Lahore School of Economics

The comprehensive study, covering product-level data from 2003 to 2024, found that Pakistan's exports, both in US dollar terms and as a share of GDP, have remained mostly flat for three decades. The report said repeated exchange rate depreciations have failed to deliver the intended export surge, whether in textiles, non-textile commodities, or services. "Exchange rate movements, once considered the main policy tool to promote exports, no longer have the same bite," the report observed.

Instead, the study emphasised that diversification of export products and markets, as well as an increase in the complexity of exported goods, have a stronger and more consistent impact on export performance. "Greater export diversity correlates with higher commodity exports, highlighting the importance of expanding the export base," the report said.

The textile sector, Pakistan's traditional export backbone, has seen limited growth despite several incentives and subsidies. The analysis revealed that lower corporate taxes tend to support textile exports, while high tax rates have a dampening effect. Meanwhile, the non-textile and ICT sectors, though smaller in scale, responded more favourably to lower import tariffs. The report noted that a 1% reduction in average tariff rates led to a rise of $0.07 billion in non-textile exports and $0.27 billion in ICT exports.

However, the report cautioned that broad tariff cuts could worsen balance of payments pressures if not targeted properly. It recommended that import duty reductions should focus on capital and intermediate goods used in export industries, rather than across-the-board cuts.

Energy pricing, often cited as a major constraint, did not appear as decisive in the analysis as many policymakers assume. The report found only a weak negative relationship between gas tariffs and export volumes, and virtually no link between electricity tariffs and export performance. This suggests that energy costs, while burdensome, may not be the key bottleneck preventing export growth.

The report also underscored the role of foreign demand as a critical factor driving exports. It found that growth in foreign incomes, particularly in developed economies, has a significant positive effect on Pakistan's textile, non-textile, and services exports. This implies that tapping into high-income markets and moving up the value chain could be far more impactful than domestic price interventions.

From a policy standpoint, the report called for a paradigm shift in Pakistan's export strategy, from reactive, price-based measures to proactive, capability-based industrial policies. It argued that while short-term fixes such as depreciation and energy adjustments might offer temporary relief, they cannot sustain long-term export growth without innovation and technological upgrading.

The report cited firm-level studies showing that exporters who invest in new products and processes tend to be more productive and competitive internationally. Yet, the overall productivity of the country has stagnated due to limited technological depth and weak linkages between industry, research institutions, and export markets.

Pakistan's export basket remains dominated by low-value, low-complexity goods such as cotton yarn, basic textiles, and unprocessed food items. The report recommended expanding into related but higher-complexity products such as technical textiles, electronics components, and knowledge-based services to unlock greater export potential.

Ultimately, the Lahore School analysis challenges conventional wisdom on Pakistan's export stagnation. It suggests that exchange rate management and tariff tweaks can no longer substitute for the structural transformation the economy urgently needs. The report concludes that a true export-led growth model will depend on fostering innovation, building human capital, and developing industries capable of competing in global markets, not merely on making the rupee cheaper.

Related: Factors that Impact Pakistan's Exports: An Empirical Analysis, Lahore School of Economics Policy Note 2/25