Pakistan’s economic performance has been marred by low export numbers, high debt servicing, and policies that seem disconnected from the country's economic realities.
Pakistan’s economic performance has been marred by low export numbers, high debt servicing, and policies that seem disconnected from the country's economic realities.
To achieve sustainable economic growth and reach a GDP growth rate of six per cent as per the growing population, Pakistan must overhaul its approach to exports and rethink monetary policies that are crippling its economy. Here’s a roadmap for how Pakistan can achieve this ambitious target:
One of the fundamental flaws in Pakistan’s economic policies is the persistent linking of inflation control to high interest rates. Unlike the demand-pull inflation faced by developed countries like the US, Pakistan’s inflation is largely cost-push -- driven by supply-side constraints such as rising energy prices, imported inflation, and currency depreciation.
Raising interest rates in Pakistan has done little to curb inflation. Instead, it has made borrowing prohibitively expensive, stifled private investment, and led to a massive rise in government debt servicing costs. According to recent data, nearly 80 per cent of borrowing from banks in Pakistan has been by the government itself. This means that keeping interest rates high primarily benefits banks while burdening the government — which has to pay Rs8-9 trillion out of the Rs13 trillion tax revenue target in debt servicing alone.
Lowering interest rates is critical to encourage private sector borrowing and investment, which can drive GDP growth. A lower interest rate regime will also reduce the government’s debt burden, freeing up fiscal space for development spending.
Pakistan’s export performance has been dismal, particularly when compared to regional peers. In FY23, Pakistan’s exports were just $27 billion, a number that pales in comparison to India’s $770 billion in exports. One low-hanging fruit for Pakistan is the IT sector, where the gap is even more striking.
India’s IT exports reached around $200 billion in FY2024, while Pakistan’s IT exports are stuck at around $3 billion. Given that Pakistan’s population is one-sixth of India’s, a conservative target for Pakistan should be at least $30 billion in IT exports. But why is Pakistan lagging so far behind?
Here’s something Pakistan can learn from India’s IT success:
1. Tax incentives: India provides IT companies with tax exemptions and allows them to retain foreign exchange earnings, whereas Pakistan’s IT sector faces inconsistent policies and excessive taxation.
2. Policy continuity: India has ensured consistent policies for its IT sector, fostering a stable environment for growth. Pakistan, on the other hand, has changed policies frequently, creating uncertainty.
3. Human Capital Development: India has invested heavily in training its youth in IT and software development, whereas Pakistan needs to improve its education system to produce more skilled IT professionals.
Lowering interest rates is critical to encourage private sector borrowing and investment, which can drive GDP growth. A lower interest rate regime will also reduce the government’s debt burden
If Pakistan can replicate even a fraction of India’s IT success, it can add billions to its export earnings. A target of $30 billion in IT exports over the next five years is achievable with the right policies.
To achieve six per cent GDP growth, Pakistan must prioritise export-based growth. This is critical for two reasons. One, job creation: export-oriented industries have the potential to create millions of jobs. With a rapidly growing population, Pakistan needs to generate at least two million new jobs annually to prevent a rise in unemployment.
Two, foreign exchange reserves: Export growth is the most sustainable way to build foreign exchange reserves and reduce reliance on external borrowing.
Textiles: Pakistan’s traditional strength but needs value addition.
Agriculture: Focus on processed food exports.
IT and services: The most promising sector for exponential growth.
Engineering goods: Invest in high-value manufacturing for export.
One of the concerns often raised with high GDP growth is that it will lead to a surge in imports, causing a balance of payments crisis. However, import management is not an insurmountable challenge. Pakistan managed its currency through a crackdown on smuggling and money changers, and a similar approach can be applied to imports.
Encourage imports of machinery, raw materials, and technology that can enhance export capacity. Impose restrictions on non-essential luxury imports to reduce the import bill.
Bring interest rates down to five per cent to encourage private-sector borrowing and investment. This will reduce the debt servicing burden on the government by more than twice the defence budget and stimulate economic activity.
Provide consistent tax incentives and policy support to the IT sector. Invest in human capital and infrastructure to increase IT exports.
Shift the focus of economic policy from consumption-driven growth to export-led growth. Support value-added industries and ensure policy continuity.
Focus on import substitution in critical industries and prioritise import-based exports to manage the balance of payments.
Pakistan cannot afford to continue with the same failed policies of the past. Achieving a six per cent GDP growth rate is possible if the country adopts an export-led growth strategy and reforms its monetary policies to lower interest rates. The IT sector is a low-hanging fruit that can significantly boost exports, reduce unemployment, and strengthen foreign exchange reserves.
Policymakers must understand that Pakistan’s inflation is not demand-driven and linking it with interest rates only exacerbates the debt burden. It’s time for Pakistan to focus on the right economic levers to achieve sustainable growth and improve the living standards of its people.
The writer is a graduate of LUMS and holds an MBA in consulting from the UK. He teaches financial markets in Pakistan and can be reached at: hissan3@gmail.com
