Pakistan’s Economic Paradox: Why Liquid Banks Aren’t Sparking Growth

Pakistan’s economy is stuck in a peculiar quagmire. On one hand, you have seemingly positive indicators: banks brimming with liquidity, a stable foreign exchange rate propped up by resilient remittances, and even a notable surge in currency circulation (an extra Rs 432 billion between July and December 2025). Yet, despite these signs of financial buoyancy, the nation’s economy remains stubbornly stagnant.

So, what’s holding it back? According to recent reports, the answer lies squarely in a persistent and debilitating lack of certainty across critical areas: fiscal, legal, strategic, and administrative frameworks. It’s these systemic uncertainties that are acting as heavy anchors, preventing the economy from lifting off.

The consequences are stark and quantifiable:

• Private sector credit has plummeted a staggering 90.8% year-on-year. This massive contraction starves businesses of the capital needed for expansion, innovation, and job creation.
• Foreign Direct Investment (FDI) saw a significant drop of 25.4%. International investors are clearly hesitant to commit capital when the ground beneath them feels unstable.
• Net foreign investment overall decreased by a sharp 77.5%. This indicates a broader retreat of foreign capital from the Pakistani market.
• The current account, once stable, has regrettably swung back into a deficit, adding further pressure.

While the influx of currency and steady remittances provide a crucial cushion, they cannot compensate for the fundamental lack of confidence stemming from an unpredictable policy environment. Businesses and investors, both domestic and foreign, thrive on clarity and foresight. When rules can change abruptly, legal recourse is ambiguous, and long-term strategies are inconsistent, capital stays on the sidelines. The very liquidity in the banks isn’t finding its way into productive investments because the risk appetite is severely curtailed.

For Pakistan to truly unlock its economic potential and translate its financial stability into actual growth, addressing these fundamental uncertainties is paramount. Clear, consistent, and predictable policies across fiscal, legal, strategic, and administrative domains are not just desirable; they are essential for pulling the economy out of its current stagnation and fostering an environment where investment can flourish.

Source: Original Article