Pakistan’s economic stabilisation under the International Monetary Fund’s ongoing Extended Fund Facility (EFF) programme has come at a significant cost, particularly for the private sector and export-oriented industries. While fiscal discipline, monetary tightening and the removal of subsidies may have helped restore macroeconomic stability, there is growing concern that the policy framework agreed with the Fund is constraining investment, weakening competitiveness and making it harder for the private sector to become the engine of sustainable economic growth.
The most immediate concern is the interest-rate environment. The State Bank of Pakistan’s policy rate currently stands at 11.5 percent, a level that remains considerably higher than rates prevailing in major regional economies such as India and China. For businesses already dealing with high energy costs, elevated taxation and weak domestic demand, expensive credit makes new investment increasingly difficult. It discourages companies from expanding capacity, modernising machinery or undertaking the long-term investments necessary to improve productivity.
Monetary policy, however, is only one component of the problem. The fiscal framework agreed with the IMF places considerable emphasis on increasing government revenue. While stronger tax collection is essential for Pakistan’s long-term fiscal health, the manner in which additional revenue is generated can have serious consequences for industry. Continued reliance on customs duties, for instance, raises the cost of imported raw materials and intermediate goods required by export-oriented manufacturers.
This creates an inherent contradiction. Pakistan wants to increase exports and diversify its foreign-exchange earnings, yet manufacturers producing goods for international markets can find themselves paying more for the inputs needed to make those products. If imported raw materials become more expensive because of tariffs and duties, Pakistani exporters become less competitive against producers in countries where industrial inputs are cheaper.
The same problem extends to energy. IMF-supported reforms have increasingly emphasised the principle of full cost recovery in utilities such as electricity and gas. From the perspective of fiscal management, the logic is understandable: the government cannot indefinitely subsidise inefficient energy systems and accumulate liabilities. But for exporters, particularly those competing with producers in regional markets, higher utility prices can significantly erode competitiveness.
Pakistan’s manufacturing and export sectors had historically benefited from a range of incentives, including relatively inexpensive financing, zero-rating arrangements for major export sectors and preferential electricity tariffs. The IMF has challenged this model on the grounds that such concessions distort markets and protect inefficient businesses rather than creating genuinely competitive industries.
The Fund made this argument explicitly in documents supporting Pakistan’s EFF programme in October 2024. It noted that subsidies had taken the form of low-cost financing and other concessions that, although varying between industries, had at times made financing and taxation more favourable than in competing economies and in sectors receiving fewer benefits.
The criticism does not stop with subsidies. The Fund has also pointed to Pakistan’s extensive use of the tax system to provide non-transparent support through exemptions for sectors including real estate, agriculture, manufacturing and energy. The proliferation of Special Economic Zones has added another layer of preferential treatment.
Similarly, government intervention in the pricing of agricultural commodities, petroleum products, electricity and gas, combined with high tariff and non-tariff barriers, has historically tilted the playing field in favour of particular sectors and interest groups.
There is considerable merit in the IMF’s criticism. Pakistan has spent decades providing incentives to selected industries without achieving the level of productivity, innovation or export competitiveness that such support was supposed to generate. If subsidies and protection merely allow inefficient firms to survive indefinitely, they ultimately impose a cost on the wider economy.
The Fund’s broader argument—that repeated protection can weaken competition and trap capital and labour in chronically inefficient industries—cannot simply be dismissed. Pakistan has indeed struggled to turn its industrial base into a dynamic source of productivity and export growth despite years of preferential policies.
Yet recognising the failures of the old model does not necessarily mean that the current policy framework is optimal. There is a danger that the pendulum may have swung too far in the opposite direction. Eliminating inefficient subsidies and broadening the tax base may be necessary, but reforms that raise the cost of credit, energy and industrial inputs simultaneously can undermine even efficient businesses. A competitive economy cannot be created simply by withdrawing support; it requires an environment in which productive businesses can invest, innovate and compete.
Pakistan’s exporters are particularly vulnerable to developments in the Gulf because the region is an important destination for Pakistani goods and a major source of remittances. A broader economic slowdown could reduce demand for Pakistan’s predominantly consumer-oriented exports. Higher shipping costs and logistical disruptions could further erode the competitiveness of exporters already operating under considerable cost pressures.
There is also uncertainty over the possibility of secondary US sanctions against countries continuing to trade with Iran. If such measures are introduced and enforced more aggressively, Pakistan’s overland trade with Iran could also come under pressure, adding another complication for exporters and border economies.
These external risks make the timing of domestic policy decisions particularly important. Pakistan cannot afford to weaken its productive sectors just as international demand is becoming more uncertain. Nor can it return to the old model of indiscriminate subsidies, protection and politically motivated concessions.
The challenge is to find the middle ground: maintaining fiscal discipline and monetary credibility while ensuring that productive investment and exports are not squeezed out of the economy.
Pakistan needs a tax system that raises revenue without unnecessarily penalising production. It needs energy pricing that reflects economic realities while protecting internationally competitive industries from becoming structurally uncompetitive. It needs monetary policy that controls inflation without keeping borrowing costs prohibitively high for productive investment. Above all, it needs an export strategy based on productivity and competitiveness rather than temporary concessions.
The IMF programme has helped Pakistan avoid a deeper economic crisis and restore a degree of macroeconomic stability. That achievement should not be underestimated. But stabilisation is only the first step. If the ultimate objective is sustainable growth, rising exports and a stronger private sector, then the policy framework must evolve accordingly.
The forthcoming IMF review provides an opportunity to make that case. Pakistan should demonstrate that it is serious about fiscal reform, eliminating waste and improving competitiveness—but it should also make clear that economic stability cannot be treated as an end in itself.
A stable economy that cannot generate investment, exports and productive employment will eventually face the same problems again. The real test of the IMF programme is therefore not merely whether Pakistan meets the conditions of the next review, but whether the policies adopted today help create an economy capable of standing on its own feet tomorrow.