The International Monetary Fund has called for the abolition of preferential treatment, tax exemptions, and other protections granted to Pakistan’s agriculture and textile sectors, which seriously handicapped the country’s economic growth. In a report released on October 10, 2024, the IMF said the two sectors were inefficient and less competitive, collecting minimal revenue for the nation but accumulating massive public funds. The organization has stated that such practices have restricted Pakistan to not moving toward a much more diversified and technologically advanced economy, with almost 40.5 percent of the population staying in poverty today.
Those recommendations from the IMF are part of the newly sanctioned USD 7 billion Extended Fund Facility (EFF) that is going to revive the economy of Pakistan. As said in the report, the policies that prefer agriculture and the textile sector have long been suffocating the growth potential of the nation. However, the agriculture sector—the sector focused on export-oriented products like rice and cotton—and the textile sector—the sector producing textile products such as cotton yarn and woven fabrics—do not either overcome resources by advancing to more technologically advanced industries.
The key finding of the report is that such a reliance on two major sectors has ensured that Pakistan does not have a more diversified or knowledge-intensive export basket. Pakistan ranked 85th on the ECI in 2022, still at its position since 2000. The failure of the country to innovate and expand into more sophisticated goods leaves the economy still in limbo. The IMF goes on to mention the lack of progress will not only frustrate Pakistan’s objective to transition towards a more advanced manufacturing base, which otherwise can boost growth in domestic markets and enhance competitiveness in the global market.
It further highlights that within these sectors, particularly the textile sector, which the IMF has noted as having the highest tax gap relative to its value added. Between 2007 and 2022, subsidies, concessional financing, and preferential tax treatment gave the textile industry an edge. Concurrently, the industry was not very productive, and fiscal and financial incentives siphoned resources away from higher-value sectors. Other distortions the IMF observed include the public purchase of agricultural products; price controls on raw inputs; and tariffs on intermediate and final products, some of which could not have made progress.
According to the IMF, whatever privilege has been given to Pakistan over agriculture, it has not been able to produce more technologically complicated goods such as medical instruments and high-value products, which are already under production, and that is operating in a very distorted economic environment. Inefficiencies have barred Pakistan from realigning resources toward sectors that might upgrade its manufacturing and export capacities.
The IMF further argued that agriculture and textiles, the top fields for aid to the Pakistani economy, have not added much to the revenues of the country. Instead, a vast amount of state money was squandered into these industries without giving much return to the state. This further has acted as a hindrance to Pakistan, which could not improve living standards and reduce poverty. The IMF proposed that government protection should gradually be decreased and other policies ensure enough stimulation of invention and competitiveness in more advanced industries.
There is a caution based on this report that Pakistan’s economic model, belonging to a 75-year-old framework, has confined the country in a boom and bust type of cycle. The report repeatedly emphasized that these trends have to be broken out by the country where structural reforms together with the elimination of outdated economic practices favoring inefficient sectors are in question.
Conclusion:
Stagnation has already become an economic jinx to Pakistan, and the IMF’s report is critical of the outdated policies of the economy, especially regarding preferential treatment of agriculture and textiles. The demand for change highlights the imperative for Pakistan to diversify its economy, innovate, and shift resources towards more technologically advanced industries. Unless there is a revolution in change, the country will be perpetually trapped in the boom-bust cycle, further entrenching poverty and hindering development.
Source: PTI