AS Pakistan experiences sluggish economic growth, there is a growing trend of impatience being presented as policy advice. Increasingly, there are calls to either abandon or dilute the IMF programme, with critics pointing to high interest rates, elevated taxes and costly energy as justification. While these concerns are valid, the conclusion that leaving the IMF would restore growth is misguided. In reality, abandoning the IMF programme would likely reignite the instability that made external support necessary in the first place. The true challenge for Pakistan is not a choice between stabilisation and growth, but rather how to use the limited fiscal space created by stabilisation to support productive activity without violating IMF commitments. This fiscal space does exist, and now more than ever, it must be deployed wisely.
External pressures and competitiveness: The urgency of this task has increased due to the EU-India trade agreement, which will gradually reduce tariffs on Indian exports to the EU — Pakistan’s largest export market, accounting for about 40 per cent of its exports, mainly textiles. This development represents a direct shock to Pakistan’s competitiveness. Preference erosion will be gradual but persistent. Without tariff preference relative to India, exports from Pakistan are vulnerable. Even without duty-free access, India exports nearly as much textile and apparel to the EU as Pakistan, and with significant overlap in product lines, substitution is inevitable. As tariffs decrease, Indian exports could become 10-12pc cheaper than before. India is also working to recapture the exports it lost as a result of US tariffs. Any further deterioration in Pakistan’s cost, quality, or delivery will quickly lead to lost orders and more idle capacity, as well as pressure on jobs and foreign exchange reserves.
Some estimates suggest that Pakistan could lose up to $2 billion from its current $9bn to $10bn in annual EU exports. Therefore, maintaining market share in Europe requires more than generic appeals to industrial revival — it demands precise, targeted interventions. The primary constraint is fiscal space.
Policy rate and fiscal space: One starting point is the policy rate. Once inflation expectations are firmly anchored and foreign exchange reserves exceed $20bn, a 100-basis-point reduction in policy rates would have significant fiscal implications. Even accounting for delays in repricing and transmission, a one-percentage point reduction in the average cost of domestic borrowing could save Rs450bn to Rs550bn annually in debt-servicing costs over time, depending on the maturity structure. Additional fiscal space can also be created by containing non-development expenditures.
The hard reality is that Pakistan cannot simply spend, borrow, or subsidise its way to growth.
Importantly, this space should be explicitly redirected towards growth-enabling interventions. Three main priorities emerge:
Supporting export-oriented industry: While broad-based tax reductions are limited under the IMF programme, targeted relief for exporters is both fiscally efficient and beneficial for the external sector. Minimum taxes on turnover and advance taxes, for which refunds take years, are particularly detrimental to exporters’ cash flows. Since exports are vital for Pakistan’s economy, relying instead on commercial borrowing to build reserves is expensive, with the country’s 10-year bond yield exceeding 10pc. Rationalising electricity tariffs for export sectors and eliminating cross-subsidies in industrial power prices would directly enhance competitiveness. Instead of a piecemeal, reactionary approach, the government should conduct a comprehensive benchmarking of costs, levies and taxes with Pakistan’s major export competitors and address the gaps.
Incentivising diversification: Pakistan’s export base remains narrow not due to a lack of incentives, but because existing schemes are misdirected — rewarding scale in established products rather than encouraging diversification. In a global context where competitors are securing preferential access to major trade blocs, this approach is unsustainable. A portion of available fiscal space should be allocated to new products, value-added processing, and untapped markets, ensuring incentives drive incremental exports instead of reinforcing old patterns.
Reviving SMEs: While large firms dominate exports, SMEs are the backbone of employment and supply chains. Years of macroeconomic volatility, high borrowing costs, punitive documentation requirements, unreliable energy, and inflated input costs — often a result of tariff protection — have severely weakened the SME sector. Any growth strategy that overlooks SMEs will struggle to create jobs. Interest savings can be partially redirected into credit guarantees, concessional refinance windows linked to export activity and simplified tax regimes that incentivise formalisation. Even an allocation of Rs50bn to Rs70bn could mobilise more private credit significantly.
Role of the IMF programme: None of these measures require abandoning the IMF programme. On the contrary, their effectiveness depends on the credibility provided by the programme. Sustainable lower interest rates require anchored inflation expectations; export incentives are meaningful only with a market-determined exchange rate; energy reforms can only last if circular debt is contained — disciplines that the IMF programme enforces.
Conclusion: The hard reality is that Pakistan cannot simply spend, borrow, or subsidise its way to growth. The available fiscal space is limited and must not be wasted. In an era of increasing external competition, fiscal resources must be justified by their impact on productivity, export protection, or employment generation. The real choice is not between growth and the IMF, but between discipline and wishful thinking. Abandoning the programme may offer short-term relief, but it would ultimately restore the instability that undermined growth in the first place. The only sustainable path is to use the IMF programme as a foundation for protecting competitiveness, expanding exports, and rebuilding employment, thereby avoiding another crisis.
The writer, a former CEO of Unilever Pakistan and of the Pakistan Business Council,serves on the boards of several public companies.
Published in Dawn, February 4th, 2026
