Azhar Rashid Khan, PSP

Introduction

Pakistan’s recurring economic crises are usually diagnosed the same way: too little national savings, too little exported output, too much consumption, and too much debt. The prescribed remedy, repeated across successive IMF programmes, is a familiar cycle — borrow, stabilise, impose austerity, recover briefly, and borrow again. By March 2026, Pakistan’s external debt stock stood near $92 billion on the government’s own reckoning, with total external debt and liabilities reported closer to $138 billion once IMF obligations and other liabilities are included (ARY News; Mettis Global). Domestic debt has grown even faster, with federal government debt alone rising 75 percent over four years to roughly Rs83.6 trillion by mid-2026 (Prokerala/The Nation). Each round of stabilisation compresses demand without altering the underlying cost structure that keeps regenerating the debt.

This essay argues that the conventional framing is incomplete. The problem confronting Pakistan is not simply “low consumption” or “low savings.” It is that a disproportionate share of household and national income is absorbed by unavoidable costs and rent-seeking financial structures rather than by the kind of discretionary, productive demand that can sustain domestic industry. Energy is the central transmission mechanism of this distortion, transport is its second half, and the concentration of economic opportunity in a handful of metropolitan centres is its geographic expression. Correcting all three simultaneously — rather than treating them as separate sectoral policies — offers a more coherent alternative to the recurring borrow-austerity cycle.

1. The real problem is unproductive, not insufficient, consumption

Household spending in Pakistan is heavily weighted toward the cost of maintaining life and mobility: electricity, gas, fuel, transport, basic food, and the taxes embedded in utility bills. This spending sustains subsistence but does not generate the same industrial multiplier as spending on furniture, appliances, clothing, education, healthcare, domestic tourism, or locally manufactured goods — categories where entrepreneurs can compete, innovate, and scale.

The distinction matters because it reframes the policy objective. The goal is not to raise consumption in the aggregate — Keynesian stimulus in its simplest form — but to reduce the cost of essential consumption so that disposable income is released into discretionary, industry-supporting demand. These are different strategies with different instruments: one is fiscal (transfers, subsidies), the other is structural (cost of energy, mobility, and credit).

2. Energy as the central transmission mechanism

Expensive energy in Pakistan does not simply raise household bills — it raises the cost of production, transport, and logistics simultaneously, attacking both sides of the economy at once: Pakistani goods become more expensive to produce and export, while Pakistani households have less income left to buy them.

The scale of the underlying financial distortion is stark. The combined circular debt of the electricity and gas sectors reached roughly Rs 5.2–5.3 trillion by mid-2026, according to IMF-cited figures, even after years of repeated tariff increases (ProPakistani; Prokerala). The power sector alone added a further Rs364 billion in FY2025–26 despite Rs302 billion in budgeted subsidies — a 709 percent jump in the annual flow of new liabilities over the previous year (Express Tribune; Minute Mirror). Research from the Pakistan Institute of Development Economics (PIDE) frames this not merely as a technical-financial problem but as a distributional one: the burden of cost-recovery tariff hikes falls disproportionately on households least able to absorb it, while structural inefficiencies — capacity payments to independent power producers, distribution losses, delayed subsidies — go largely unaddressed (PIDE, Circular Debt and Electricity Tariffs).

The consequence has been an unplanned but telling market response. Facing grid tariffs that repeatedly outpaced incomes, Pakistani households and businesses began abandoning the grid altogether. Rooftop solar capacity rose from under 1 GW in 2023 to an estimated 5–6 GW by mid-2025, and further to roughly 33–51 GW of distributed solar capacity (formal and informal) by early-to-mid 2026 — driven overwhelmingly by falling Chinese panel prices and consumer frustration rather than by government incentive design (WRI; South Asian Voices; Renewables First/now.solar). By the summer of 2025, solar had become Pakistan’s single largest source of electricity generation during peak months, according to satellite-based tracking (Bright Spots/Rosenow). This is, in effect, a bottom-up demonstration of the exact mechanism this essay describes: when the cost of an essential input falls, released income and released productive capacity go somewhere else — in this case, into millions of individual investment decisions that bypassed the state entirely.

The lesson for policy is important: it confirms that cheaper energy materially changes household and firm behaviour, but it also shows the risk of an unmanaged transition. Regulatory responses such as NEPRA’s 2026 Prosumer Regulations, which curtailed the older net-metering buyback model, illustrate that a distributed-energy shift left to consumer self-interest alone can strand the utilities’ finances further and disproportionately benefit better-off households who can afford upfront solar costs (South Asian Voices). A deliberate industrial policy — sequencing cheaper generation with grid reform, storage, and targeted support for lower-income and productive users — is therefore preferable to reliance on organic, poorly regulated adoption.

3. Debt retirement as a structural, not merely fiscal, project

Pakistan cannot retire its debt stock through ordinary fiscal surpluses alone; debt servicing itself consumes the fiscal space that would otherwise fund a surplus. A more realistic objective is to retire the most economically destructive and expensive liabilities first — those generated by circular debt, high-cost commercial borrowing, and inefficient generation contracts — while simultaneously eliminating the expenditure structures that keep re-creating them. Recent practice offers a partial precedent: in September 2025 the government arranged Rs1.225 trillion in commercial-bank financing to retire high-cost legacy power-sector liabilities, funded through a per-unit consumer surcharge, with the explicit aim of “refinancing high-cost liabilities with lower-cost borrowing” over a multi-year horizon (Profit/Pakistan Today).

This is instructive but insufficient on its own: refinancing changes the cost of the debt, not the structural reasons it recurs. Without addressing distribution-company losses, weak recoveries, and capacity-payment obligations to independent power producers, the debt reappears — as it has, repeatedly, even within a single fiscal year. The proposal advanced here is therefore best understood as a debt-for-productivity transformation: retire debt while re-engineering the cost structures (energy, transport, credit allocation) that generated it, so that the fiscal space created is not simply refilled.

4. Transport as the second half of the equation

Pakistan’s transport system functions as a hidden tax on economic activity: a worker who spends a large share of income commuting, or an SME that spends heavily moving goods, has correspondingly less capacity for productive economic participation. Electrifying appropriate categories of transport — two- and three-wheelers, buses, urban delivery fleets, and short-haul commercial vehicles — addresses this directly, and the underlying economics already favour it. Over 90 percent of parts for two- and three-wheelers are already manufactured locally, and an electric rickshaw or bike user is projected to recover the additional upfront cost within roughly one year and ten months through lower running costs (Business Recorder; PID).

The National Electric Vehicle (NEV) Policy 2025–30, launched in June 2025, targets 30 percent of new vehicle sales being electric by 2030, backed by a five-year subsidy package exceeding Rs100 billion (about $353 million) focused on 116,053 electric bikes and 3,171 rickshaws in its first phase (Arab News; Dawn). The policy’s own projections claim savings of roughly Rs800 billion over 24–25 years through reduced fuel imports and cheaper electricity use, alongside nearly $1 billion annually in foreign-exchange savings from displaced fuel imports (Electrive; Serrari Group). Because Pakistan’s electricity system currently has surplus generation capacity — a large part of the projected 126 TWh of five-year EV electricity demand can reportedly be absorbed without new capacity (PID) — transport electrification and the existing capacity-payment burden can, in principle, be addressed together: shifting idle capacity payments into productive use rather than leaving them as a pure fiscal drag.

The deeper significance of cheaper mobility, however, is that it changes what is economically possible geographically — which leads to the essay’s next argument.

5. Reversing Pakistan’s economic geography

Pakistan’s economic activity is heavily concentrated in a small number of metropolitan centres, producing high urban rents, congestion, and capital concentration, while smaller cities close to agricultural, livestock, fisheries, textile, and mineral resources often lack the capital and skilled labour needed to develop their comparative advantages. Cheaper energy and cheaper mobility create the preconditions for reversing the conventional pattern — instead of people moving to jobs, jobs and productive investment can move closer to underused resources and existing populations. This is not a new idea in the region, but combining it with the cost reductions described above gives it a more concrete industrial logic: solar-powered SME clusters processing local agricultural output, retaining labour, and building local consumer markets that in turn support retail, services, education, and healthcare — cumulatively building the kind of distributed industrialisation that recreating Karachi, Lahore, and Islamabad everywhere cannot achieve.

6. Capital, credit, and the missing link to production

The final structural gap is finance. Despite comprising over 90 percent of Pakistani businesses, generating an estimated 40 percent of GDP, roughly a quarter of exports, and employing about 78 percent of the non-agricultural workforce, SMEs receive only about 6–7 percent of private-sector credit, according to a 2023 Competition Commission of Pakistan study (Arab News). A 2025 policy brief from the Karachi School of Business and Leadership found that only 2.1 percent of Pakistani firms report access to bank loans or lines of credit, compared with a South Asian regional average of 31.6 percent, and behind peers such as Bangladesh (42.5 percent) and Indonesia (20.6 percent) (KSBL). Much of the reason is structural rather than a simple lack of appetite: as of late 2024, commercial banks held roughly Rs30.3 trillion in deposits, of which about 96 percent had been loaned to the government rather than the private sector, with the Investment-to-Deposit Ratio (a proxy for government absorption of bank credit) close to 96 percent (Express Tribune). In other words, capital in Pakistan has had every incentive to flow into government securities, property, and protected or arbitrage-driven markets rather than into manufacturing or productive risk — precisely because those channels have offered safer, higher, and more predictable returns.

This confirms a more precise diagnosis than the standard “trickle-down” critique. The problem is not simply that gains accrue disproportionately to capital; it is that the investment function itself is distorted toward rent-seeking assets. Pakistan does not primarily need capital to trickle down — it needs capital to move sideways, from government securities, land, and import arbitrage into productive, technologically engaged enterprise. Encouragingly, the State Bank of Pakistan has begun treating this as an explicit policy priority: outstanding SME financing reportedly more than doubled between June 2021 and December 2025, with the number of SME borrowers rising by around 75 percent, alongside newer instruments like the Asaan Karobar Card and a 2026 SBP-led task force targeting Rs1.5 trillion in SME credit (Express Tribune; Arab News; Profit). These remain small relative to the scale of the gap, and regional disparities persist — officials have flagged particular financing shortfalls in Khyber Pakhtunkhwa and Balochistan relative to Sindh and Punjab (Profit/Pakistan Today) — underscoring that credit reform, like energy reform, needs to be deliberately linked to the regional-development goals described above rather than pursued as a separate sectoral initiative.

7. A synthesised model: from rent-seeking to productive demand

Bringing these threads together, the proposed sequence runs as follows:

• Retire the most expensive and destructive public and energy-sector liabilities first, using refinancing tools already being piloted.
• Simultaneously eliminate the structural causes of recurring debt — distribution losses, weak recoveries, unmanaged capacity payments — rather than treating retirement as a one-off fiscal exercise.
• Replace expensive imported-fuel generation with lower-cost domestic renewable and hybrid capacity, managed deliberately rather than left to an unregulated consumer-led transition.
• Electrify appropriate categories of transport, using existing surplus grid capacity and Pakistan’s already-high domestic manufacturing content in two- and three-wheelers.
• Use the resulting reduction in household utility and mobility costs to release disposable income toward discretionary, industry-supporting consumption.
• Direct financial-sector reform toward closing the SME credit gap, shifting bank balance sheets away from near-total government absorption and toward productive lending.
• Anchor new investment in smaller, resource-proximate cities rather than concentrating it further in existing metropolitan centres, linking regional universities and technical institutes to local SME clusters as informal R&D and commercialisation partners.
• Allow the resulting gains in industrial competitiveness, exports, and reduced fuel-import demand to ease pressure on the exchange rate and external financing needs, creating space to retire further debt without renewed borrowing.

Conclusion

The recurring cycle of IMF-supported stabilisation followed by renewed borrowing reflects a diagnosis that treats Pakistan’s crisis as one of aggregate demand or fiscal indiscipline alone. The evidence assembled here — a circular debt stock still above Rs5 trillion despite years of tariff increases, an SME sector that generates 40 percent of GDP but absorbs under 7 percent of private credit, and a spontaneous consumer-led solar transition that already outpaces formal policy — suggests a different diagnosis: household and national income are being absorbed by unavoidable costs and rent-seeking financial channels rather than being converted into productive, discretionary demand. Pakistan’s ongoing energy and transport transitions are, in this light, not simply climate policies. Designed and sequenced deliberately, they are candidates for a genuine industrial and debt-reduction strategy — one aimed at converting cost relief into productive investment rather than repeating another round of borrow, stabilise, and borrow again.

References

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