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 businesses grow and generate employment. Without access to full financial systems, large swathes of the population are excluded from economic currency.
Scaling Blended Finance and Fintech Ecosystems
Digital finance is believed to be a critical means of narrowing this gap. Pakistan is making notable progress in this area with the development of instant digital payment infrastructure like Raast, which allows individuals and businesses to send and receive payments rapidly and at a low cost. The goal of such initiatives is to loosen the constraints that have historically dissuaded many citizens from accessing the formal banking sector. Leora Klapper, in her research, found that the use of digital payments could expand access to financial services, especially for those who are excluded from the banking system. But digital payment infrastructure isn’t enough by itself. An inclusive financial ecosystem must also ensure access to credit, savings, and risk management tools that help individuals and businesses to plan for the future and withstand shocks.
The international development finance institutions are increasingly devoted to this challenge. The United Nations Capital Development Fund (UNCDF) was established by the United Nations General Assembly to support the economic development of the least developed countries. It has also developed financing models to facilitate capital access in otherwise neglected markets. The UNCDF is a hybrid development organization and development finance institution that uses grants, loans, and guarantees to attract investment for development impact.
The strategy for development effectiveness is to significantly raise the development finance flows from commercial sources to sustainable development projects across emerging economies and developing countries for the 2030 agenda. Policymakers and academics in the Organisation for Economic Co-operation and Development (OECD) & World Economic Forum (WEF) have identified blended finance as an essential instrument for mobilizing the huge volumes of capital necessary to meet sustainable development goals.
The work of UNCDF will concentrate on three key areas: financing for SMEs, strengthening subnational and local government finance, and expanding digital financial ecosystems. The organization plans to boost the financing for the development process by supporting fintech innovation and local financial institutions and designing risk-sharing financial instruments to attract more investment from private actors. According to research by Dirk Willem for the Overseas Development Institute on blended finance initiatives, these models can mobilize capital inflows into sectors considered ‘non-investable’ by traditional financiers, particularly in developing economies with underdeveloped financial markets.
For Pakistan, these strategies offer many important lessons. A big part of Pakistan’s economy and employment comes from small and medium enterprises, but a large part of these enterprises does not have access to formal credit. The pool of available finance is restricted, which ultimately hinders expansion, investment, and job creation. The large informal economy means many entrepreneurs operate outside formal financial systems, limiting their ability to access capital. Digital financial ecosystems can be transformative when combined with risk-mitigating investment structures that can work for private lenders. Policymakers can develop pathways for informal enterprises to become formalized and obtain financing when digital payment infrastructure is integrated with credit and financial services.
The significance of these reforms is reflected strongly in turbulent economic times. As Muhammad Yunus notes in his book, Banker to the Poor: Micro-Lending and the Battle Against World Poverty, just as fuel prices rise or international markets fluctuate, those hurt first are small enterprises and the informal workers with low income. Access to digital financial tools and credit facilities provides a crucial cushion against such shocks so that entrepreneurs can continue their business and households can manage temporary financial stress. For a long time now, inclusive financial systems have been seen as a way to enhance resilience that allows communities to adapt better to uncertainty and recover more quickly after crises.
Institutionalizing a Resilient Economic Future
Pakistan has already taken steps toward extending digital financial inclusion, but the government’s challenge is to scale those initiatives and connect them with national investment plans. Agreements between policymakers at home, development agencies from abroad, and private-sector players could speed progress here. Pakistan could improve access to financing for small businesses and more resilient local economic systems through mechanisms like the ones used by the UNCDF. In particular, Pakistan can use blended finance structures that help mobilize private investment.
The key takeaway from Pakistan’s recent austerity measures is that reactive emergency measures cannot ensure economic resilience. Short-term fiscal adjustment may relieve pressure, but over time, stronger economic foundations are needed. Expanding financial inclusion, supporting small businesses, and strengthening digital financial infrastructure are important steps to a more stable and inclusive economy. The journey towards sustainable growth is leaving behind innovative development finance solutions combined with national policy reforms that enable economic opportunity to flow to groups that have historically been excluded from the formal financial sector.
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The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.
Wali Kharal is a final-year law student at the University of London and has previously written for The Friday Times and South Asia Times.
