Pakistan at a Crossroads
By Piotr Opaliñski
(Former Polish Ambassador to Pak)
(Mem, Centre for Intl Relations)
Located at the crossroads of South Asia, Central Asia and the Middle East, Pakistan occupies a strategic place in the balance of geopolitical power, and the implementation of the China-Pakistan Economic Corridor (CPEC) not only shapes its position in the global economy, but also fits into the competition between powers for dominance in Eurasia.
In 2024, Pakistan grappled with mounting political tensions, serious economic challenges, and growing security threats. While it managed to avoid financial collapse, fundamental structural problems remain unresolved. Will the country be able to leverage its economic and demographic potential to achieve lasting stability and development, or will it remain embroiled in a spiral of crises?
The February 2024 parliamentary elections, which were supposed to restore stability, have in fact further polarized society. Imran Khan’s Tehreek-e-Insaf (PTI) party has been subjected to systemic repression, and its leaders have been removed from public life through legal and judicial action. Meanwhile, the coalition government formed by the Pakistan Muslim League (PML-N) and the Pakistan Peoples Party (PPP) has not only failed to stabilize the situation, but has itself become mired in disputes and mutual accusations of breaking coalition agreements.
Despite political instability posing a serious challenge to the country’s stability, the government has embarked on a wide-ranging economic reform program, both to avoid a financial crisis and to boost economic growth. The “Uraan Pakistan” development program, which aims to achieve a 6% annual GDP growth by 2028, focuses on key sectors: IT (which has grown by 28%), energy, pharmaceuticals, textiles, and agriculture, with the aim of ensuring the sustainable development of the entire economy.
Stabilization measures, falling global commodity prices, and improved supply chains helped reduce inflation from around 40% in May 2023 to 4.1% in December 2024. At the same time, foreign exchange reserves increased, improving Pakistan’s ability to finance imports. As part of fiscal reforms, the government increased tax collection by 40%, and the modernization of the Federal Board of Revenue (FBR) improved tax administration.
In response to the improved macroeconomic situation, the Central Bank began a rapid cycle of interest rate cuts – from 22% in mid-2024 to 12% in January 2025. Additionally, foreign investment inflows increased by 20%, indicating growing market confidence in the country’s economic prospects.
Financial support from the International Monetary Fund played a key role in averting a crisis, as it provided Pakistan with $3 billion under a stabilization program, conditional on tax reforms and reduced subsidies. Saudi Arabia and the United Arab Emirates provided additional support, extending debt repayment dates, averting the threat of default. The World Bank also pledged $20 billion for infrastructure projects over the next decade.
However, fundamental economic problems remain unresolved. High public debt and limited capacity to maintain long-term fiscal sustainability remain serious risks. GDP growth in the first quarter of fiscal year 2024/25 was just 0.92%, prompting the government to lower its annual growth forecast from 3-3.2% to 2.5%. Such a low growth rate will not be enough to effectively reduce poverty – which still affects over 40% of the population – or to create enough jobs for the 3.5 million young people entering the labour market each year. It could lead to deepening social tensions and increasing labour migration.
The implementation of reforms is also questionable due to political instability and security threats, which are undermining the confidence of both investors and citizens. Over the past year, several major European investors have withdrawn from the Pakistani market, citing regulatory uncertainty and a deteriorating operating environment.
The security situation in Pakistan has deteriorated significantly. In 2024, the number of terrorist attacks increased by 70% compared to the previous year, reaching 529 incidents, and the number of victims increased by 23% (over 850 killed and 1,100 injured). The majority of perpetrators are Islamic extremists, mainly from Tehreek-e-Taliban Pakistan (TTP) and its factions, such as Hafiz Gul Bahadur and Lashkar-e-Islam, as well as from the Islamic State of Khorasan (IS-K) group. At the same time, the activity of separatist groups in Balochistan has increased, as has the number of clashes between Sunnis and Shiites. According to intelligence reports, attacks are becoming more coordinated, and terrorists are receiving financial support from abroad. The threat of cyberattacks on critical infrastructure is also growing, prompting the government to revise its national security strategy. In addition, the TTP’s use of Afghan territory has contributed to heightened tensions between Islamabad and the Taliban government in Kabul.
For Pakistan, China remains a strategic ally, a key arms supplier and the most important economic partner, especially in the context of the development of the China-Pakistan Economic Corridor, as confirmed by the visit of the Chinese Prime Minister to Islamabad. Despite the close cooperation, however, tensions are emerging – Beijing is increasingly irritated by Pakistan’s bureaucratic problems, its repeated requests for extensions of commitments and threats to the safety of Chinese personnel involved in CPEC projects.
After two fatal attacks on Chinese workers last year, the Chinese ambassador to Islamabad publicly criticized the insufficient security measures, which coincided with a slowdown in the implementation of some infrastructure projects and the suspension of the allocation of new funds. At the same time, fears are growing in Pakistan about the deepening asymmetry in economic relations and dependence on Chinese capital, which raises concerns about the country’s long-term financial sovereignty.
Pakistan’s relations with the United States are characterized by a strategic distance resulting from the divergence of priorities between the two countries. After the end of the Afghan intervention, Islamabad’s importance to Washington declined in favor of the U.S. strategic partnership with India, a country that Pakistan sees as an existential threat. As a result, Islamabad lost its status as a priority U.S. ally, while being burdened with U.S. sanctions for its development of missile and nuclear programs.
Despite the cooling, cooperation in selected areas continues, especially in the fight against terrorism and countering extremism, where the US sees Pakistan as a key element of regional stability. The parties maintain limited channels of cooperation on security issues and development programs. Islamabad, seeking to avoid isolation, is not cutting ties with Washington but is shifting its priorities towards China, which deepens mutual distrust.
The strengthening of US military and economic relations with India complicates Pakistan’s situation in the region. Although Islamabad does not seek open conflict, it increasingly sees US policy as part of a broader strategy to weaken its position in the subcontinent. In the longer term, these relations are likely to remain transactional, based on short-term interests rather than the strategic partnership that was the foundation of cooperation a decade ago.
Pakistan’s relations with India remain tense, primarily as a result of the conflict over Kashmir, which has been a major factor destabilising relations between the two countries since the division of the subcontinent in 1947. Islamabad has expressed opposition to the political and demographic changes imposed by New Delhi on the territory and the repression of Kashmiri Muslims. Dialogue is blocked by mutual accusations of supporting terrorism – India accuses Pakistan of aiding Kashmiri militants, and Islamabad accuses New Delhi of supporting Baloch separatists.
Hopes for a breakthrough during the first visit in a decade by the head of Indian diplomacy S. Jaishankar to Islamabad (for the Shanghai Cooperation Organisation summit) turned out to be vain. The fundamental conflict of interests and deep lack of trust mean that the rivalry between the two countries is chronic, and regional stability is based more on deterrence than on the real prospect of agreement. — INFA