Incentives: exporters must deliver

Rs98b being directed towards productive capacity, employment, exports

KARACHI:

The US-Iran war is clouding positive developments for Pakistan, including the S&P Global's upgrade of the sovereign rating from B- to B with a stable outlook. It reflects IMF-backed reforms, fiscal consolidation and rebuilt reserves, although B remains a speculative grade. Significant, therefore, is the government's decision to support exporters on an unprecedented scale.

Last week, the Economic Coordination Committee approved three export-promotion schemes. Reports describe the package as exceeding Rs255 billion, but this mixes current-year costs with multi-year commitments. The actual FY27 fiscal cost is estimated at Rs98 billion. First, the enhanced Exim Bank-administered Export Finance Scheme will provide six-month working-capital loans at a fixed 8.5%, carrying an FY27 subsidy of Rs58 billion.

Second, the Long-Term Export Growth Financing Facility will offer up to Rs350 billion for new projects and balancing, modernisation and replacement. Borrowers will pay 2% for two years and 5% for the following eight. The government may absorb up to 11.5 percentage points: Rs25 billion in FY27 and approximately Rs195 billion over the facility's life.

Third, exporters achieving growth of up to 10% over the previous year will receive 1% of the incremental export value, and growth above 10% will qualify for 2%. This is not a rebate on total sales but incremental. Its estimated annual cost is Rs15 billion. Separately, the E-EFS portfolio has been raised 50%, from Rs1 trillion to Rs1.5 trillion.

Pakistan has tried this before. The Rs180 billion export package announced in 2017 offered rebates ranging from 4% on yarn and grey fabric to 7% on garments, sports goods, leather and footwear. Merchandise exports subsequently rose 12.6% to $24.7 billion in FY18. However, imports increased 16.3% to $56.6 billion, leaving a $31.8 billion trade deficit. Incentives helped, but could not offset an overvalued currency and consumption-led imports.

The FY27 budget reinforces the package. Tax collection on export proceeds has fallen from 2% to 1.25%; the 0.25% rate for IT exports has been extended to tax year 2029; super tax has been abolished on income up to Rs500 million and cut from 10% to 8% above that threshold for most sectors and super tax scrapped for exporters; and tariffs on inputs have been rationalised. Fixed rupee financing at 2-5% becomes exceptionally attractive if long-run currency depreciation averages 7-8%, indicating a negative USD denominated interest rate.

This follows the discontinuation of remittance incentives, including transfer-charge reimbursement, which cost around Rs76 billion last year. The funds are not formally ring-fenced, but the reallocation is clear: approximately Rs98 billion of FY27 support is being directed towards productive capacity, employment, taxes and recurring export earnings. That is a better use of scarce fiscal space.

Over recent years, imports were compressed through administrative controls, tight policies and the falling purchasing power as the rupee moved from roughly 160 to 280 per dollar. Remittances provided the external lifeline, reaching a record $41.6 billion in FY26. They limited the current account deficit to $139 million and helped rebuild SBP's reserves to $17 billion by late July, without a corresponding improvement in merchandise exports.

That achievement is welcome, but insufficient. Pakistan still depends on IMF disbursements and bilateral deposits and rollovers from China and Saudi Arabia. A genuinely independent, economy-centred foreign policy requires the capacity to repay – not perpetually refinance – external obligations. This demands a measurable export-and-FDI plan with sector targets, investment pipelines and accountability for every rupee of subsidy.

Exporters have long cited electricity, gas, taxation and financing as binding constraints. Industrial power tariffs have declined, while incremental grid consumption is available near Rs23 per unit. Higher captive gas prices are pushing the industry towards the grid, potentially spreading fixed capacity costs over greater demand. With cheaper long-term credit now added, the environment is materially more supportive. The ball is firmly in exporters' court.

The rebate should help thin-margin textiles, food, agriculture, pharmaceuticals and engineering, while IT needs skills, payment access and data infrastructure more than machinery loans. Vietnam's exports expanded 12.7% annually over two decades through FDI-led global value chains. Costa Rica made medical devices 37% of exports by 2022, while Morocco's automotive exports reached $17 billion in 2024.

The lesson is that financing must be paired with investment promotion, anchor multinationals, supplier development and skills. Pakistan should link subsidies to additional dollars, domestic value addition, new markets, skilled jobs and tax compliance, publishing results every six months.

The urgency is visible in the data. FY26 merchandise exports fell 6% to $30.1 billion, imports rose 7.9% to $69.6 billion and trade deficit widened 21.6% to $39.5 billion. June alone produced a deficit of approximately $4.5 billion as imports reached $6.8 billion. There is no imminent rupee crisis given remittances and stronger reserves, but another $500-750 million in monthly energy and consumption imports could erode this buffer within a few quarters.

Finally, capital parked in speculative real estate should face stronger carrying costs, while export capacity, technology and brands receive stable rules for at least 10 years. Merchandise exports equal only 7-8% of GDP, and goods and services together are around 10%. Raising the latter towards 15% by 2030 would add roughly $20 billion annually at today's economic size.

Alongside sustained FDI and remittances, that could make gross reserves above $50 billion achievable. The government has put money on the table; exporters must now deliver measurable dollars. Exports remain Pakistan's clearest route beyond IMF programmes and bilateral bailouts.

The writer is an independent economic analyst