Pakistan’s recent austerity measures demonstrate, once again, how susceptible the country remains to external economic shocks, despite all assurances to the contrary. Durable resilience will require moving from short-term fiscal restraint towards inclusive finance, leveraging blended development finance to strengthen local economic systems as well as digital financial ecosystems, and focusing on the development of finance models that expand capital access for small businesses and marginalized communities.

The Fragility of Austerity: Why Fiscal Restraint Falls Short

Despite being induced by a rise in international oil prices and regional unrest, these measures are symptomatic of a much deeper challenge: Pakistan’s limited fiscal space and import dependence on energy. These emergency policies may help in resource conservation, but they also reveal Pakistan’s overall economic weakness in various sectors.

Economic shocks, be they fuel price hikes, inflation, or currency volatility, hurt small businesses, informal workers, and rural communities whose livelihoods rest on stable access to markets and finance the most. The focus should be on making the vulnerabilities of these groups resilient, and that requires more than just a temporary austerity measure; it requires long-term investment in inclusive finance and local economic development.

Pakistan’s financial inclusion is an ongoing challenge in that area. Even though mobile connectivity and digital infrastructure have expanded, millions of Pakistanis are still outside the banking system. As per the National Financial Inclusion Strategy (NFIS) Progress Reports, a large number of adults, especially women and rural residents, do not have access to formal financial services such as a bank account, credit, or insurance. Financial exclusion hampers entrepreneurship while curbing the growth potential of small and medium enterprises. Studies in development economics, such as in the Global Findex 2021, have shown recurrently that access to finance is at the heart of economic development as it allows households to invest in education and helps........

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