Political Instability in Pakistan and Its Impact on the Economy: A Plain-English Guide

The question

Every Pakistani has heard the claim. If only politics would settle down, the economy would take off. Finance ministers say it. Generals say it. Business leaders say it loudest of all.

Is it true? Partly. This guide tries to separate the part that is true from the part that is a comfortable excuse.

Instability does not explain why Pakistan is poor. It helps to explain why Pakistan keeps having the same crisis.

What counts as instability

The word covers several different things, and they do not all do the same damage.

A short history of unfinished terms

Notice that even in the “stable” decade from 2008 to 2018, when two assemblies ran their full course, neither prime minister who started a term finished it.

Five ways instability damages the economy

1. Short horizons

A reform such as widening the tax net or raising electricity prices to cover costs causes pain at once and brings benefits years later. A government that expects to last five years may accept that trade. A government that fears it will fall within twelve months will not. So the hard decisions are postponed, by one government after another, until a crisis forces them all at once.

2. Spending to survive

Before an election, or when a government feels threatened, the temptation is to spend: subsidies on fuel and electricity, pay rises for government workers, development schemes for wavering members. Economists call this the political budget cycle. Pakistan shows it clearly. Deficits tend to widen in election years and to be squeezed painfully in the year after.

3. Policy that reverses

Each new government tends to undo its predecessor’s signature policies and cancel or investigate its contracts. Power plants, motorways, housing schemes and privatisation deals have all been reopened after a change of government. An investor who signed with one government cannot be sure the next will honour the agreement.

4. A higher price for borrowing

Lenders and rating agencies put a number on political risk. When politics looks shaky, Pakistan’s bonds fall in value, and the interest rate the country must offer on new borrowing rises. The ratings tell the story. They sank to the edge of default in 2023 and were raised step by step as politics appeared to settle, reaching B from S&P in July 2026.

5. The churn of people

Policies need people who stay long enough to carry them out.

That is eight finance ministers in under six years. Each negotiated with the IMF afresh. The same turnover runs through the tax authority, the power ministry and the planning commission.

The clearest case: 2022 and 2023

If one episode shows the link, it is this one.

1. Early 2022. Facing a vote of no confidence, the government of the day cut petrol and electricity prices and froze them, even as world oil prices soared. This broke the terms of the IMF programme then running.
2. April 2022. The government fell. The new coalition inherited the subsidy and took weeks to remove it, fearing the anger of voters.
3. Mid-2022. Record floods struck. The finance minister who had restored the IMF programme was replaced by another who tried to hold the rupee’s value up. The programme stalled again.
4. Early 2023. Reserves fell to about 3 billion dollars, less than a month of imports. Ports filled with containers that importers could not pay for. Factories closed for want of parts.
5. May 2023. The former prime minister was arrested, his supporters attacked army buildings, and inflation reached about 38 per cent.
6. Mid-2023. A last-minute emergency loan from the IMF averted default.

In those eighteen months the economy went from growth of about 6 per cent to roughly zero. Almost every bad decision had a political motive: a government trying to avoid falling, and another trying not to be blamed.

Earlier episodes

But stability alone has not worked either

Here the simple story runs into trouble.

Pakistan’s longest stretches of political calm were under military rulers: the 1960s, the 1980s and the early 2000s. Growth in those decades was high. Many people conclude that firm rule is good for the economy.

Look closer and the lesson is different.

• Each of those booms was fuelled by foreign money: American aid in the 1960s, aid and remittances during the Afghan war of the 1980s, and aid and debt relief after 2001.
• Each ended in crisis when the money stopped.
• None fixed the underlying weaknesses. Taxes stayed low, exports stayed narrow and schools stayed poor.

In other words, calm made it easier to borrow and spend. It did not, by itself, make the economy stronger.

What the sceptics say

A number of Pakistani economists argue that “instability” has become an alibi. On their view the real problems are older and deeper:

These, they point out, have survived every government, elected or not. A stable government that leaves them untouched will end where the unstable ones did.

Since 2024: a test of the theory

The period since the 2024 election is a kind of experiment.

What has gone right. One finance minister has been in office throughout. The IMF programme agreed in September 2024 has stayed on track through several reviews. Reserves have been rebuilt to record levels. The ratings have been raised. A loss-making airline has at last been sold. Growth reached 3.7 per cent in 2025-26.

What that shows. Continuity helps. Much of the improvement came from simply doing the same sensible things for two years running.

What has not changed. Growth of 3 to 4 per cent, with the population rising by about 2.5 per cent a year, barely lifts incomes. Private investment remains very low. Exports have not surged. Inflation was back above 10 per cent in the autumn of 2026.

And the politics underneath. The calm rests on a disputed election, a jailed opposition leader and two constitutional amendments passed over the objections of the opposition and of several senior judges. In early October 2026 talks between the government and the main opposition party collapsed and a protest march set off towards the capital. The stock market, which had peaked in January, was already about a tenth below that level.

So the experiment is unfinished. It has shown that two years of continuity can stabilise the economy. It has not yet shown that this kind of continuity can make it grow.

How instability reaches an ordinary household

Talk of ratings and reserves can make all this sound remote. It is not. Each link in the chain ends at a kitchen table.

The poorest are hit hardest, for two reasons. They spend most of their income on food and fuel, whose prices move first. And they have no savings in dollars, gold or property to protect them when the rupee falls. People with assets often come through a crisis richer in rupee terms than they went in.

This is the strongest argument for taking political stability seriously as an economic question. Its absence works like a tax, and the tax falls on those least able to pay it.

What would actually help

Economists of very different politics tend to agree on a short list.

1. Rules both sides accept. Elections whose results the losers recognise, so that losing office is survivable and winning it is legitimate.
2. A shared minimum on the economy. Several parties have proposed a “charter of the economy”: a handful of policies, such as the tax system and energy pricing, that all promise not to reverse.
3. Institutions that outlast governments. An independent central bank, a professional tax service and regulators whose heads cannot be dismissed at will.
4. Fewer discretionary favours. The less a government can hand out, the less there is to fight over.
5. Local government. Power spread across thousands of elected councils is harder to seize in one go.

None of this is new. Versions of each have been promised by every major party. The difficulty is that each party favours such restraints most strongly when it is in opposition.

Words used in this article

Timeline

For the constitutional background, read our explainers on the caretaker government and the National Assembly, and our guide to Pakistan’s politics.

Frequently asked questions

Sources

• Dawn, “Economy grows 3.7pc in FY26 — fastest in four years, but short of target” — 11 June 2026.
• Business Recorder, “Economic Survey: Pakistan misses GDP growth target as IMF talks continue” — June 2026.
• The Express Tribune, “S&P upgrades Pakistan’s credit rating to ‘B'” — July 2026.
• ProPakistani, report on the Finance Ministry’s annual debt review for 2025-26 — 1 October 2026.
• Aaj English, “State Bank keeps policy rate unchanged at 11.5%” — 2026.
• Geo News, “PTI begins Islamabad long march after talks breakdown” — October 2026.
• International Monetary Fund, Pakistan country page — for the history of programmes.
• State Bank of Pakistan — for official data.
• World Bank, Pakistan Development Update, October 2025: questions and answers