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Abstract In Pakistan, accessibility to groundwater is a dividing line between poverty and welfare. Access to groundwater allows poor people to not only increase their production and incomes, but also reduce their vulnerability against external shocks. However, the present uncontrolled and unregulated use of groundwater is replete with serious consequences. Rapidly falling groundwater tables and increasing salt content in the pumped groundwater are threatening the sustainability of irrigated agriculture. This paper reviews the challenges faced by Pakistan due to unsustainable use of groundwater and identifies opportunities for improving its management. The paper suggests that there is a need for a more refined understanding of the peculiarities and socio‐ecology of groundwater before identifying management solutions. In addition to institutional reforms, supply and demand management approaches also need to be followed. For demand management, farmers should adopt improved irrigation and agronomic practices. Current land use patterns should be reviewed to replace water‐intensive crops with water‐efficient crops. For supply management, use of waste water and saline drainage effluent for agriculture should be promoted. In rain‐fed areas, more efforts should be focused on rainwater harvesting. Effective coordination between organizations responsible for the management of groundwater resources also needs to be enhanced. Copyright © 2008 John Wiley & Sons, Ltd.