Market Update: ‘Economy needs structural reset’ – Full Analysis

Concerns over weak growth, low investment and shrinking competitiveness are pushing business leaders to renew calls for a comprehensive overhaul of the economic framework, warning that incremental fixes will no longer be enough to stabilise and revive the economy.

Recent discussions among industrialists and traders have highlighted that despite periods of macroeconomic stabilisation, structural issues continue to undermine confidence. Complicated procedures, inconsistent policies and a narrow tax base are widely seen as key reasons why economic recovery has remained fragile. According to business representatives, these challenges are not new, but their cumulative impact has intensified in recent years.

Muddasir Masood Chaudhry, a former executive committee member of the Lahore Chamber of Commerce and Industry (LCCI), said the current economic structure requires fundamental rethinking. He noted that government red tape continues to restrict business expansion, particularly for small and medium enterprises, which account for an estimated 90% of businesses and nearly 40% of GDP. He stressed that unless procedural bottlenecks are removed, private investment will struggle to gain momentum.

A major concern raised by economists and industry experts is the size of the informal economy. Unofficial estimates by industry leaders suggest undocumented economic activity still makes up close to two-fifths of overall output. This has kept the tax-to-GDP ratio stuck around 10%, far below the 15% average seen in comparable emerging markets. Analysts argue that this imbalance forces the government to rely heavily on indirect taxes and repeated borrowing, adding pressure on inflation and growth.

Chaudhry said documenting the economy was unavoidable but cautioned against sudden enforcement measures. He emphasised that relevant departments already have access to significant data through digital banking, utility records and national databases. In his view, the process should be gradual and based on dialogue, so businesses are encouraged to enter the formal system rather than pushed away from it. He added that once documentation improves, the tax base can be expanded, creating space to lower tax rates for compliant sectors.

Beyond taxation, business leaders also urge greater stakeholder participation in economic policymaking. They argue that policies framed without on-ground input often fail to deliver results. Giving industry a stronger voice, they say, would not only improve implementation but also distribute responsibility more evenly between the public and private sectors.

Export performance remains another area of concern. Despite some recovery, exports in FY2024-25 hovered around $32 billion, well below the levels achieved by regional peers with smaller populations. Experts believe this reflects a lack of long-term industrial planning. Chaudhry suggested policymakers should identify a limited number of priority sectors and support them consistently over the next decade or two, instead of frequently shifting focus.

The low participation of women in the workforce was also highlighted as a missed economic opportunity. As per Pakistan Bureau of Statistics, female labour force participation was still hovering around 24% in 2024. Economists estimate that even a modest increase could add billions of dollars to annual output. Business leaders argue that targeted skills programmes, flexible work arrangements and safer workplaces could help unlock this potential.

Economic analyst and industry consultant Shehzad Rauf said reform success depends less on ambition and more on consistency. “The private sector is not afraid of reform, but it needs predictability,” he said. If businesses can see a clear direction for the next five to ten years, whether in taxation, energy pricing or trade policy, they are far more likely to invest and expand. He added that the changing landscape of the country’s auto sector is a clear example in this context.

Rauf said moving towards a market-based economy, where prices and quality are shaped by demand and supply, would reduce distortions and improve efficiency. He noted that excessive controls often create shortages and rent-seeking, ultimately hurting consumers and exporters alike.[12:04 AM]Structural overhaul-economic fault lines-Shahram