Ch M Sarwar
IN much of the developed world, economic progress owes much to stable, business-friendly policies, transparent regulations and reliable infrastructure.
These enable companies to plan ahead, invest, generate employment, export goods and expand. Developed economies follow fixed principles that create a favourable environment for growth. They maintain stable regulatory regimes so firms know rules won’t drastically change with each election. Tax rates—both corporate and indirect—are kept at levels allowing profitability while ensuring public services. Incentives are applied carefully and uniformly. These countries also minimize administrative friction, with fewer departments, digital processes, low corruption and fast approvals for permits, trade licenses and customs. Their supply chains are resilient and energy costs are often stable, subsidized where needed or diversified through renewables to reduce costs. Such policies enable trade, competitive exports and foreign investment.
By contrast, Pakistan’s experience shows that ineffective policy design, instability, energy tariffs and a complicated tax regime are holding business and trade back, undermining growth and deterring investment. Pakistan’s standard corporate tax rate for most public and private companies is around 29%, with numerous other taxes and levies that increase costs and compliance burdens. Taxes change frequently and dealing with tax departments is cumbersome. As Governor of Punjab, I received thousands of complaints from businessmen fed up with bureaucratic hurdles. There are too many overlapping authorities with inconsistent enforcement. Another deterrent for long-term and foreign investment is that policies change whenever governments change. Laws, tariffs, subsidies and contracts often get renegotiated or reversed. This lack of continuity prevents investors from forecasting returns over the 5–15-year horizons needed for manufacturing, industry and infrastructure. The risk premium is high, pushing investors toward more stable countries.
Pakistan’s industrial sector pays nearly double the electricity rates of India, China or the US—about 13.5 cents per kWh in 2024 versus 6–8 cents elsewhere. This stems from high “capacity payments” to Independent Power Producers (IPPs), often in foreign currency, paid regardless of generation. In FY 2024-25, capacity payments are expected to reach Rs 2.8 trillion—around 71% of total power purchase costs—while only 29% reflects actual energy use. These exorbitant contracts and rising fixed costs are passed on to consumers, placing a heartbreaking burden on the people and crippling Pakistan’s industrial competitiveness.
These high tariffs make Pakistani goods less competitive than those from India, Bangladesh, China and Malaysia. The country also faces the “too much, too little” water phenomenon. During the monsoon season, floods devastate vast areas, destroying lives and causing billions in damage. Afterward, dry months bring scarcity, hurting agriculture. These disasters deter investment and hinder growth. Pakistan must invest in flood resilience, build reservoirs to store excess water and recharge underground aquifers. Run-of-the-river dams should be built where possible to produce hydroelectricity. India has long pursued such projects and now generates power from hundreds of these dams.
Despite government claims, Pakistan still faces weak foreign investment inflows and reluctance among investors to commit to long-term ventures. Political instability, poor law and order, regulatory lapses and corruption add to risk. Exporters in India, Bangladesh and Vietnam enjoy lower energy costs, simpler compliance and more stable policies. To compete globally and grow manufacturing and trade, Pakistan must restructure IPP contracts to reduce fixed capacity payments and link them to actual output. It should also invest massively in renewables like solar and wind and expand cheaper hydroelectric sources. The government must simplify the tax regime, lower corporate tax, digitize approvals and avoid frequent fiscal changes. Transparency in policymaking is vital so businesses can plan and invest better.
Pakistan must also utilize existing opportunities more effectively. Pakistan was granted GSP+ status on 1 January 2014 after an intense diplomatic campaign led by myself as Governor of Punjab. As a former UK parliamentarian, I used my contacts in the EU Parliament to build support, coordinating between Pakistan and EU member states. Working with the Ministry of Commerce and MOFA, we ensured compliance with the EU’s 27 required conventions. I presented Pakistan as a cooperative and reform-oriented country, successfully building the case for its economic stability.
Since then, Pakistan has benefited significantly from GSP+ status, especially in textiles and garments. Before GSP+, exports to the EU were about €4.5 billion in 2013; by 2022, they rose to over €7.5 billion—a 70% increase—with major markets including Germany, Spain, Italy, the Netherlands and France. This growth created hundreds of thousands of jobs, especially for women in garment factories, helping medium manufacturers scale up, upgrade machinery and meet EU standards. However, Pakistan has not gained maximum benefit from this opportunity due to high manufacturing costs. If Pakistan can bring down production costs through cheaper energy, it can greatly expand its market in the EU alone. Economic growth is possible but requires serious, sustained reforms, political will and strong leadership.
—The writer is former Governor, Punjab Province.
