrum.

To move decisively into a growth phase, four priorities demand attention: revitalising industry and agriculture, lowering the government’s footprint in the services sector, deepening global integration, and fixing governance.

Boosting industrial growth requires a decisive shift in mindset, from reliance on textiles to the development of higher-value engineering goods such as mobile phones, defence equipment, and consumer durables. Defence manufacturing illustrates this opportunity clearly. Despite a mature production base, Pakistan accounted for just 0.019% of global defence exports in 2023, even as growing international interest in platforms such as the JF-17 Thunder points to significant untapped potential.

Similarly, mobile phone manufacturing and consumer durables must move beyond import substitution towards export orientation. CPEC Phase-II offers a timely opportunity to support this transition by prioritising industrial upgrading, technology transfer, and export-led growth, allowing Pakistan to break out of low-value production patterns and integrate into global engineering value chains.

Agriculture was among the weakest performers in 2025, reflecting deep structural constraints. Opening the sector to competition, rather than prolonged protection, is essential to raise productivity, farmer incomes, and exports. Yet access to modern seeds, inputs, and technologies remains constrained by policy.

Heavy subsidisation of traditional crops crowds out higher-value segments such as horticulture, pulses, and oilseeds, where Pakistan runs large trade deficits. Livestock, which accounts for nearly 60% of agricultural GDP, receives less than 1% of public investment. Redirecting support towards livestock and high-value crops would attract private investment, diversify incomes, reduce imports, and unlock billions of dollars in export potential, while strengthening food security.

A similar challenge exists in services, where a heavy government footprint has kept key sectors, particularly telecoms and energy, underperforming. The privatisation of PIA demonstrates that private capital is willing to invest when processes are transparent and the state does not insist on excessive upfront returns. By prioritising short-term spectrum revenues, Pakistan has delayed broadband expansion and a credible 5G roadmap, costing the economy an estimated $1 billion a year in lost GDP.

An investment-first approach, accepting lower upfront prices in exchange for binding rollout and efficiency commitments, should also be applied to power distribution companies, whose losses are estimated at around Rs400 billion annually. Reducing energy-sector losses and expanding affordable digital infrastructure would sharply improve industrial competitiveness, unlock tech-led jobs and exports, and place Pakistan on a more sustainable growth path. Year 2026 should also mark a year of deeper global integration and renewed regional trade. Pakistan’s trade-to-GDP ratio remains among the lowest in the world, reflecting a degree of economic isolation that is increasingly costly.

Recent tariff reforms are a necessary first step, but they must be followed by more ambitious engagement with global markets. Accession to major blocs such as the Regional Comprehensive Economic Partnership should be seen as essential, not optional, if Pakistani firms are to compete in an increasingly integrated global economy.

None of these objectives can be achieved without confronting Pakistan’s deep-rooted governance weaknesses. The IMF’s Governance and Corruption Diagnostic Assessment provides a clear, evidence-based diagnosis of what needs to be fixed. What remains missing is an effective mechanism for execution. If Pakistan addresses these governance gaps, IMF estimates suggest that GDP growth could rise by roughly 5% to 6.5% above current trends over a five-year period.

The path from stabilisation to sustained growth is now clearly defined. It requires continuity in sound macroeconomic management, combined with bold and targeted structural reform. The priorities are unmistakable: unlock the potential of farms and factories, scale services and digital exports, integrate more deeply with the global economy, and fix the governance failures the IMF has identified.

If this moment is seized with urgency and resolve, 2026 can be remembered not as a year of cautious optimism, but as the turning point when Pakistan reignited its engine of inclusive prosperity and began to close the gap with a rapidly advancing world.

The writer is a member of the steering committee for the implementation of National Tariff Policy 2025-30. Previously, he served as Pakistan’s ambassador to the World Trade Organisation