Pakistan’s Economic Crossroads: Rising Poverty and the Stagnation Trap in 2026

Pakistan’s poverty rate hits 28.9% in 2025, with 70 million people below the poverty line. Explore the causes of poverty in Pakistan 2026, economic stagnation, inequality trends, and the policy rethink the country desperately needs.

Imagine a wheat farmer in rural Punjab — call him Aslam — who has tilled the same two acres his father left him for thirty years. In 2022, catastrophic floods submerged his fields for six weeks. In 2023, erratic monsoons halved his harvest. By 2024, the government’s support price for wheat had been slashed under IMF conditionality, and the middlemen who once paid a modest premium had moved on. Aslam’s real income today, inflation-adjusted, is lower than it was a decade ago. He is not alone. He is, statistically speaking, one of 70 million Pakistanis.

Pakistan’s economic stagnation is no longer a forecast. It is a lived reality — etched into household budgets, migration patterns, and the quiet despair of a shrinking middle class. The country’s latest Household Integrated Economic Survey (HIES 2024–25), released by the Planning Commission, confirms what many economists had long warned: the poverty rate has surged to 28.9%, the highest level since 2014, up sharply from 21.9% in 2018–19. For a nation of 240 million, that translates to roughly 70 million people subsisting on less than Rs8,484 per month — approximately $30.

The macroeconomic headline numbers tell a different story, of course. Inflation has cooled from its 38% peak. The current account has stabilised. The IMF programme is on track. Foreign exchange reserves have recovered. Islamabad calls this “stabilisation.” But stabilisation, it turns out, is not the same as development. And the gap between the two — in human terms — is widening by the year.

Pakistan Poverty Rate 2025: A Decade of Lost Ground

The Planning Commission data is unambiguous and, frankly, damning. Real household income — adjusted for inflation — in 2024–25 is 13% lower than it was in 2015–16. Real consumption has fallen 8% over the same period. These are not rounding errors. They represent a structural deterioration of living standards across an entire generation.

Key Economic and Poverty Indicators: Pakistan 2015–2025

Sources: Pakistan Planning Commission HIES 2024–25; World Bank Pakistan Overview; IMF Article IV Consultation 2024

Income inequality, as measured by the Gini coefficient, has risen to 31.7 nationally — up from 28.4 in 2018–19. Rural inequality has jumped from 25.1 to 29.2, while urban inequality sits at 34.4. The countryside, long assumed to be Pakistan’s economic cushion, is fraying fastest. Rural poverty now stands at 36.2%, up from 28.2% just six years ago.

The UNDP Human Development Report 2023–24 places Pakistan’s HDI at 0.540, ranking it 164th out of 193 countries, with a 33% decline when adjusted for inequality — one of the steeper inequality-adjusted drops in South Asia. This is not a country on the cusp of emerging market status. It is a country sliding in the wrong direction.

Causes of Poverty in Pakistan 2026: Climate, Policy, and the Urban-Rural Divide

The Climate Shock No One Planned For

Aslam’s story is not idiosyncratic. Climate change has become a structural driver of rural poverty in Pakistan. The 2022 floods submerged one-third of the country, destroying crops, livestock, and infrastructure worth an estimated $30 billion, according to World Bank damage assessments. The recovery was incomplete before the next climate shock arrived.

Small farmers, who constitute the backbone of Pakistan’s agricultural sector, are disproportionately exposed. They lack irrigation alternatives when rains fail, insurance when floods arrive, and credit to replant after losses. The government’s response — oscillating support prices for wheat and sugarcane, and import/export restrictions that shift with fiscal pressures — has amplified rather than cushioned these shocks. When the wheat support price was cut in 2023–24 under IMF programme conditionality, it was economically defensible. But for farmers already operating at subsistence margins, it was catastrophic.

As the Guardian’s climate desk has documented, Pakistan contributes less than 1% of global greenhouse gas emissions yet ranks among the top ten countries most vulnerable to climate impacts. The moral asymmetry is real; the policy response has been inadequate.

The Urban Worker Squeezed from Both Sides

Three hundred kilometres east of Aslam’s flooded fields, a garment worker named Nadia stitches denim in a Lahore factory. Her nominal wage has risen — just not nearly as fast as prices. Urban inflation, which exceeded 40% at its 2023 peak before retreating, eroded purchasing power faster than any wage negotiation could track.

Urban Pakistan’s manufacturing base, meanwhile, has contracted. The Large Scale Manufacturing (LSM) index stands at 115 in 2024–25, down from a peak of 128 in 2021–22. Food processing and textiles — sectors that employ millions at the lower end of the income spectrum — have struggled under high energy costs, import restrictions on raw materials (introduced during the 2022–23 foreign exchange crisis), and weak domestic demand. Some sectors have rebounded: automobile sales have recovered, and apparel exports hit record highs in 2024, buoyed by global supply chain diversification away from Bangladesh. But these gains are concentrated in capital-intensive niches that create fewer jobs per unit of output.

Urban unemployment, at 7.1%, understates underemployment — the millions working part-time, informally, or below their skill level. Pakistan’s youth bulge intensifies the pressure: roughly 60% of the population is under 30, and an economy growing at 2–3% annually cannot absorb the 1.5–2 million new labour market entrants each year.

Pakistan Economic Stagnation: A Lost Decade Compared

The contrast with the early 2000s is instructive — and painful. Between 2002 and 2007, Pakistan grew at an average of 7% annually. Poverty fell sharply. A nascent middle class emerged in urban Punjab and Sindh. Consumer goods companies expanded distribution networks into secondary cities. That growth story attracted foreign direct investment, spurred telecom expansion, and created something rare in Pakistan’s economic history: optimism.

What happened? Partly geopolitics — the war economy distortions of the post-9/11 decade. Partly structural: the early 2000s growth was partly debt-financed and built on shallow foundations. The textile and agriculture sectors never underwent the productivity transformation that, say, Bangladesh’s garment industry did through sustained investment and export discipline.

The Bangladesh and India Comparison

The regional comparison is sobering. Bangladesh, starting from a lower base, has sustained export-led manufacturing growth, reduced its poverty rate to below 19%, and achieved per capita income convergence with Pakistan. It did so through a narrow but disciplined focus: the garment sector, remittances, and microfinance penetration at scale. The IMF’s South Asia Regional Economic Outlook credits Bangladesh’s export institutional framework — stable energy supply, reliable port infrastructure, workers’ rights minimum floors — as critical differentiators.

India, despite its own inequality challenges documented by the World Inequality Lab, has managed 6–7% growth rates that structurally reduce extreme poverty even if inequality rises. The key difference is productive investment: India’s gross fixed capital formation runs at approximately 30% of GDP. Pakistan’s hovers around 13–15% — insufficient to generate the employment density a young population requires.

Pakistan’s FDI inflows have been chronically low — under $2 billion in most recent years — and several multinational firms (in consumer goods, pharmaceuticals, and energy) have scaled back or exited entirely, citing regulatory uncertainty, energy costs, and currency risk. The Financial Times has tracked this multinational exodus as symptomatic of a broader investment climate problem that stabilisation packages alone cannot fix.

Impact of Inequality on Pakistan Growth: A Vicious Cycle

Rising inequality is not merely a moral concern — it is an economic drag. When the Gini coefficient rises and the middle class contracts, domestic consumption loses its dynamism. Pakistan’s consumer market, once a compelling growth story for multinationals, becomes less attractive. Tax revenues from a narrowing formal economy remain inadequate. Public investment in health, education, and infrastructure — the long-run foundations of productivity — is crowded out by debt servicing, which now consumes nearly 50% of federal revenue.

The World Bank’s “Fragile Gains” assessment notes that while macroeconomic stabilisation has reduced tail risks, it has not addressed the structural drivers of low growth and high vulnerability. A country where real household incomes are 13% below their 2015–16 levels is not stabilising around a healthy equilibrium. It is stabilising around a poverty trap.

Poverty Alleviation Strategies for Pakistan: What Would Actually Work

The policy menu is not mysterious. Economists from Islamabad to Washington have outlined the broad contours for years. What has been missing is political will, sequencing, and a coherent growth vision that complements — rather than defers to — stabilisation.

1. Debt Restructuring and Fiscal Space Creation Pakistan’s external debt obligations leave almost no room for productive public investment. A credible medium-term debt restructuring — ideally coordinated with bilateral creditors (China, Saudi Arabia, UAE) and multilaterals — could free fiscal space for the infrastructure and human capital investment that growth requires. The early 2000s precedent is instructive: the Paris Club rescheduling of 2001 gave Pakistan’s government the breathing room to invest, and growth followed.

2. Tax Base Broadening — Genuinely Pakistan’s tax-to-GDP ratio, at approximately 10–11%, is among the lowest in the region. Agricultural income — concentrated among large landowners — is largely untaxed. Real estate capital gains escape formal taxation. The retail and wholesale trade sector, dominated by politically connected interests, contributes minimally to the exchequer. Broadening the tax base is not technically difficult. It is politically difficult. The IMF has repeatedly flagged these exemptions; the government has repeatedly deferred action.

3. A Jobs-Centred Industrial Policy Pakistan needs a Bangladesh-style sectoral focus — probably in textiles and apparel (where it has comparative advantage and recent export momentum), agro-processing (where raw material inputs are domestic), and digital services (where the youth bulge becomes an asset). This requires stable energy supply at competitive prices, predictable trade policy, and investment in technical and vocational education aligned to employer needs.

4. Climate-Resilient Agriculture Small farmers need crop insurance, drought-resistant seed varieties, water-efficient irrigation, and access to credit at non-usurious rates. These are not novel ideas — they are standard development economics. The challenge is delivery through institutions that have historically served large landowners rather than smallholders.

5. Restoring Private Sector Confidence State-owned enterprises continue to crowd out private investment, drain fiscal resources, and distort markets. A credible privatisation programme — with transparent processes and regulatory frameworks that protect consumers — would signal seriousness to both domestic and foreign investors.

Conclusion: Stabilisation Is Not Enough

Pakistan in 2026 stands at a genuine crossroads. The IMF programme has averted the acute crisis that loomed in 2022–23. Inflation is retreating. Reserves are recovering. These are real achievements, and dismissing them is unfair.

But stabilisation around stagnation is not a development strategy. Seventy million people below the poverty line is not a rounding error on the path to recovery — it is a structural failure demanding structural response. The shrinking middle class, the youth unemployment crisis, the rural poverty surge, the climate vulnerability of smallholder agriculture: these are interconnected problems that no single IMF tranche will resolve.

The early 2000s showed that Pakistan can grow — and when it grows inclusively, poverty falls. The ingredients are known. What is required is the political economy to assemble them: debt relief to create fiscal space, tax reform to fund public investment, industrial policy to generate jobs, and climate adaptation to protect the rural poor.

Aslam cannot wait another decade for the theory to become practice. Neither can the 70 million Pakistanis who share his predicament.