EDITORIAL: The Prime Minister has announced incentives to industry with the explicit objective of promoting exports that, data indicates, are lagging behind regional countries. These incentives include ending cross-subsidy on electricity payable by industry, lowering wheeling charges to below 9 rupees per unit, and the release of subsidy from the export development fund (EDF) to rice exporters. There is a need for the government to provide some clarity on two counts.
First, while there are reports that the government is proactively engaged with the International Monetary Fund (IMF) to phase out the extremely politically harsh upfront monetary and fiscal conditions, no doubt premised on strict adherence since the ongoing Extended Fund Facility programme was formally approved in October 2024; however, it is not quite clear whether the Fund has approved these specific incentives. After the Covid pandemic the Fund has either deferred/suspended staff-level agreements for a subsequent tranche release that has brought forth the prospect of an impending default as over USD 12 billion annual rollovers by the three friendly countries are linked to an active programme to this day.
It is also relevant to note that the Fund’s appraisal of incentives to industry and agriculture is rather damning: “subsidies have taken the form of low-cost financing and other concessions, which although varied across industries, left financing and taxes net of subsidies more favourable than in peer economies and less-favoured sectors. The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones. The government’s intervention in price setting, including for agricultural commodities, fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favour of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.”
READ MORE: Businessmen laud PM’s new incentives for export industry
Be that as it may, instead of extending incentives to specific industries it may have been advisable for the authorities to renegotiate the contractionary monetary and fiscal policies in place today — by reducing the need for government borrowing significantly, and implementing structural tax reforms by decreasing reliance on indirect taxes, to the tune of over 75 percent at present, and raising direct ability-to-pay taxes rather than raise incentives. This was possible if the government had decided to reduce its current expenditure significantly which, in turn, would divert commercial lending from the government to the private sector and, at the same time, enable the Federal Board of Revenue to meet realistic annual revenue targets.
Second, what is to be the source of funding for these incentives, given that they were not budgeted and what would be the implications, if any, on the budget deficit? While the government has pledged full-cost recovery of the poorly performing sectors, specifically electricity and gas, there is a need for major structural reforms to achieve a permanent resolution of issues that beset them and which remain pending. These include: (i) the recent decision to borrow 1.25 trillion rupees from commercial banks, already over-exposed to the power sector, to retire a major portion of the circular debt enabled the government to reduce the tariff but this was approved by the IMF only because the policy rate declined from 22 to 10.5 percent. Fully cognizant of this situation, the Fund stipulated the removal of the 10 percent cap on Debt Service Surcharge in case of any revenue shortfall in debt repayment; (ii) renegotiations with the Independent Power Producers (IPPs) that pre-date 2014 led to a mere 43 paisa per unit reduction; however, the power plants set up under the umbrella of the China Pakistan Economic Corridor have refused to renegotiate which accounts for payment of capacity charges (which have risen dramatically as demand declined subsequent to the government support for renewable energy alternatives) and repatriation in dollars (which is in short supply); and (iii) the decision of the government to continue the policy of extending a tariff differential subsidy to ensure the same tariff countrywide (a policy not in practice in neighbouring India or China) with the current year budgeting 1 trillion rupees as power sector subsidies.
Additionally, money is fungible and it is therefore also necessary for the government to clarify the release of funds to rice exporters from the EDF.
In spite of these decisions, it is relevant to note that the Islamabad Chamber of Commerce and Industry has emphasised the need for further critical reforms, including moving towards a single digit KIBOR, rationalising the tax regime and further reducing the cost of doing business. Or, in other words, there is an urgent need for a medium- and long-term planning strategy rather than fire-fighting from one unsustainable balance of payment situation to another and that requires all stakeholders on board — the government, the productive sectors as well as independent economists with the integrity to challenge the government’s decisions where appropriate.
Copyright Business Recorder, 2026