Pakistan’s long engagement with the International Monetary Fund (IMF) has produced temporary postponement from bankruptcy, but in the name of stabilisation, fiscal consolidation and ‘reform’, Pakistan has been subjected to a policy mix that has dramatically raised energy costs, imposed highly regressive taxation, throttled industrial production, increased poverty and pushed the economy towards de-industrialisation
The strategy for Pakistan's socio-economic development should have strengthened education, science, technology and innovation so that Pakistan could move from a low-value, natural resource-based economy to a high-value-added, technology-driven knowledge economy. The exact opposite has happened, which now poses a huge threat: our schools, colleges and universities lie in tatters, our exports have declined to about $30 billion after touching $35 billion, the poverty has increased substantially and there has been a mass migration of talented youth and industrial groups to greener pastures abroad.
Pakistan has entered IMF programmes 23 times since 1958 – more than almost any other country – and the recent cycle has been among the most aggressive. According to a research report by the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on the historical impact of IMF programmes, Pakistan’s industrial growth during IMF programme periods has been 2.27 percentage points lower, and GDP growth 1.44 percentage points lower, than in non-IMF years.
In the past five years, Pakistan’s industrial landscape has seen a dramatic contraction, with hundreds of local manufacturing units shutting down as a direct result of rising energy costs, heavy tax burdens and long-term policy uncertainty. Business leaders have claimed that over 50 per cent of factories in major industrial zones have closed, as firms struggle to compete with smuggled, under-priced imports and cope with a two-tier tax burden that stifles growth.
Regional data show similar trends at the provincial level. The textile sector, Pakistan’s traditional export engine, has been particularly devastated: industry sources estimate that at least 144 textile mills have shut down nationwide, while broader garment-sector closures have led to tens of thousands of jobs lost and declining export competitiveness. The wave of corporate exits from Pakistan signals a deteriorating investment climate in which both foreign and local enterprises find it increasingly difficult to plan long-term, secure capital, and compete with regional rivals that benefit from more predictable policies and cost-competitive inputs.
A sharp, immediate change of direction is needed so that Pakistan can transition to a knowledge economy and begin manufacturing and exporting high-value-added, high-technology industrial goods, thereby enhancing our exports to over $100 billion within a decade. This can only happen if the business sector is facilitated by suitable government policies.
According to research by the Pakistan Institute of Development Economics (PIDE), the base electricity tariff was raised twice in 2023 alone, resulting in a cumulative increase of roughly 76 per cent in a single year. A second PIDE study on energy pricing for industry documents that between 2022 and mid-2023 industrial power tariffs escalated from roughly Rs20 per kilowatt-hour to Rs39-45 per kilowatt-hour, while the total delivered cost, including fuel adjustments and taxes, climbed from around Rs28 to nearly Rs50 – approximately a 78 per cent increase in about twelve months.
Pakistan’s general industrial electricity price surged to around $0.15 per kilowatt-hour, roughly double Vietnam's and significantly above India's and Bangladesh's. Energy-intensive exporters, already squeezed by exchange-rate volatility and working-capital constraints due to record-high interest rates, found themselves priced out of global markets.
The predictable consequence has been a collapse in grid demand and accelerating de-industrialisation. Many factories in Karachi, Faisalabad and Sialkot have reduced shifts or closed outright, while others are fleeing the central grid. Major firms – from Forward Sports and Coca-Cola to Hyundai – have been forced to make massive capital investments in solar power to survive. While this transition helps individual firms survive, it has paradoxical macroeconomic effects: grid demand falls, circular debt persists because fixed IPP capacity payments must still be made, and the remaining captive consumer base is squeezed even harder.
Circular debt continues to hover near Rs2.4 trillion despite repeated tariff hikes. The IMF’s policy logic assumes that higher tariffs restore solvency, but the Pakistani case shows the opposite: high tariffs cause demand destruction, deindustrialisation and loadshedding, which undermine the very revenue base required to service fixed system costs – a classic ‘death spiral’ in utility economics.
The aggressive tax policy reshaping imposed under IMF conditionalities has caused further damage. The IMF has demanded that Pakistan raise its tax-to-GDP ratio by roughly three percentage points within a short horizon. To hit headline revenue targets, the state has resorted to broad-based tax increases rather than structural base-widening.
The 2023-24 budget cycle and subsequent supplemental measures pushed FBR collections up by almost 30 per cent, with sharp increases in sales tax, customs duties and federal excise duties. Petroleum, already a basic input in transport and industry, became the easiest fiscal instrument. The petroleum levy was raised to Rs80 per litre by 2025, substantially increasing the average household.
The combined energy-tax-monetary stance imposed by the IMF has battered Pakistan’s industrial sector. Large-scale manufacturing output contracted sharply by approximately 10.9 per cent in 2023, according to sectoral analyses, and then stagnated with a fractional contraction of around 0.03 per cent in 2023-24, as reported by the Pakistan Bureau of Statistics. Industrial GDP fell by roughly –3.8 per cent in FY2023 and –1.6 per cent in FY2024. Poverty increased from about 20 per cent in 2020 to 25 per cent in 2025.
There is a clear need for urgent change of direction. We need a clear strategy for rapid socio-economic development based on a technology-driven knowledge economy, where the manufacture and export of selected high-value-added (high-technology) goods become the primary focus of the government. This can only be done if power is vested in technocrats, not in smooth-talking politicians. Industrialisation can be promoted by the government providing energy to industrial zones at Rs10 per unit by establishing 1000MW solar plants within them.
Tax incentives, such as 15-year tax breaks, can be given to industries for the manufacture and export of selected products, including vaccines, sophisticated semiconductors, medical appliances, engineering goods, energy storage systems, automobiles, industrial enzymes, defence goods and other such items. This will only be possible by massive investments in education, science and engineering and creating an innovation ecosystem where new ideas can be quickly transformed into commercial products and processes.
The writer is a former federal minister, Unesco science laureate and founding chairperson of the Higher Education Commission (HEC). He can be reached at: [email protected]
