Zafar Iqbal
Pakistan’s government has unveiled what appears to be a cleverly engineered solution to support struggling exporters without violating IMF commitments or straining public finances. The mechanism involves coordinated moves between the State Bank of Pakistan and commercial banks to reduce export financing costs by an additional three percent—seemingly without any direct fiscal subsidy. While the initiative demonstrates creative policymaking under constrained circumstances, it raises fundamental questions about central bank autonomy, credit allocation distortions, and whether such interventions can genuinely revive Pakistan’s stagnant export sector.
Pakistan’s export landscape has transformed dramatically over recent years, particularly for large textile manufacturers who historically enjoyed generous government support. These exporters once benefited from subsidized energy—both through captive power plants and grid connections—along with concessional financing for working capital and long-term investments. Taxation burdens remained minimal, creating a comfortable operating environment that made Pakistani textiles competitive internationally.
However, this comfortable arrangement gradually unraveled. Subsidies were withdrawn one by one as fiscal pressures mounted. Exporters now face normal income tax rates, including super tax provisions that significantly increased their burden. Energy prices simultaneously skyrocketed due to rising global costs and persistent inefficiencies plaguing Pakistan’s domestic power system. Interest rates climbed sharply without any subsidy cushion to soften the blow.
These challenges coincided with weakening demand for textiles in traditional importing countries, creating a perfect storm. Predictably, Pakistan’s exports have stagnated despite the government’s stated policy of pursuing export-led growth. The disconnect between policy pronouncements and concrete measures has been glaring, with outcomes reflecting ground realities rather than official ambitions.
Large textile exporters have lobbied aggressively to restore lost incentives, but the government faces severe fiscal constraints. More importantly, Pakistan must comply with International Monetary Fund conditions that limit its ability to provide direct subsidies or engage in practices that compromise fiscal discipline or central bank independence.
Previously, subsidized financing came directly from the State Bank of Pakistan, which effectively meant printing money and loading risks onto the central bank’s balance sheet. This window closed after legislative amendments to the SBP Act strengthened the institution’s autonomy and prohibited such practices.
The government later offered a three percent relaxation in working capital financing rates for exporters, funded through a fiscal subsidy channeled through the budget. While this provided some relief, exporters demanded more substantial support, arguing that their international competitors enjoyed far better financing terms and operational conditions.
The State Bank has now introduced an innovative approach to deliver an additional three percent reduction in export financing costs without triggering IMF objections or requiring budgetary outlays. This appears to result from behind-the-scenes coordination between the SBP, commercial banks, exporters, and government officials who collectively devised a mechanism to expand concessional financing while maintaining technical compliance with fiscal and monetary discipline requirements.
The mechanism operates through two synchronized moves. First, in its monetary policy decision, the State Bank reduced the cash reserve requirement for commercial banks by 100 basis points. This requirement had been elevated in 2021 to absorb excess liquidity circulating in the banking system. However, with the SBP now continuously injecting liquidity rather than mopping it up, maintaining the higher CRR lacked justification.
This reduction frees approximately Rs300 billion in liquidity for banks, allowing them to earn incremental profits estimated at Rs30-35 billion annually. Banks can now deploy these previously frozen funds into lending activities that generate returns, substantially boosting their profitability without any operational changes or efficiency improvements.
Days later, the government announced a three percent reduction in the Export Finance Scheme rate, bringing it from policy rate minus three percent to policy rate minus six percent. Crucially, commercial banks would absorb this additional cost rather than the government or central bank. Given the existing financing stock of roughly Rs1 trillion under the scheme, this translates to approximately Rs30 billion in annual costs for banks—almost exactly matching the windfall they received from the CRR reduction.
The arrangement essentially transfers the benefit banks gained from regulatory relief directly to exporters through cheaper financing. On paper, it appears fiscally neutral since no government funds are involved and the central bank hasn’t compromised its balance sheet. Banks theoretically break even, exporters gain cheaper capital, and fiscal constraints remain respected.
Additionally, the government announced eliminating cross-subsidies embedded in industrial electricity tariffs and wheeling charges, potentially delivering benefits around Rs4 per unit to industrial consumers including exporters. However, officials have not clearly explained how this reduction will be financed despite claims of fiscal neutrality, leaving questions about whether this component genuinely avoids fiscal costs.
While the export financing reduction appears fiscally neutral when viewed narrowly, it raises serious concerns about the State Bank’s operational autonomy and its role in credit allocation. Central bank independence represents a cornerstone of sound macroeconomic management, ensuring monetary policy serves price stability and financial system health rather than political expedience or sectoral lobbying.
This coordinated maneuver—reducing CRR specifically to create space for banks to absorb lower export financing margins—suggests the central bank’s regulatory decisions are being shaped by industrial policy objectives rather than purely monetary considerations. This distorts credit allocation by directing banking system resources toward specific sectors and activities chosen through political processes rather than market-determined profitability and risk assessments.
Historical experience offers ample reason for caution. Pakistan has witnessed numerous instances where preferential financing schemes intended to support exports or other favored activities were systematically misused. Unscrupulous operators exploited loopholes, claimed benefits without genuinely expanding productive capacity or exports, and diverted concessional funds toward other purposes entirely.
Not long ago, another export facilitation scheme operated by the Federal Board of Revenue suffered similar misappropriation, forcing the government to discontinue it after discovering widespread abuse. The fundamental challenge remains: how will the State Bank ensure this expanded export financing scheme isn’t similarly exploited? What monitoring mechanisms, verification processes, and enforcement capacities exist to guarantee funds actually support genuine export activities rather than becoming another avenue for rent-seeking?
Even assuming the scheme operates as intended without misappropriation, questions remain about its effectiveness in genuinely reviving exports. The government is essentially providing cheaper working capital financing, which primarily boosts exporters’ profit margins on existing operations. While this improves their financial position, it doesn’t necessarily expand productive capacity or enhance competitiveness through technological upgrades, quality improvements, or product diversification.
A potentially more effective approach would offer concessional long-term financing specifically tied to capacity expansion, technology adoption, or moving up value chains. Such financing could catalyze genuine structural improvements in Pakistan’s export sector rather than simply subsidizing current operations. Working capital relief helps exporters survive difficult conditions but doesn’t fundamentally transform their competitive position.
Moreover, past experiences with export subsidies in Pakistan haven’t been particularly encouraging. Despite years of generous support, the export sector failed to achieve the kind of dynamic growth and structural transformation seen in successful Asian economies. Subsidies often became entitlements that perpetuated inefficiencies rather than temporary support enabling internationally competitive industries to emerge.
The new export financing arrangement represents a creative attempt to support Pakistan’s goods-exporting sector while navigating severe fiscal constraints and IMF conditionality. The technical ingenuity involved in structuring an apparently subsidy-free intervention deserves acknowledgment, particularly given the limited policy space available.
However, significant concerns remain. The arrangement potentially compromises central bank autonomy and distorts credit allocation in ways that could create longer-term problems. The risk of misappropriation remains substantial given Pakistan’s track record with similar schemes. Most fundamentally, cheaper working capital may prove insufficient to revive exports facing deep structural challenges including energy costs, infrastructure deficiencies, limited technological capabilities, and weak integration into global value chains.
The true test lies ahead: will this intervention catalyze meaningful export expansion, or will it prove another temporary palliative that fails to address underlying competitiveness problems? The answer will reveal whether Pakistan has found a sustainable path toward export-led growth or simply discovered a more sophisticated way to perpetuate old patterns under new packaging.
