Export growth not possible without policy reforms

While the government celebrates its ambitious five-year Transformation Plan: The URAAN Pakistan, (2024-2029), the business community is left wondering how this will be achieved given the current economic environment.

The initiative structured around five core pillars: Exports, E-Pakistan, Environment, Energy & Infrastructure, and Equity, Ethics & Empowerment (5Es), has no implementation strategy.

All eyes are now on what new measures the government intends to introduce to liberate the industrial community from the recurring cycle of weak policy enforcement, which continues to hinder industrial growth, investment, and export expansion.

The document, which sets its sights on seeing Pakistan “among the ten largest economies of the world by 2047” alongside a target of USD 50 billion in exports over the next four years (though some pages of the document suggest USD 60 billion), is unlikely to lead to any policy shift.

Such policy frameworks have been introduced repeatedly in the past — with little or no real impact.

Meanwhile, the textile industry, the country’s leading export sector, continues to be suffocated by unrealistic tax regimes, the removal of zero-rating on local inputs for export manufacturing, exorbitant energy prices, regressive policies on captive power plants, and declining cotton production.

Team URAAN must recalibrate its approach by reversing these policies and redirecting its efforts toward addressing the real issues.

Textile exports remain the first line of defense:

Pakistan’s import dependency is precarious. Initially concentrated on petroleum products and machinery, imports have expanded to cover a broad range of food commodities, including palm oil, tea, and pulses, driving up the import bill. Alarmingly, this trend is now extending to the textile sector. The rising import of raw cotton is particularly concerning, surging to USD 1.7 billion in FY 2023 and already reaching USD 706 million in the first four months of FY 2025, a more than 50 percent increase from the same period of last year.

Once self-sufficient in cotton, Pakistan has now become a major net importer; in fact, the largest importer of US cotton; a shift driven by successive crop failures.

With that, production costs for key crops, including cotton, have doubled since 2023, further increasing the sector’s reliance on imports.

The country’s export mix is rapidly deteriorating. Apart from IT and agricultural exports -which remain opportunistic and unreliable - textile exports are the only glimmer of hope for Pakistan’s balance of payments and therefore require urgent attention and support.

Yet, the sector is facing increasing pressure from government policies that threaten its long-term sustainability.

Export diversification will come with the right infrastructure:

Diversifying the product mix and export markets is essential for Pakistan’s export growth. However, advancing sophistication and value addition requires the country to ascend the economic complexity ladder - an area that has consistently been neglected and remains uncertain.

Pakistan ranks 85th in economic complexity globally as of 2022, unchanged since 2000. This stagnant position highlights the country’s ongoing struggle to produce technologically advanced goods and services, with negative performance across key indicators such as trade, technology, and research (Table 1).

The IT sector stands out as a relatively more complex industry with growth potential. However, unstable connectivity and frequent internet slowdowns cast a long shadow over ambitions to expand IT exports. Without guaranteed, reliable infrastructure, investment in the sector will remain elusive.

In a country always grappling with basic internet stability, the transition to the 4th and 5th Industrial Revolutions is more of a distant aspiration than an imminent possibility. Until critical infrastructure gaps are addressed, Pakistan’s vision of entering the 5th industrial revolution – as highlighted in the document - will remain unachievable.

Forced pre-mature deindustrialization:

The 5th industrial revolution remains a distant goal; instead, Pakistan’s policy landscape is driving key industries, including textiles, toward premature deindustrialization.

Historically, the textile sector benefited from a vertically integrated value chain, keeping import dependency low by relying on local raw materials such as cotton and intermediates like yarn. However, with over 25 percent of spinning units closed, other units operating at 50 percent or less capacity, and millions of jobs lost - adding to the 4.5 million already unemployed in the economy - the industry is now on the path to rapid deindustrialization, especially as the share of manufacturing in the country continues to decline(Figure 1).

This industrial decline is contributing to rising poverty, which has become a growing concern. According to a recent World Bank report, high inflation has deepened poverty in non-agriculture sectors, with the poverty rate rising to 40.5 percent in FY24, up from 40.2 percent in FY23. As industrial activity slows and employment opportunities dwindle, an additional 2.6 million Pakistanis have fallen below the poverty line, and this number is likely to increase rapidly.

Deindustrialization typically occurs as economies progress and per capita incomes rise beyond middle-income levels. However, Pakistan remains far below this threshold. The country’s premature deindustrialization, driven by the shutdown of upstream industries, risks triggering severe economic disruptions.

Considering this troubling trend, achieving export-led growth will not be possible unless critical policy reforms are undertaken.

Counterproductive economic policies come with a significant economic cost:

This premature deindustrialization is largely driven by the government’s counterproductive economic policies, particularly the heavy tax burden and frequent policy shifts that exacerbate the challenges faced by the textile industry.

The FY25 budget has placed exporters under the normal tax regime, subjecting them to a 1 percent advance minimum turnover tax, adjustable against a 29 percent final income tax, along with an additional super tax of up to 10 percent. Despite this, exporters are still required to pay a 1.25 percent advance tax on export proceeds (including a 0.25 percent export development surcharge). Subjecting exporters to double taxation is unjustified and discriminatory, particularly given that textile businesses operate on high volumes and low margins.

No other country taxes its export sector in such an illogical manner. Achieving USD 50 billion in exports within four years under this tax structure is nothing short of absurd.

This is further compounded by the removal of zero-rating on local supplies for export manufacturing under the EFS, leading to an 18 percent sales tax that undermines competitiveness by making domestically sourced raw materials more expensive than imported alternatives, which are exempt from both duties and sales tax. As a result, exporters have shifted to imported inputs, with imports of raw cotton and cotton yarn surging by 52 percent and 288 percent, respectively, in the first four months of the current fiscal year compared to the same period last year (Figure 2).

Adding to the financial strain, the sales tax refund system is plagued with delays, with refunds often taking six months or longer – or, in most of the cases, partially deferred, further intensifying the burden on exporters. As highlighted in the World Bank’s Economic Memorandum, the current tax regime in Pakistan is ‘complex and opaque,’ with refunds taking an average of 18 months to process, as compared to the 72-hour timeline stipulated under the sales tax rules.

In addition to these challenges, the government’s decision to cut gas supplies to the CPPs has dealt a further blow to the industry. How can team URAAN pursue USD 50 billion in exports while implementing policies that make it impossible to even maintain the current export levels?

Revival of fresh investment and the up-gradation of industrial plants are the need of the hour:

As Milton Friedman once observed, trade deficits are not inherently harmful. The true concern arises when trade imbalances coincide with fiscal mismanagement, as is the case with Pakistan.

A few years ago, Pakistan was a cotton exporter. Today, it has transformed into a net importer, becoming the largest buyer of US cotton. How much longer can Pakistan sustain this growing import dependency without seeing a corresponding boost in exports?

For Pakistan to achieve export-led growth, it is imperative to safeguard every segment of the value chain, with an emphasis on reducing import dependency wherever possible. The ongoing decline in cotton production and the closure of textile units will continue to undermine net exports. Preserving progress in value-added textile exports is critical to prevent turning the balance of trade into a zero-sum game.

In this context, reassessing Pakistan’s corporate tax structure is urgent, as the current burden stifles investment. The EFS must be reinstated to its pre-Finance Act 2024 form, including the zero-rating of local supplies used in export manufacturing. This restoration is essential to ensure fair competition for domestic producers against imported substitutes, which has become critical as businesses face closure due to the changes in EFS rules.

Cotton remains the cornerstone of Pakistan’s textile industry, and immediate action is needed to enhance domestic production. Declining cotton yields, driven by factors such as the lack of climate-resilient seeds, limited mechanization, and insufficient advisory services, are costing Pakistan an estimated USD 4 billion annually in direct losses, along with USD 15 billion in GDP, as per our estimates.

In short, the government’s 5E framework cannot drive export growth if businesses remain stifled under oppressive tax regimes and structural challenges. Pakistan must avoid premature deindustrialization and focus on safeguarding net exports by addressing these issues and adopting the proposals outlined above.

Without delay, the team URAAN needs to prioritize fixing structural issues faced by the businesses, rather than focusing on repetitive rhetoric.

Copyright Business Recorder, 2025