ISLAMABAD: The International Monetary Fund (IMF) has asked Pakistan to swiftly end preferential treatment, tax exemptions, and other protections for the agriculture and textile sectors. According to the IMF, these policies have stifled the country’s growth potential for decades.
In its staff report on the factors behind Pakistan’s struggling economy, the IMF blamed the agriculture and textile sectors. It criticized these sectors for failing to contribute adequately to national revenue. The report also noted that they consume large portions of public funds while remaining inefficient and uncompetitive.
Need for Pakistan to Diversify Beyond Agriculture and Textile Sectors
As part of the recently approved $7 billion Extended Fund Facility (EFF), the IMF stressed that Pakistan must change its economic practices from the past 75 years. This shift is necessary to escape the country’s recurrent boom-bust cycles. The report highlighted Pakistan’s significant lag behind similar nations. This stagnation has compromised living standards and pushed over 40.5 percent of the population below the poverty line.
It said Pakistan had struggled to develop more sophisticated export goods, and the share of knowledge-intensive exports remains low as it failed to innovate. As of 2022, Pakistan ranked 85th in the Economic Complexity Index, the same rank it held in 2000.
“With an export basket strongly biased towards agriculture and textile sectors (cotton yarn, rice, woven fabrics, beef, leather apparel), the country has struggled to reallocate resources towards more technologically complex products,” it said.
The current focus on agriculture has limited Pakistan’s ability to diversify into more technologically complex goods. Pakistan does export some high-value products, such as medicines, medical instruments, and plastic products. However, these sectors operate in a heavily distorted economic environment. The report highlighted tariffs on intermediate and final goods as barriers to competitiveness and domestic market growth. These barriers are inhibiting the country’s transition towards more advanced manufacturing.
“Reallocation, however, is held back by existing microeconomic distortions, including public procurement of agricultural goods, price controls on raw inputs, and fiscal and financial incentives for low productivity sectors,” it observed.
Reform Needed in Textile Sector and Trade Policies
The report identified the textile sector as having the highest tax gap relative to its value added. It noted that between 2007 and 2022, the sector benefited from several advantages. These included subsidies, favorable pricing on inputs, concessional financing schemes, and preferential tax treatment. As of May 2024, 70pc of the outstanding concessional central bank loans were tied to the textile sector.
The IMF recommended that the government focus on simplifying trade policies under the upcoming National Tariff Policy (2025-29). The report urged Pakistan to avoid using tariffs to promote industrialization or protect inefficient sectors. It argued that such policies weaken exports and hinder participation in global value chains. Additionally, these policies incentivize rent-seeking behavior.
The report also warned that Pakistan should discontinue trade policies aimed at promoting specific domestic sectors. This includes export subsidies and local content requirements. The report stated that these policies are likely to promote resource misallocation and may violate international obligations.
IMF Urges Pakistan to Remove Trade Restrictions and Address Resource Misallocation
Compared to other regional peers, Pakistan’s export growth has been weak. Sales to the world were particularly stagnant during the 2010s. The country has many trade restrictions, including exchange measures and restrictions on payments. Additionally, tariff and non-tariff barriers to imports have consistently placed Pakistan around the 90th percentile of the Measurement of Aggregate Trade Restrictions index. Greater integration to world trade and fundamentals-driven competitiveness gains would help spur Pakistan’s economic development, the IMF advocated.
The report noted that persistent policy-induced resource misallocation and their retention in low productivity activities not only hampered the incentive to invest, innovate and enhance total factor productivity but also a major source of the decline in Pakistan’s living standards and competitiveness. The Fund called for removing these distortions so that the country could develop a stronger, more competitive and technologically advanced economy.
It said several complex goods were within likely technological proximity to Pakistan’s current export basket, including glassware, paints, chemicals, fabrics for industrial use, paper, cosmetics and rubber products.
However, to facilitate the development of such new industries, the country needed a level playing field for business, avoiding targeted policies aimed at picking winners.
This includes greater integration into global trade and easier access to imports, both as intermediate inputs for production and as final goods to promote domestic competition. The removal of fiscal incentives would reduce the existing misallocation of resources and promote price discovery across firms.
Need for Reducing Government Interventions in Agriculture
In addition, the agriculture sector in Pakistan provided an extreme example of government policies hindering transformation by trapping resources in low-productivity activities. The agriculture sector suffered from one of the lowest levels of labour productivity and had shown both the smallest reallocation relative to peers and the smallest improvement in labour productivity.
The IMF said that large-scale government interventions, such as support prices and preferential tax treatments, have locked resources into agriculture at the expense of more productive sectors.
This news is sourced from Dawn News and is intended for informational purposes only.
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