Export Refinance Scheme rate slashed to 4.5%

300bps reduction in ERS rate, power relief to lift textiles, cement and steel

KARACHI:

Textiles, cement, engineering (steel) and other export-oriented industries are poised to be the primary beneficiaries of the government's newly announced relief and incentive package, which combines cheaper export financing with broad-based energy cost reductions to improve industrial competitiveness and ease liquidity pressures in the backdrop of the India-Europe trade deal.

The textile sector, Pakistan's largest export earner, stands out as the biggest gainer from the package. The sharp 300 basis point cut in the Export Refinance Scheme (ERS) rate to 4.5% from 7.5% is expected to significantly lower working capital costs for spinners, weavers and value-added exporters, many of whom operate on thin margins amid intense global competition.

"The announced measures are supportive for export-oriented and energy-intensive sectors, led by textiles, cement and engineering (steel), as lower ERS rates for exporters and reduced power costs for all industries improve margins, liquidity and competitiveness," noted an AHL report.

The sectors are also set to benefit materially from the reduction in industrial power tariffs by around Rs4 per kilowatt-hour and a further Rs4.04 per unit cut in electricity wheeling charges. Cement manufacturing is highly energy-intensive, and power costs form a substantial portion of overall production expenses. Analysts note that companies with greater dependence on grid electricity will gain the most, as the tariff cut feeds directly into lower cost of sales and stronger margins. Over the next two fiscal years, earnings improvements are projected across several cement producers, with the scale of benefit varying depending on each company's energy mix and captive power capacity.

The engineering sector, particularly steel manufacturers, is another key beneficiary of the power tariff relief. Steel producers typically rely heavily on grid electricity, making them especially sensitive to changes in power prices. For these firms, the announced reduction offers immediate cost relief at a time when demand conditions remain challenging and balance sheets are under strain. Industry analysts expect the lower energy cost base to support a gradual recovery in margins and improve the sector's ability to compete with imported steel products, especially if domestic demand stabilises over the coming quarters.

Beyond these headline sectors, the export financing relief is expected to support a wider range of export-oriented industries, including food processing, technology and select engineering segments. While the direct earnings impact on technology exporters may be modest due to lower leverage and financing needs, cheaper export credit still provides incremental support by easing cash flow management and encouraging reinvestment. In the food sector, exporters of rice, processed foods and agro-based products are likely to benefit more visibly, as financing costs often represent a significant constraint in managing seasonal procurement and inventory cycles.

At a macro level, the package is being viewed as a pro-export policy signal at a time when Pakistan's external sector remains under pressure. Total exports stood at around $20.2 billion in the first half of FY26, reflecting a marginal year-on-year decline after a strong performance in FY25. Policymakers appear to be using a mix of targeted incentives and cost relief to protect export momentum, strengthen competitiveness and sustain medium-term growth in foreign exchange earnings. Lower financing costs under the ERS, combined with cheaper energy, are expected to enhance exporters' ability to price competitively in international markets and secure new orders.

The impact on the banking sector, meanwhile, is expected to be largely neutral. While the reduction in the ERS rate may compress margins on export-linked loans, this is likely to be offset by improved asset quality as exporters' debt-servicing capacity strengthens. In addition, the recent cut in the Cash Reserve Requirement (CRR) is projected to inject substantial liquidity into the banking system, enabling banks to expand lending at market rates and absorb any earnings pressure from concessional export financing.

Importantly, analysts caution that the full effectiveness of the package will depend on timely implementation and clarity around operational details. While the announced measures have been welcomed by industry and investors, businesses are awaiting formal notifications and guidelines to assess the precise financial impact. There are also broader fiscal considerations, particularly regarding how the government will absorb or reallocate subsidies following the removal of industrial cross-subsidies in electricity tariffs.