The Heritage Institute's Index of Economic Freedom serves as a critical benchmark for assessing the economic landscape of nations worldwide. This comprehensive index evaluates 12 distinct economic freedoms, which are fundamental to fostering sustainable growth and development. These pillars include property rights, government integrity, judicial effectiveness, tax burden, government spending, fiscal health, business freedom, labour freedom, monetary freedom, trade freedom, investment freedom, and financial freedom. Together, they form the institutional and structural conditions necessary for a thriving economy.
Pakistan's Ranking in the 2025 Index
In its 2025 report, the Heritage Institute classified Pakistan as a "repressed" economy, placing it 150th out of 184 economies globally. Pakistan scored 49.1 out of 100, indicating significant challenges across multiple dimensions. The report highlighted a lack of commitment to much-needed economic reforms, with efforts in key areas described as marginal at best. It pointed to institutional resistance in reforming public finance management and outdated economic structures. Furthermore, the judiciary was noted as susceptible to political interference and corruption, which undermines property rights. The entrepreneurial environment and private-sector dynamism have not seen meaningful improvement, and the labour market remains stagnant, with much of the workforce underemployed in the informal sector. High inflation has also disrupted monetary stability, though it was around 12% at the data cut-off date of June 2024 and has since shown a downward trend.
Limitations of the Index and Current Dynamics
The Heritage Index has its limitations, as it may not fully capture the actual economic dynamics in Pakistan. For instance, it awarded relatively high scores of 88.9% for government spending and 78.3% for tax burden, based on government spending and tax collection as percentages of GDP. Pakistan's government spending is approximately 20% of GDP, while the tax-to-GDP ratio stands at 10%. From an absolute perspective, 20% does not indicate an excessively large government. However, when considering that interest payments and defence spending account for nearly 70% of total expenditure, along with wasteful spending in other areas, the high score for public spending becomes largely irrelevant. Similarly, a 10% tax-to-GDP ratio might suggest a low tax burden, but the actual tax burden on those who pay taxes remains very high, highlighting a disconnect in the index's methodology.
Recent Developments and Future Outlook
Looking ahead to the first quarter of 2026, the next edition of the Index of Economic Freedom will need to account for significant changes in Pakistan's economic landscape. Since the last report, the tax burden on taxpayers has increased substantially. The top marginal tax rate on individual incomes has risen from 35% to 45%, and the super tax on corporate incomes, initially a temporary levy, has received judicial cover, raising the effective tax burden on large corporations to over 50%. On a positive note, inflation has been largely tamed, now hovering around 5%, and the government has made credible commitments to reform. Key initiatives include the successful privatisation programme of PIA, a new open and trade-oriented tariff policy, and efforts to improve the regulatory environment through the regulatory guillotine process. These developments should contribute to an improved score on economic freedom in future assessments.
Persistent Challenges and Negative Trends
Despite these reforms, several sobering observations from the 2025 Index remain valid today, and in some aspects, the situation has worsened since 2024. The unemployment rate has increased, and most of the workforce continues to be underemployed in the informal economy. According to the latest official labour force survey, the informal sector employs 81% of the workforce, with the figure at 71% in urban areas. This is exceptionally high for an economy aspiring to sustainable development and marks an increase from the 72.5% reported in the 2020-21 survey. The judiciary's susceptibility to political interference and corruption, as noted in the index, has been echoed in recent IMF reports, with evidence suggesting increased interference eroding investor confidence. Additionally, the lack of fresh private-sector investment remains a challenge, as investment-to-GDP has not picked up, and exports in the last six months of 2025 have declined compared to the same period in 2024, partly due to across-the-board tariff reductions.
Conclusion: A Mixed Picture for Economic Freedom
In the final analysis, Pakistan's outlook on economic freedom, viewed through an institutional lens, presents a mixed picture. While reforms in areas like privatisation and trade policy may lead to improvements in the index score, backward progress in parameters such as judicial effectiveness, informal employment, and investment levels could undermine these gains. The balance between positive reforms and persistent challenges will shape Pakistan's future ranking and economic trajectory.
