Export Growth Needs Market Liberalization, Not Subsidies

By Dr. Abedullah[1]

Author is formal Chief of Research at Pakistan Institute of Development Economics, Pakistan and can be reached at abedullahanjum@gmail.com

Pakistan has spent decades trying to boost exports through subsidies. The results have been disappointing. Large amounts of public money have been spent on rebate schemes, yet exports remain stuck in a narrow range while the fiscal burden continues to grow. Real and lasting export growth requires market liberalization that reduces costs and pushes firms to compete on efficiency and quality, rather than on government support.

Evidence from Pakistan’s own experience is telling. A World Bank study of the Duty Drawback of Taxes scheme for textiles found only a limited impact on overall exports. For every dollar spent on the scheme, just $1.1 in additional exports was generated. Much of the effect came from shifting sales toward products that received higher rebates, rather than expanding the total volume of exports. Between 2017 and 2020, the scheme absorbed roughly one per cent of the federal budget without delivering significant growth.

Wider research points in the same direction. The Pakistan Institute of Development Economics estimates that tariffs and export subsidies together cost the economy about Rs1.67 trillion a year through inefficient allocation of resources. Removing these distortions could raise domestic production by 2.4 per cent and exports by 4.9 per cent annually, while also generating additional tax revenue of Rs278 billion over time.

Pakistan’s export record reflects these weaknesses. Goods and services exports stood at around $38.6 billion in 2024 and $40.7 billion in 2025. Merchandise exports have remained in the $30–32 billion range in recent years. The share of exports in GDP has fallen from 15–16 per cent in the late 1990s to about 10 per cent today. In contrast, countries such as Bangladesh and Vietnam have expanded their exports far more rapidly by opening their markets and linking more closely to global supply chains.

Textiles and apparel, which account for 55–60 per cent of merchandise exports, reached about $18 billion in FY2025-26. Yet overall merchandise exports still declined 5.9 per cent to $30.14 billion in the same period. Export-related tax concessions cost the government nearly Rs44 billion in 2023-24. Rice exporters received Rs15 billion in support under the Drawback of Local Taxes and Levies scheme, but export volumes are expected to fall sharply, even as India’s rice exports continue to grow .

Similar problems appear in agriculture. Subsidized gas for fertilizer producers cost about Rs84.5 billion in 2024-25, while total agricultural input subsidies exceed Rs250 billion. Subsidies on solar tube wells have reduced the cost of pumping groundwater almost to zero, encouraging water-intensive crops and putting pressure on aquifers. Heavy subsidies on farm machinery also weaken the private rental market that many small farmers rely on. Removing these supports would help lower costs and improve the quality of crops that Pakistan can export, such as rice and cotton.

Some argue that subsidies are still needed until deeper problems—high energy prices, poor logistics and costly finance—are resolved. In practice, however, temporary schemes tend to become permanent, and the harder structural reforms receive less attention.

A better approach is to open markets more fully. Lowering tariffs on intermediate goods would allow exporters to buy inputs at competitive prices. The National Tariff Policy 2025-30 has already begun reducing duties. If implemented consistently, it can help Pakistani firms become more competitive. Greater competition also forces inefficient producers to improve or exit, while rewarding those that invest in better technology, higher quality and new markets.

Pakistan needs a clear change in direction. Open-ended subsidies should be phased out with fixed end dates. Any remaining support should be linked to actual growth in exports rather than given automatically. Tariff reductions on industrial inputs should continue. Money saved from subsidies can be used to lower energy costs, improve logistics and support skills and technology.

Pakistan has the potential to export far more than it does today. What it lacks is a consistent policy approach. Continuing with subsidies will only rearrange a limited export base at high cost. Opening markets and reducing distortions offers a more difficult but ultimately more lasting route to growth.