The World Bank has clarified that the Indus Waters Treaty, a long-standing water-sharing agreement between India and Pakistan, cannot be unilaterally suspended—echoing Pakistan’s consistent stance on the matter. However, it remains uncertain how soon India will reverse its recent declaration of placing the treaty “in abeyance,” leaving diplomatic observers and regional analysts on edge.

This ambiguity may not immediately shake Pakistan’s economic foundations, but a prolonged standoff could complicate the country’s already delicate economic trajectory. As the new fiscal year approaches, the rising uncertainty is disrupting efforts to build a resilient medium-term strategy for economic growth.

Despite international diplomatic interventions—most notably former U.S. President Donald Trump’s attempt to mediate peace between the nuclear neighbors—tensions linger, casting a shadow over regional stability.

Economic Pressures Mount Ahead of FY26

While the second installment of a $1 billion loan from the International Monetary Fund (IMF) has temporarily eased pressure on Pakistan’s balance of payments, recent trade figures have sparked fresh concern. April saw imports spike to $5.5 billion, while exports lagged at just $2.14 billion, exposing a significant gap that could prove unsustainable if political volatility with India escalates.

Economic managers are believed to have activated a contingency plan to navigate the remaining months of FY25. Yet, the real challenge lies ahead: sustaining fiscal discipline and trade balance in FY26 appears increasingly difficult.

External Dynamics: US-GCC Relations and Remittance Risks

Adding to Pakistan’s economic complexity is the shifting geopolitical landscape shaped by the United States’ renewed alliances with Gulf states. Former President Trump’s visits to Saudi Arabia, Qatar, and the UAE yielded multibillion-dollar investment pledges and enhanced defense cooperation, possibly influencing the investment and trade strategies of these influential nations.

Pakistan’s economic future may be deeply affected by how these countries recalibrate their engagement, not only in terms of capital inflows but also regarding the vital remittances sent by overseas Pakistanis. Remittances from the Gulf and the U.S.—the latter contributing over $3.5 billion annually—remain a crucial financial pillar.

However, a looming U.S. legislative proposal to impose a 5% tax on outbound remittances from July 2025 could jeopardize that stream. With the U.S. being Pakistan’s fourth-largest remittance source, the potential impact of this tax policy is a growing concern.

Domestic Headwinds: Tax Gaps and Fiscal Pressures

On the domestic front, the government is grappling with revenue shortfalls. The Federal Board of Revenue (FBR) missed its FY25 target by Rs831 billion during the first ten months, a shortfall driven by lower-than-expected import volumes and subdued inflation, which dented indirect tax collection.

The Prime Minister has called for urgent reform, emphasizing tax base expansion and stricter action against evasion. Nonetheless, these measures face structural challenges, including weak enforcement, data limitations, and a high degree of informality in the economy.

Complicating matters, the government kept domestic fuel prices steady in May, despite falling global prices—suggesting a reluctance to forego tax income from petroleum products amid mounting fiscal strain.

Trade and Investment Outlook: Limited Relief, High Hopes

Temporary relief could emerge from low inflation, recent interest rate cuts, and a pause in energy price hikes—factors that might marginally boost export competitiveness. Still, this is unlikely to make a significant dent in the ballooning trade deficit, especially with non-oil imports rising to meet growing domestic demand.

Looking ahead, maintaining a current account surplus in FY26 will be an uphill battle. Proposals to reduce import duties to foster global competitiveness may inadvertently widen the trade gap unless carefully managed.

With GDP growth projected at 2.6% by the IMF—lower than the government’s original 3.6% target—Pakistan’s economic path forward hinges on decisive fiscal action, smart trade policy, and a stronger push for foreign direct investment, particularly from Gulf nations.

A Call for Consensus and Reform

Pakistan’s economic recovery and stability now depend on more than technocratic solutions. What’s urgently needed is a broad-based political consensus on reforms, especially in taxation, trade, and investment policy. Creating a transparent and investor-friendly environment is essential if Pakistan hopes to tap into the GCC’s multi-billion-dollar investment ambitions.

The road ahead is complex and fraught with external and internal challenges. But with strategic planning, institutional reform, and a cohesive policy framework, Pakistan can still steer its economy toward resilience in FY26 and beyond.