From concessions to competitiveness

In Pakistan, exporters often complain about expensive electricity, high taxes or unpredictable tax policy, high interest rates, delays in tax refunds, costly logistics and inconsistent government policies.

These complaints are justified. A country cannot expect its firms to compete internationally if its own policies systematically raise production costs or make long-term investment unpredictable.

But what has Pakistan received in return for the support it has given exporters? Successive governments have offered subsidised export finance, tax concessions, preferential energy arrangements, duty exemptions, and export-development programmes. The results are hard to defend. Exports fell from 16.9 per cent of GDP in 1991 to 9.99 per cent in 2025. In FY2026, merchandise exports fell about 6.0 per cent to $30.1 billion (provisional) while imports rose about 8.0 per cent to $69.8 billion. Roughly three-quarters of what Pakistan sells abroad is still low-value-added textiles and rice.

However, this does not prove that incentives achieved nothing. Export figures might have been worse without them. It also does not mean that exporters alone are to blame. But it raises the question: was public support designed after a cost-benefit analysis and evaluated afterwards, to reward additional exports and productivity gains? The problem may not be that Pakistan has given too little support, but that it has never tied support to the capabilities it expects firms to build.

Support without conditions has a predictable result. An exporter can make money without getting any better at what it does. A firm can sell to the same buyers year after year and earn a decent profit, without spending on new machines, research, or new markets, as long as cheap loans and other help keep coming. This does not mean such firms are lazy or wasteful. Unreliable power and costly credit are real problems. But help that only keeps a business running will keep export earnings steady and nothing more. Policies should help firms grow, improve, sell new things in new places and enable new firms to enter global markets.

Government support also has an opportunity cost. Subsidised credit has a financing cost, tax concessions reduce revenue, and cheap power shifts costs to the budget, other consumers or the power sector. Money spent on ineffective subsidies cannot go to education, health, infrastructure or technology. The question is not whether to scrap export support, but whether each measure justifies its cost.

This points to a distinction that policy often blurs. Two things must be kept apart. Correcting disadvantages the government itself creates, such as delayed refunds of legitimate claims, duties on inputs, or cross-subsidies loaded onto industry, is not a concession and should not hinge on export targets. Discretionary support, such as subsidised credit or extra energy relief, spends public money and should be earned and evaluated.

The evidence points the same way. Pakistan has enjoyed tariff advantages in the European Union under GSP Plus since 2014, and exports there grew, particularly in textiles and clothing. But concentration on traditional products persists, and preferences make exports cheaper to buy, not firms more productive.

Empirical evidence is not different either. A study by Defever, Riano and Varela published in 2025 found that the Export Finance Scheme and the Long-Term Finance Facility raised firms’ export growth, but mainly by expanding existing sales; neither significantly increased the number of products or destinations. Another study by Lovo and Varela published in the same year found that the textile duty drawback raised textile exports by only about 1.9 per cent a year, largely by shifting sales toward traditional, higher-rebate products. In other words, support can work, but more sales of the same goods are not diversification.

The key question is whether exports would have happened without assistance. Governments can compare assisted firms with similar unassisted ones before and after support to see whether incentives create new exports or just support existing sales.

Strong export numbers in a month or a year are good news, but they do not tell the whole story. Exports can rise just because world prices went up or the rupee lost value, even when firms have not become any better at their work. For consistent export growth, government support, or, one could say, reforms, should be judged by whether firms are becoming more productive, adopting new technology, selling new products, improving skills and quality and staying competitive after the support ends. Each sector also needs its own yardstick. What counts as progress for rice exporters is different from what counts for garment makers or software firms.

Electricity shows how this works in practice. High industrial electricity tariffs can hurt competitiveness. However, lowering tariffs does not automatically mean more exports. The effect depends on whether electricity is the binding constraint, how much of the saving reaches production costs and whether firms can obtain finance and inputs, and respond to extra demand. Some will use savings to expand output or cut export prices; others will offset costs elsewhere or raise margins. These outcomes should be measured, not assumed.

The first step, no doubt, is to correct distortions: end unjustified cross-subsidies, make gas grid levies transparent, clearly measure whether they are moving industry to the grid and at what cost, and reduce system losses. That is the state’s obligation. Any relief beyond it should be tested against its fiscal cost by comparing recipients with similar non-recipients on delivered cost, capacity utilisation, investment, exports and new products and markets. The debate would then move from whether electricity should be cheaper to whether a particular measure would lower delivered costs, raise productivity and earn foreign exchange.

The government must build a foundation for competitiveness by providing predictable taxation, timely refunds, reliable energy priced at its cost of supply without cross-subsidies, efficient customs, access to imported inputs, competitive logistics, enforceable contracts and stable, simple regulation. These should not depend on export targets. They should reach every firm, including new and small ones, and the government should report how many actually use them. It must also reduce the anti-export bias that comes from protected domestic markets and costly imported inputs.

In return, businesses receiving assistance must show gains in productivity, technology use and export capabilities (new products, designs, brands, international certification and new markets), and programmes should have clear objectives and regular reviews.

Accountability is necessary. Exporters shouldn’t pay for government failures like high electricity tariffs or inconsistent tax policy. The government must be clear about its commitments and keep requirements reasonable for small businesses. Some programmes will fail; the government should learn from the results, move money elsewhere and not keep ineffective programmes alive because beneficiaries push for them. Independent evaluation is crucial, as both sides often exaggerate – governments treat an announced incentive as a reform, while businesses blame every difficulty on policy.

The writer is an economist and researcher with expertise in the energy sector.