EDITORIAL: The government is exhibiting out-of-the-box thinking in supporting exports. In the past, large exporters—especially in textiles—received extensive subsidies, including low-priced energy (captive and grid) and concessional financing for both working capital and long-term investment, while taxation was minimal as well.
Over the last few years, these subsidies were withdrawn one by one, and goods exports are now subject to normal income tax.
This shift happened at a time when energy prices in Pakistan rose astronomically due to higher global prices and continued domestic system inefficiencies. Rates of taxes, including super tax, also increased significantly.
Interest rates skyrocketed as well, with no subsidy support. That, combined with shrinking textile demand in importing countries, explains why Pakistan’s exports are stagnating.
The government now has a stated policy of export-led growth. However, until recently there were no meaningful measures to support it, and outcomes have reflected ground realities. Meanwhile, large textile exporters have continued lobbying to regain the incentives they lost. But the government faces fiscal constraints and must comply with IMF conditions.
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Previously, subsidised financing was provided by SBP (State Bank of Pakistan), which effectively meant money creation and added risk to SBP’s balance sheet. That window was closed after amendments to the SBP Act. Later, the government offered a 3 percent relaxation in working capital financing for exporters, funded through a fiscal subsidy. Exporters, however, demanded more.
Now, SBP has introduced an out-of-the-box idea to further lower the financing rate by 3 percent without any subsidy. It appears SBP, banks, exporters, and government officials had a tacit understanding of how to expand concessional financing without providing a subsidy or unsettling the IMF.
The mechanism is as follows. First, in its monetary policy decision, SBP reduced the cash reserve requirement (CRR) by 100 bps. This requirement had been increased in 2021 to mop up excess liquidity. Now that SBP is continuously injecting liquidity into the system, there is little justification for an elevated CRR. The reduction is expected to free up roughly Rs300 billion in liquidity, allowing banks to earn an incremental Rs30–35 billion in profit.
A couple of days later, the government announced a 3 percent reduction in the Export Finance Scheme (EFS) rate (from policy rate minus 3 percent to policy rate minus 6 percent), with banks absorbing the additional cost. The impact on the existing financing stock of around Rs1 trillion is roughly Rs30 billion—almost equal to the benefit banks were expected to gain from the CRR cut.
In addition, the government announced an end to cross-subsidies embedded in industrial tariffs and wheeling charges, where the benefit is estimated at around Rs4/unit. However, the government has not clearly communicated how it will finance this reduction, even though officials claim that it will be fiscally neutral.
Without getting into the broader power tariff debate, the EFS reduction does appear fiscally neutral. However, it raises concerns about SBP’s autonomy, as it distorts credit allocation and lending behaviour. In the past, there have been several instances where such schemes were misused. The key question that needs a plausible answer is how SBP will ensure the scheme is not misappropriated. Not long ago, another export facilitation scheme offered by FBR was misused, and the government was forced to discontinue it.
Moreover, the government is effectively providing cheap working capital financing, which primarily boosts exporters’ margins. A more effective approach may have been to offer concessional long-term financing instead, so that capacity expansion could take place. Nevertheless, it is a step toward supporting the goods-exporting sector, which is facing significant headwinds. It remains to be seen how this plays out and whether it leads to a meaningful expansion in exports, especially since past experiences with subsidies have not been very encouraging.
Copyright Business Recorder, 2026
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