Fear-driven policies dent trust

Pakistan's economy is caught in a cycle of fear-driven policies that hinder growth, repel investment, and deepen structural weaknesses. Instead of fostering confidence, restrictive monetary controls, high tariffs, protectionism, and regressive taxation have created capital flight, widened trade imbalances, and encouraged corruption. The result is billions in revenue losses every year.

The State Bank's restrictions on foreign currency (FCY) accounts highlight this fear-based approach. By limiting exporters and importers from freely holding and using foreign exchange, these measures unintentionally strengthen informal systems like hawala and hundi. They fuel under-invoicing in trade and drive transactions away from the formal banking system. Exporters often delay repatriating their earnings, fearing forced conversion at unfavourable rates, while importers turn to informal financing to pay for goods. Instead of stabilising reserves, these restrictions erode trust and push more activity underground.

Tariffs and protectionism have had the same effect. High import duties meant to protect domestic industry have instead entrenched monopolies, raised production costs, and discouraged innovation. Smuggling and customs corruption thrive under these conditions, while legitimate businesses struggle. Imports remain largely unaffected because demand is met through informal channels, making policy both ineffective and damaging.

For decades, successive governments have clung to short-term, crisis-management measures aimed at protecting reserves or appeasing domestic lobbies. These may buy time, but they never address the underlying weaknesses. The economy remains trapped in a cycle of defensive policymaking, unable to shift toward openness, investment, and long-term reform.

Pakistan's reliance on high tariffs to shield industry has made production more expensive and exports less competitive. The country's export basket remains narrow and low-value, dominated by textiles and a few commodities. High duties on inputs discourage diversification, while smuggling undermines formal traders and reduces tax revenue. Monopolies and oligopolies thrive because they face little competition and no incentive to cut costs or improve quality.

Bangladesh and Vietnam followed a different path. They pursued export-oriented policies, lowered tariffs, and integrated into global value chains. By welcoming foreign investment, they expanded exports far beyond low-value commodities. Pakistan, still clinging to protectionist barriers and import bans, has fallen behind in industrial growth.

Taxation policy reflects the same fear-based mindset. Pakistan's tax-to-GDP ratio lingers around 10% to 11%, one of the lowest in the region. Instead of broadening the base, successive governments squeeze existing taxpayers harder. Reliance on indirect taxes like GST and sales tax shifts the burden onto the poor and middle class, shrinking disposable incomes, suppressing demand, and reducing savings. This slows growth and widens inequality.

Rather than taxing sectors that remain largely outside the net like agriculture, real estate, and wholesale or retail trade, the government repeatedly raises GST or imposes extra levies on electricity and fuel. These moves discourage business activity and push more people into evasion. A fairer approach would be to adopt a lower, uniform VAT or GST of around 10%. Countries such as Malaysia and Turkey show that simpler tax systems encourage compliance, increase collections, and support growth.

Pakistan's chronic trade deficit reflects its structural problems. The economy depends heavily on imported fuel, machinery, and raw materials, while exports remain concentrated in low-value goods. Whenever the current account gap widens, authorities respond with import restrictions, devaluation, or ad-hoc subsidies. These steps bring temporary relief but worsen inflation, raise the cost of imported machinery and technology, and ultimately reduce productivity.

Corruption exacerbates these problems. Complicated regulations and high duties create space for rent-seeking and discourage foreign investors. Importers bribe officials to clear goods faster, under-invoice to reduce duties, or bypass customs altogether. This drains revenue and creates unfair competition for compliant businesses. The solution is not more rules, but fewer and clearer ones, enforced through digital systems that reduce human discretion and increase transparency.

Despite these weaknesses, Pakistan has one of the most promising demographic profiles in the world. Almost 64% of its people are under 30, and internet penetration is expanding rapidly. This creates a unique chance to turn digital transformation into a driver of growth. Freelancing platforms, e-commerce, and IT services are already generating foreign exchange, and Pakistan ranks among the top five countries in freelance workforce size.

Yet this potential remains untapped. Poor infrastructure, inconsistent policies, and limited venture funding prevent digital businesses from scaling. High broadband costs, lack of reliable payment gateways, and bureaucratic hurdles discourage entrepreneurs. If the state prioritised digital infrastructure, ensured low-cost, high-speed internet, and gave startups a clear regulatory framework, it could unlock a wave of innovation and job creation. The digital economy could become Pakistan's largest export sector within a decade if properly supported.

Breaking this cycle of stagnation requires bold reforms that emphasise facilitation over control. Pakistan must first liberalise foreign currency accounts, allowing exporters to retain their earnings, settle imports, and remit funds abroad without fear of forced conversion. Restoring trust in formal banking will reduce reliance on hawala and keep capital in the system.

Second, tariffs must be lowered to regional levels and non-tariff barriers removed. A simplified trade regime will reduce smuggling, make industries more competitive, and bring prices down for consumers. Protectionism has failed; openness is the path to growth.

Third, the tax system must be restructured. A uniform, lower VAT or GST, combined with digitised collection, can improve compliance and widen the base. Untaxed sectors such as agriculture, real estate, and retail must be brought in. Reducing compliance costs will encourage voluntary participation and improve revenue without punishing the same taxpayers.

Fourth, digital infrastructure must be strengthened. Expanding fibre connectivity, supporting local payment gateways, and providing clear rules for fintechs and e-commerce will unleash the potential of Pakistan's young, tech-savvy population.

Fifth, exports must be diversified. The government should lift bans on processed food exports, support higher-value manufacturing, and promote pharmaceuticals, IT, and other emerging sectors. Integration into global supply chains is vital for sustainable growth.

Finally, institutions must be modernised. Customs, ports, and regulatory agencies should be digitised along the lines of Singapore, Hong Kong, and the UAE. Transparent, automated systems will reduce corruption, cut delays, and improve competitiveness.

Pakistan's economic stagnation is not the result of fate but of policy choices rooted in fear and short-term thinking. By replacing crisis management with structural reform, the country can create a virtuous cycle of growth, confidence, and investments. The path forward is clear: liberalise foreign currency markets, open trade, reform taxation, and embrace the digital economy. With political will and consistent execution, Pakistan can reposition itself as a regional economic powerhouse and deliver the opportunities its young population deserves.

THE WRITER IS FORMER VICE PRESIDENT OF KCCI, AND INTernational TRADE EXPERT