Every June, promises are made in the budget session that exports will become the engine of growth; however, the engine sputters back to idle once the speech is over.
Budget 2026-27, in this regard, is slightly different. It offers some relief to exporters, a good omen, because sentiment alone cannot spur exports. The real question now lies in how the scale and pace of these measures can close a gap that has been widening for nearly three decades.
The long-term trend provides the background to this problem. In the early ‘90s, exports of goods and services accounted for around 16 per cent of GDP. However, in 2024, the share had fallen to around 10 per cent, which was below the average share of goods and services exports among lower-middle- and upper-middle-income countries.
For about two decades, merchandise exports remained stuck in the $25-$30 billion range, despite GDP rising to around $400 billion. Exports of goods reached the level of $32.1 billion in fiscal year 2025, marking an increase of 4.7 per cent. Total exports of goods and services rose to nearly $40.7 billion; however, the momentum could not be sustained. The export figure fell to $25.8 billion in the first ten months of fiscal year 2025-26, a 5.4 per cent reduction from the same period last year.
Over the year, the earnings from dollars have not grown, and the export basket has either witnessed any change. For instance, the textile and apparel sector continues to dominate around 56 per cent of total exports. Textile exports, which reached an all-time high of nearly $18.4 billion in FY2021-22 due to pandemic-driven demand, dropped to $16.6 billion the following year before rebounding to nearly $17.3 billion in FY2025.
Pakistan finds itself entrenched at the low-value-addition end of the value chain, which is highly competitive, marginally profitable and facing a shift in global tastes from natural fibres to artificial fibres. The example of the textile industry proves that the impact of fiscal incentives is very limited. Although there have been continuous concessional loans and tariff reductions, they have not made a difference due to structural inefficiencies.
The positive news has come from newer sectors. Exports of information technology and IT-enabled services increased by around 20 per cent, reaching an annual export turnover of $4.5 billion. Also, freelance income has been reported at around $856 million in just nine months of FY2025-26, representing almost a 50 per cent increase over last year. Sports goods were also among the sectors that saw positive trends, driven by Pakistani-made footballs ahead of the Fifa World Cup. These are exactly the sort of export items Pakistan needed to be exporting.
The regional comparison hurts more than any other thing. The per capita incomes of Pakistan, India, Bangladesh, Vietnam, and China were not too far apart in the early 1990s. However, today, Pakistan’s per capita income is around $1,47, while India’s, Bangladesh’s, Vietnam’s, and China’s stand at $2,695, $2,593, $4,717, and over $13,000, respectively. This is true when considering the countries’ export trends.
When adding goods and services together, Vietnam is able to sell its exports worth over $430 billion annually, and India sells almost $820 billion in exports. Likewise, Bangladesh exports $55 billion annually through its garment industry, based on compliance, women’s employment, and added value. Pakistan has been tasked with renegotiating the EU’s GSP Plus trade program by 2027, adding pressure on all competitiveness issues. Nevertheless, the goal set by URAAN Pakistan to export at least $100bn within a few years seems quite difficult, given that the country’s combined exports are around $41 billion, less than half the target.
Such structural issues are symptomatic of more fundamental problems within the policy structure. Exchange rate miscalculations create an indirect tax for the export products. An undervalued exchange rate makes exports uncompetitive on price, whereas an overvalued exchange rate raises the price of imported intermediates. The tax regime is yet another structural barrier affecting the export market due to advance taxes, turnover taxes, super taxes, and withholding taxes, thereby raising the cost of production. Delays in refund claims for duty drawbacks and energy subsidies result in tied-up working capital. Energy price miscalculations increase production costs and widen the competitive gap relative to regional competitors.
The Advance Income Tax on Exports has been reduced from 2.0 per cent to 1.25 per cent, easing cash tied up in refunds. The Export Development Surcharge has been removed, which was 0.25 per cent. The general super tax rate will be reduced from 10 per cent to 8.0 per cent for income exceeding Rs500 million, whereas it will be scrapped for income below Rs500 million. Pakistan’s exporters operate under a stacked effective tax burden estimated at 68 per cent of profits, which is much higher than in Vietnam, Bangladesh, and India.
The Export Refinance Scheme has also been enhanced by the addition of Rs88 billion in subsidised finance, while the mark-up rate has been slashed from 7.5 per cent to 4.5 per cent. For technology firms and freelancers, the withholding tax on international card transactions has been reduced from 5.0 per cent to 0.5 per cent.
Taken together, these are meaningful steps and a signal that policymakers are beginning to treat exporters as partners rather than a source of revenue. But tax relief, welcome as it is, cannot carry the weight of ambition alone.
The targets on the table, $44.2 billion in exports next year, $100 billion within a decade, demand more than a trimmed surcharge or a lower refund rate. They demand a rupee that exporters can plan around, energy that does not price them out of regional markets, and trade policy that opens doors rather than guards them. This budget points in the right direction. Whether it marks a turning point will depend on what follows.
Dr Junaid Ahmed is the chief of research at the Pakistan Institute of Development Economics (PIDE). He can be reached at: [email protected] Wajid Islam is a research economist at PIDE. He can be reached at: [email protected]
