Pakistan is one of the largest countries in South Asia and an important participant in regional political and economic processes. The country possesses significant demographic potential, a favorable geographical location, and a large domestic market. At the same time, Pakistan's development over recent decades has been accompanied by persistent structural problems, including macroeconomic instability, high poverty levels, energy shortages, weak state institutions, and continuing security threats.
According to estimates by international financial institutions, Pakistan's population exceeded 255 million in 2025, while its gross domestic product (GDP) reached approximately USD 408 billion. However, GDP per capita remains below USD 1,700, indicating a persistent gap between the country's economic potential and the actual living standards of its population.
In 2022–2023, Pakistan faced one of its most severe economic crises in recent decades. The country's economy was effectively stagnating, accompanied by record-high inflation, a sharp decline in foreign exchange reserves, depreciation of the national currency, and the threat of default on external obligations. Additional pressure on the financial system resulted from the consequences of the COVID-19 pandemic, rising global energy and food prices, and the devastating floods of 2022, which caused significant damage to the country's economy and infrastructure. To prevent financial collapse, the government was forced to seek assistance from the International Monetary Fund (IMF) and implement a set of strict macroeconomic stabilization measures, including tighter monetary policy and reductions in government spending.
The implementation of the financial stabilization program helped improve the situation. In 2024–2025, economic growth resumed, reaching approximately 2.7–3.1%, while the size of the economy exceeded USD 400 billion for the first time. At the same time, inflation declined compared with the crisis period of 2023, when consumer price inflation exceeded 29%.
An important role in stabilizing the economy was played by the IMF's Extended Fund Facility (EFF) program, amounting to approximately USD 7 billion. In May 2025, the IMF Executive Board approved the disbursement of another tranche of approximately USD 1 billion to Pakistan, as well as additional financing of USD 1.4 billion to strengthen climate resilience.
Despite these positive developments, the country's economy continues to demonstrate relatively low growth rates compared with its demographic dynamics. In practice, economic growth only slightly exceeds population growth, limiting opportunities to improve citizens' living standards.
One of the most serious challenges remains demographic pressure. Pakistan is among the world's fastest-growing countries in terms of population. Every year, millions of young people enter the labor market, while the economy is unable to create a comparable number of jobs.
The situation of young people is particularly concerning. In recent years, the unemployment rate among citizens aged 15–24 has remained at approximately 9–10%. Actual figures may be higher, given the large informal sector of the economy.
Another significant source of risk is the country's high debt burden. Pakistan's economy remains dependent on external financing and loans from international organizations. The country's total external liabilities exceed USD 130 billion, while debt-servicing costs continue to rise. A substantial share of the government budget is allocated to interest payments and debt repayment, limiting opportunities to finance social programs and infrastructure projects.
The energy sector remains one of the most vulnerable sectors of Pakistan's economy. Despite having an installed electricity generation capacity exceeding 45 GW, the country continues to face chronic problems in electricity generation and distribution. Distribution network losses in certain regions reach 15–20%, while the energy sector's so-called "circular debt" has exceeded PKR 2.6 trillion (approximately USD 9 billion).
Another risk factor is the country's heavy dependence on imported energy resources. A significant share of Pakistan's oil and liquefied natural gas requirements is met through foreign supplies, making the economy sensitive to fluctuations in global prices and exchange rates. As a result, industrial enterprises regularly face disruptions in electricity supply, rising electricity tariffs, and increasing production costs. These factors negatively affect the competitiveness of the national economy and discourage foreign investment.
The difficult socioeconomic situation has a direct impact on the country's domestic political stability. Social discontent is particularly pronounced in major urban centers, including Karachi, Lahore, Islamabad, Peshawar, and Quetta. These cities concentrate major industrial enterprises, financial institutions, and large urban populations that are particularly sensitive to deteriorating economic conditions. In recent years, these cities have regularly witnessed protests triggered by rising food and energy prices, electricity supply disruptions, increasing tax burdens, and declining real incomes. High youth unemployment, particularly among university and college graduates, represents an additional source of tension.
Social discontent is further intensified by persistent wealth inequality. According to expert assessments, a significant share of national wealth is concentrated in the hands of a limited number of financial and industrial groups, while approximately 25% of the population lives below the poverty line. Taken together, these factors create favorable conditions for growing protest activity, increasing political polarization, and the mobilization of the population by opposition forces.
Another destabilizing factor is the persistent regional disparity in socioeconomic development. The most difficult situation is observed in the provinces of Balochistan and Khyber Pakhtunkhwa, which lag significantly behind the country's more developed regions in terms of household income, access to social and transport infrastructure, education, and healthcare services.
Although Balochistan accounts for approximately 44% of Pakistan's territory and possesses substantial reserves of natural gas, coal, copper, and gold, it is home to less than 5% of the country's population and has one of the highest poverty rates. In many districts of the province, access to basic utilities and social infrastructure remains significantly below national averages. Socioeconomic problems are further aggravated by the activities of separatist movements advocating greater autonomy or independence for the region.
In Khyber Pakhtunkhwa, the presence of a significant number of Afghan refugees and migrants places additional pressure on local authorities. According to international organizations, approximately 1.5 million registered Afghan refugees continue to reside in Pakistan, of whom more than 478,000 live in Khyber Pakhtunkhwa, accounting for more than half of their total number in the country. Taking into account undocumented migrants and individuals who arrived after the Taliban returned to power in Afghanistan in 2021, the total number of Afghans in Pakistan is estimated at approximately 2 million. Such a concentration of refugees places additional pressure on the labor market, healthcare system, education sector, and local budgets, while further complicating the socioeconomic situation in border areas.
The activities of radical and extremist groups continue to pose a serious threat to national security. Over the past five years, terrorist activity along the Pakistan–Afghanistan border has increased. Tehrik-i-Taliban Pakistan (TTP) remains the most dangerous militant group, having significantly intensified its operations in border regions.
According to international monitoring organizations, Pakistan was among the countries most severely affected by terrorism in 2024–2025, with the number of terrorist attacks and casualties showing a sustained upward trend. Most attacks occur in the provinces of Khyber Pakhtunkhwa and Balochistan, where military personnel, law enforcement officers, transport infrastructure, and energy facilities are regularly targeted.
Persistent instability in Afghanistan facilitates the movement of militants across poorly controlled mountainous sections of the border, which extends for more than 2,600 km. This significantly complicates efforts to ensure security in border areas and requires substantial resources for counterterrorism operations.
The climate factor also deserves particular attention. The devastating floods of 2022 caused tens of billions of dollars in economic damage and demonstrated Pakistan's high vulnerability to the consequences of climate change. Floods, droughts, and water shortages may have long-term negative effects on agriculture, employment, and food security.
The analysis suggests that, in the medium term, the most likely scenario is a limited economic recovery accompanied by the persistence of existing structural problems. According to estimates by the IMF and other international organizations, Pakistan's economy could grow by approximately 3–4% annually. However, such growth rates are insufficient to achieve a substantial reduction in poverty and address the employment challenges associated with rapid population growth.
Continued dependence on international financial assistance makes the country vulnerable to external economic shocks, fluctuations in energy prices, and changes in global financial conditions. Political polarization, regional conflicts, and climate-related threats create additional risks.
At the same time, IMF experts indicate that consistent reforms in public administration, tax policy, and anti-corruption efforts could generate additional economic growth of 5–6.5% over the coming years.
The evolution of Pakistan's socioeconomic situation is becoming increasingly important for Central Asian countries, which regard Pakistan as a key transit corridor providing access to Indian Ocean seaports and an important component of the emerging system of interregional connectivity. In this context, Pakistan's stability is a critical prerequisite for the implementation of infrastructure and energy projects, including the CASA-1000 electricity transmission initiative and the development of transport corridors passing through Afghanistan.
The resilience of Pakistan's political system and the security situation in its border regions directly determine the prospects for the functioning of transit corridors, the volume of mutual trade, and the depth of economic cooperation between Central and South Asia.
More broadly, Pakistan is becoming one of the key determinants of regional security, as its internal socioeconomic imbalances, energy constraints, and persistent instability in border areas may have consequences extending beyond its national borders.
Should the domestic situation deteriorate, the risks of slowing regional economic integration, declining investment attractiveness of transregional infrastructure projects, and intensifying transboundary threats—including irregular migration, drug trafficking, and the activities of radical groups—would increase.
Conversely, Pakistan's sustainable development would create favorable conditions for expanding trade and economic cooperation and establishing a more interconnected Central and South Asian region, in which Pakistan would serve not as a source of instability but as a key transit and logistics hub.
* The Institute for Advanced International Studies (IAIS) does not take institutional positions on any issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of the IAIS.
