**Khyber Pakhtunkhwa at a Pivotal Point in Its Economic Journey**
Khyber Pakhtunkhwa (KP) stands at a crucial juncture in its economic development. Despite Pakistan’s significant strides in macroeconomic stabilization—marked by a 2.68% GDP growth in FY2025, a historic primary surplus of 3.0% of GDP, and a dramatic decline in inflation to 0.3% in April 2025—KP’s economic potential remains largely unrealized. This is primarily due to structural regulatory inefficiencies that hinder business growth and investment.
According to *Reforming Business Regulations in Khyber Pakhtunkhwa: A Path to Economic Growth*, challenges within the business environment are especially pronounced given KP’s strategic role as a gateway for regional trade. While the national macroeconomic outlook has become increasingly stable—with an investment-to-GDP ratio of 13.8%, savings at 14.1%, and a rise in per capita income to $1,824—the private sector in KP continues to grapple with fragmented, duplicative, and often non-transparent regulatory requirements.
### Regulatory Challenges and Business Environment
The report offers a detailed analysis of regulatory challenges across both developed and underdeveloped regions of KP. Notably, 87% of businesses in the province are sole proprietorships, reflecting the high compliance costs and the limited reach of formalization mechanisms at both provincial and divisional levels.
Pakistan has made progress in women’s economic inclusion, supported by more than 12,000 women-led startups through national incubation centers. However, women-led businesses in KP still face a 6% to 13% higher regulatory burden compared to their male counterparts. This disparity arises from social mobility constraints, network exclusion, and weak institutional support.
### Intra-Provincial Disparities and Sector Vulnerabilities
There are stark intra-provincial disparities in infrastructure and service delivery, with higher formalization in urban centers and persistent bottlenecks in remote divisions. Data from the Pakistan Bureau of Statistics reveals a moderate, broad-based recovery in industry and services nationwide, with industrial growth at 4.77% and services at 2.91%. Nevertheless, KP’s agriculture and manufacturing sectors remain especially vulnerable to local regulatory bottlenecks.
Key challenges such as land acquisition delays, permit backlogs, and infrastructure constraints disproportionately affect the primary and secondary sectors. Meanwhile, the services sector suffers from high transaction costs due to inadequate digital payment and tax systems. The slow growth of the national agriculture sector (only 0.56%) further accentuates vulnerabilities, especially in KP’s less diversified economy.
### Financial Inclusion and Digitalization Efforts
On the financial front, private sector credit expansion has improved nationally, increasing to Rs 767.6 billion in FY2025 from Rs 265.2 billion the previous year. Digital financial inclusion is also on the rise; the IT sector recorded $2.8 billion in exports, with freelancers contributing $400 million.
However, only 10% of KP-based deposits are reinvested locally. The persistence of informality and lack of collateral keeps most KP firms outside mainstream financial channels. While digitalization efforts like the Pakistan Single Window (PSW) offer potential, their impact in KP remains limited due to connectivity and literacy gaps.
### Trade and Regional Connectivity
Pakistan’s current account surplus of $1.9 billion (July–April FY2025) and rising foreign exchange reserves—reaching $16.6 billion as of May 2025—reflect a stabilizing external position. For KP, increasing trade with Afghanistan and Central Asia presents a major untapped opportunity.
Nonetheless, inconsistent customs procedures, banking incompatibilities, and weak logistics networks—especially beyond Peshawar—continue to stifle cross-border SME growth. National reforms such as PSW and CAREC initiatives hold promise but require urgent localization to meet KP’s specific needs.
### Fiscal Consolidation and Investor Confidence
Pakistan’s fiscal consolidation—with the deficit reduced to 2.6% of GDP—alongside rising investor confidence (the KSE-100 index up 50%) and an improved credit rating (Fitch upgraded Pakistan to B-) create a conducive environment for KP’s regulatory overhaul.
The key challenge lies in translating these national gains into provincial realities, particularly for lagging regions and excluded communities.
### Recommendations for KP’s Economic Transformation
To drive economic transformation, KP must prioritize creating a provincial digital one-stop shop that integrates all business approvals—including registration, tax, utilities, and environmental clearances—into a single, streamlined platform. This infrastructure should align with national reforms but be customized to address KP’s unique regional and administrative realities.
Moreover, gender-responsive regulatory reforms are critical. Building on national momentum for women’s entrepreneurship, KP should focus on removing collateral constraints, expanding credit guarantee schemes, and establishing dedicated women’s business facilitation desks at the provincial level to ensure equitable access and institutional support.
Strategic, division-specific policy targeting should become central to KP’s regulatory modernization. The macroeconomic headroom now available must be leveraged to direct public investment toward infrastructure and sectoral priorities in underperforming divisions—for example, strengthening agriculture in southern KP and boosting tourism corridors such as Malakand.
Enhancing financial inclusion requires policies mandating a greater allocation of KP-based deposits toward local lending. Expanding Shariah-compliant and digital financial products, alongside fostering partnerships between provincial business associations and financial institutions, can help address informality and limited finance access.
Furthermore, trade facilitation and improved border connectivity are imperative. Rapid localization of national trade facilitation tools like the Pakistan Single Window, combined with banking reforms and logistics upgrades in key border divisions, will support SMEs and particularly benefit women-led exporters.
### Institutionalizing Public-Private Dialogue
Lastly, establishing formal regulatory review platforms at both divisional and provincial levels will institutionalize public-private dialogue. Continuous feedback from business leaders—especially youth and women entrepreneurs—is essential for ensuring responsive and adaptive policy reforms.
*Reforming Business Regulations in Khyber Pakhtunkhwa* is the first comprehensive diagnostic to capture regulatory realities across every KP division, including urban, rural, developed, and lagging areas. It provides a critical evidence base for targeted action.
With national macroeconomic stability returning, KP must act decisively to translate stability into opportunity by enacting targeted, digital-first, and inclusive regulatory modernization. Only by closing the implementation gap and localizing national gains can KP transform from a region of potential to one of sustained, inclusive prosperity.
https://www.thenews.com.pk/tns/detail/1345110-transforming-kps-business-landscape