2 days ago
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- Business Recorder
Economic realities and export
While macroeconomic indicators have achieved feeble stability over the past year, on-the-ground conditions remain as hopeless as they were a year ago.
There's abundant rhetoric about increasing exports, but it's nothing new. If rhetoric and targets were all it took, Pakistan would be the largest exporter in the world. In fact, the impracticality of plans like Uraan Pakistan is that it envisions at 6 percent CAGR and US$50 billion in exports over the next 5 years. Starting from US$373.08 billion GDP in 2024, 6 percent CAGR lands us at US$499.27 billion GDP in 2029. With US$50 billion exports, that is around 10 percent in export to GDP, which is the around same as where we are today, and 25 years ago.
To build an export-based economy, economic activity must become disproportionately export-oriented, and export growth must consistently outperform GDP growth by a significant margin. If something as fundamental is overlooked in a plan prioritizing exports as its first pillar, it raises serious concerns about the coherence and effectiveness of the framework.
The plan ignores another major ground reality: Pakistan is straight-jacketed in a very stringent IMF programme, with no control over its economic policies or space to give incentives for export. In fact, the programme specifically withdrew existing incentives and concessions given to exporters, and with good reason.
The most fundamental issue in Pakistan's economy is it was one day decided that these are going to be our export sectors, and these are going to be our domestically oriented sectors. The export sectors were showered with subsidies and concessions to make them competitive in international market, and domestic sectors were showered with protection to shield them from international competition in the domestic market. The result is that neither the export nor the domestic sectors have achieved the productivity and innovation necessary to compete globally.
While Pakistan champions itself a textile and apparel exporter, which comprise over half of its total exports, its share in global textile and apparel exports is only 1.5-2 percent. It's not that Pakistan is a major exporter of textiles; rather, Pakistan happens to export a bit of textiles and not much else because all other sectors have been so heavily protected from imports that they never bothered working on improving production efficiency and quality.
This kind of policymaking has brought us to the point where the IMF has forced a complete withdrawal of all incentives and concessions for export. The May 2025 Staff Report reads, 'The adoption of the FY25 budget marks an important first step and its high-quality revenue measures targeting general sales taxes, personal income tax, and the corporate income tax of exporters and developers are initial milestones for enhancing fairness, transparency, and revenue collection.'
The rationale is that if you select export sectors and give them special treatment with no sunset, they will never be able to stand on their own, and neither will any of your other sectors ever become competitive in export markets. The rationale behind the aggressive tariff rationalisation is similar — either become competitive or exit the market is the message across the board.
The IMF has also made it clear that Pakistan must look for exports beyond the traditional sectors like textiles. In addition to withdrawing existing incentives for exporters, new schemes must focus on non-traditional sectors. Regarding the Export Finance Scheme being shifted to EXIM Bank, for example, the IMF 'will implement an action plan, setting ambitious goals for the E-EFS to support non-traditional exports and new markets, aiming to move beyond traditional beneficiaries of the schemes.'(May 2025 Staff Report)
To become an export-based economy, Pakistan must generate an exportable surplus that is globally competitive. Whether we export rice, cotton, yarn, apparel, solar panels, semiconductors, or financial and technological services is secondary. What matters is having something that can be produced at scale and sold competitively in global markets. This requires making the agricultural, industrial and services sectors globally competitive by lowering the cost of doing business and cutting red tape across the board.
But will even this yield any increase in exports? A quick answer: No.
We are a commerce-loving nation, addicted to arbitrage profits and averse to adding tangible value. Around 11 percent of GDP comes from large- and small-scale manufacturing, 20 percent from agriculture, and 60 percent from services — of which 20 percent is from wholesale and retail trade. We create roughly half the value from manufacturing of goods as we do from selling goods — both imported and domestic.
Employment shares are similar, with around 38 percent in agriculture, 15 percent in industry — including mining and slaughtering in addition to large and small-scale manufacturing — and 14.4 percent in wholesale and retail trade. Not only are we employing more of our labour force in retail and wholesale trade, but these workers are also more productive since their per labour contribution to GDP is higher than that of manufacturing.
Meanwhile, despite the strong emphasis on being an agricultural country, Pakistan remains a net food-importing country. Its agricultural productivity is roughly half that of India despite comparable agro-climatic conditions, reflecting market inefficiencies, low mechanisation, limited R&D uptake, and poor water and input use efficiency.
These are not the characteristics of an economy headed for an export boom.
The economic environment is also not at all conducive to exports, or any kind of business for that matter. Electricity prices for industry are one of the highest in the world, and the recent reductions are not financially sustainable without a major overhaul of the entire power sector. There is also the blatantly and purposefully miscalculated levy on gas consumption of captive power plants, a testament to the gold-standard governance and rule of law that will protect foreigners' investment in Pakistan.
Then the strongest incentive of all: if you are a manufacturer for the domestic market, you are required to pay a 1.25 percent minimum turnover tax, adjustable against 29% final income tax plus super-tax. However, if you export, you are required to contribute an additional 1 percent of your entire export proceeds into the fixed tax regime. Together, these subject exporters to an effective income tax of up to 135 percent depending on profit margin.
Conversely, you can get into wholesale and retail trade, where the goods are imported and smuggled, business in cash, and 100% of profit, pocketed. It makes one wonders why people aren't rushing to export.
Beyond the major economic distortions, there are also the day-to-day barriers — economic, social, cultural and political — that leave little space for any kind of critical and creative thinking, innovation, or interaction with the world, let alone commerce. Pakistan is not just a closed economy; it is a closed country.
Imagine a young man from a middle-class background who has developed a fantastic product he now wants to travel to the United States or Europe to find buyers for. First, he must go through a 6-to-12-month hassle to get a visa. In the unlikely scenario his visa gets approved, he must spend a small fortune buying an airline ticket—over half of which is comprised of government fees and taxes. Finally, when he goes through five layers of harassment in the name of airport security and makes it to the gate, he discovers that the airspace has been closed, and flights suspended due to a developing security situation.
And the government, rather than streamlining and improving the security process, rooting out corruption, will create a special security regime for young men going to the US/Europe to find buyers. This is why the IMF has gone so hard after exemptions.
For women it's even worse — the first response they get at the bank is to bring their husband or father.
These are the fateful realities that Pakistanis deal with every day. Unfortunately, our decision-makers continue to believe that exports can be engineered by selecting sectors and setting targets in a boardroom. Rather, exports come from the very fundamental agents of the economy, its people. They come when people are given space to think, create, innovate and interact with the outside world.
But in a security-driven state, constantly managing internal instability and external tensions, that space does not exist. Investment hesitates in the face of uncertainty, and trade cannot thrive without peace. A fundamental of trade theory is that countries trade most with their neighbours. Pakistan, however, has virtually no trade with its immediate neighbours, except for imports from China. Without a stable social contract and coherent peace, no export strategy — no matter how well-designed — can deliver sustained results.
So, under present IMF constraints and fiscal realities, the best the government can do is to keep its head down and finally clean up a decades-old mess that has kept Pakistan from ever experiencing a real export boom. It is clear where and how policies are being made; the budget will tell more, but the captive gas levy is a strong indicator. Expectations of growth should be kept low for the next two to three years.
But even that will not be enough. A far deeper transformation is needed. Our entire economic model, social structure, political incentives, and cultural mindset must be reoriented toward openness, productivity, and value creation. Exports should stop getting such a holy treatment, they will follow naturally. Only then can we hope to become a functioning, engaged participant in the global economy.
Copyright Business Recorder, 2025
