One institution is calling for competitiveness and investment. The other is endorsing increased taxes and tariffs on those who create value. Both cannot be right.
The World Bank’s latest Pakistan Development Update (PDU) of October 2025 is, perhaps quietly, one of the most consequential diagnoses of Pakistan’s economic trajectory in recent years. It states unambiguously that Pakistan has become structurally uncompetitive.
The report highlights that Pakistan’s export share in GDP has fallen from around 16 per cent in the 1990s to just 10 per cent today, even as comparator economies have integrated more deeply into global supply chains. As a result, Pakistan is now under-exporting by nearly $60 billion annually relative to what its scale, geography and workforce should enable.
This is not the result of temporary shocks, cyclical downturns or external adversities. It is the outcome of a growth model that rewards low-value, short-term activity and penalises long-term investment, scale and productivity. The PDU identifies four structural constraints that have severely weakened Pakistan’s competitiveness: high and non-competitive energy tariffs that raise the cost of production; complex, distortionary tariff and regulatory frameworks that fragment markets and discourage formal participation; policy unpredictability and weak contract enforcement that deter long-term investment; and incentive structures that reward informality and speculative trading instead of value addition, technology adoption and export-oriented scaling.
The message from the World Bank is explicit. It says (not in specific words and obviously without referring to the IMF programmes) that, in essence, Pakistan has not built an economy designed to compete. It has built one designed to survive, moving from one stabilisation cycle to the next – particularly under recurrent IMF programmes. These programs have become less pathways to recovery and more emergency breathing apparatus, necessary only because the underlying system remains unchanged.
The consequences of this competitiveness erosion are not limited to GDP statistics. They manifest directly in the lived reality of households and workers. The World Bank’s September 2025 report, ‘Reclaiming Momentum: Pakistan’s Poverty, Equity and Resilience Assessment’, documented that poverty has risen to 25.3 per cent, and unemployment has risen sharply, particularly among the young and urban workforce.
It stated plainly: “Pakistan’s consumption- and debt-led growth model has reached its limits”. And further, “Bold, sustained, people-centered reforms are needed to reduce poverty and build resilience”. In other words, the economic model is no longer delivering improved living standards. It is delivering stagnation, vulnerability and downward mobility.
The core message was unmistakable: Pakistan’s inability to generate productive jobs is not a social welfare failure; it is a competitiveness failure rooted in the structure of the economy itself. And that structural deterioration did not begin recently. The World Bank’s April 2024 PDU had already warned explicitly: “Pakistan’s tax system places a disproportionate burden on formal firms, while large parts of the economy remain outside the tax net”. It also noted that “the reliance on withholding and indirect taxation discourages firms from scaling and investing”. These observations were not theoretical. They were diagnostic and predictive.
Yet, in contrast to the World Bank’s advice, Budget 2024–25 and Budget 2025–26 – under IMF programme oversight – increased taxation on the same formal sectors that produce, export and employ. The most conspicuous example is the drastic change in export taxation. The long-standing one per cent turnover-based final tax regime, designed to support reinvestment and maintain price competitiveness in global markets, was dismantled. Exporters were forced into the normal tax regime, where effective tax incidence reaches around 40 per cent once the super tax, WWF and WPPF are included. For low-margin export sectors, this was a major erosion in viability.
This reversal occurred within two months of the World Bank’s April 2024 warnings – not because the government misunderstood the implications, but because the IMF programme demanded higher immediate revenue, regardless of its effect on competitiveness. This was a deeply misguided policy choice that worsened the very structural weakness Pakistan is now struggling to overcome.
Yet the October 2025 PDU does not specifically mention this tax reversal. It discusses the effects – declining exports, shrinking manufacturing, weak investment – while avoiding discussion of one of the main causes. This omission is not merely analytical; it is an institutional aspect of diplomacy. To name the cause would require acknowledging that the stabilisation strategy enforced under the IMF programme has contributed to Pakistan’s loss of competitiveness.
Meanwhile, the IMF, in its latest Staff-Level Agreement, praises Pakistan’s policy direction, describing higher revenue, energy price increases and continued demand compression as “necessary to strengthen macroeconomic stability”. In simpler terms, the IMF endorses stabilising the economy by further tightening pressure on the documented, productive sectors – even when such sectors are already contracting.
This is where the contradiction becomes unavoidable. The World Bank now says that Pakistan’s growth model is exhausted, exports have collapsed, and rising poverty is a structural outcome of stagnation. The IMF insists that fiscal tightening must continue, even if it suppresses competitiveness, investment, job creation, and exports. One institution is pointing to the engine of the economy. The other is watching the fuel gauge. Both concerns matter – but when pursued without coherence, they lead only to one outcome: managed decline.
Pakistan does not generate enough productive jobs because it lacks sufficient investment; the policy environment creates more impediments than incentives; the economy fails to produce enough competitive firms; and the incentive structure renders scale and innovation unprofitable. Recovering through contraction is not recovery – it is economic erosion. No country has expanded exports by raising the cost of exporting. No economy has attracted investment by taxing investment. No society has reduced poverty by shrinking its productive base.
The countries that successfully transformed – Korea, Taiwan, Singapore, Malaysia, Indonesia, Vietnam, Bangladesh – all followed the same path: export-led growth built on competitiveness, not stabilisation through stagnation. Pakistan must now choose whether to shrink into fragility or grow into resilience.
What is needed is not another round of belt-tightening, but a competitiveness and investment strategy. This must include substantial reduction in tax rates to lower the cost of being formal and to encourage informal sectors to become formal; reversal of recent tax changes that increased the cost of exporting; energy pricing reform that rewards efficiency rather than passes system losses to industry; regulatory predictability and credible contract enforcement; a stable, market-based exchange rate; and long-term policy continuity that signals seriousness to investors.
Pakistan cannot stabilise its way into growth. It must grow its way out of instability. And growth will not come until we stop taxing the sectors that create value and start enabling the ones that can lift the country forward.
X/Twitter: @Asad_Ashah
The writer is a former managing partner of a leading professional services firm and has done extensive work on governance in the public and private sectors.
