Pakistan’s economic trajectory today is not much different from the past. However, the pace is slow, which is visible from the economic growth and external account numbers. In previous cycles, the economy used to move fast, growing over 5 percent, followed by rapid current account slippages. It seems history is repeating itself, albeit in slow motion.
We are sleepwalking into another external account deficit which may not be like the crises the country faced in the previous three cycles. This gives time to retrospect and think on what is required to change direction. What should policymakers do to move towards export-led growth?
The first line of defence is the exchange rate. The obsession with a sticky exchange rate is not good. It cannot sustain and eventually results in a sudden devaluation which is not advisable and has its own adverse consequences. It is always better to depreciate in moderation when required. And to have export-led growth, the currency ought to be undervalued by keeping the REER in the 90s, not over 100.
Goods exports are down to $2.4 billion in November 2025, down by 15 percent year-on-year. And in 5MFY26, the toll is down by 6 percent to $12.8 billion.
One of the biggest falls is in rice exports due to low prices and the return of Indian rice in the exporting market. Apart from that, textile garments are facing demand challenges in the US due to Trump’s tariff. Consumers in the US are moving towards dollar stores as their purchasing power is falling. Clothing is discretionary spending and people usually cut it in crunch times. Seeing a depressed US market amid high tariffs, China is dumping into the EU market while other textile exporters are undercutting prices. Space is shrinking and those who are less competitive are likely to be the bigger losers.
There are three factors that are hurting Pakistan’s export competitiveness: taxation, energy prices and the exchange rate. Some say interest rates are a factor too, but if the currency adjusts by a few percentage points, real rates would be lower at the current policy rate, and interest rates may become viable for exporters.
Without undermining the imperative of addressing energy and taxation woes, emphasis is on correcting the exchange rate before it is too late. Not only are exports falling, but imports are growing at an uncomfortable rate. Goods imports are up by 13 percent to $28.3 billion in 5MFY26.
There is a natural incentive to import more when the exchange rate is relatively overvalued. People spend more on discretionary imported items when there are growing expectations of currency adjustment; and that too in a jerk. Car sales are increasing as the relatively affluent are buying vehicles as an investment. With growth in imports, taxes on cars could increase and the currency can adjust. In both cases, cars become a good investment option. A similar argument can be applied to mobile phones and other items.
However, authorities are celebrating growing remittances, which have kept the current account manageable to date, but slowly the deficit ought to grow. It is great to have upbeat momentum in remittances, but at the same time one should be mindful that it is fuelling import demand. Higher the remittances, more is the demand for so-called non-essential imports. SBP (State Bank of Pakistan) should do an analytical paper on linking import demand to remittances.
If there is consensus, at least in words, to follow a path of export-led growth, then the action should support it. Lessons to learn are to keep exchange rates undervalued to attract investment in exporting sectors and to curb growing import demand.
That is to ensure a stable path which is imperative for attracting investment, especially FDI. The fear of sharp currency depreciation is keeping investors at bay. There are multiple examples where foreign investment, especially in banking and telecom, came at a time of stable exchange rates and struggled to make returns due to sudden jumps in currency.
Let us not make the same mistake again. Learn from our own past and the experiences of others to move away from the fixation on an overvalued exchange rate.
Copyright Business Recorder, 2025
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar