At the World Economic Forum in Davos this January, Prime Minister Shehbaz Sharif painted an encouraging picture of Pakistan’s economy. Inflation had fallen from around thirty percent to 5.5 percent. The policy rate had been reduced from 22.5 percent to 10.5 percent. The tax-to-GDP ratio had improved. IT exports were showing progress. The IMF Managing Director acknowledged Pakistan’s reform efforts. On paper, the indicators appear reassuring. Yet beneath this polished surface, a more disturbing reality unfolds. Official data for the first seven months of fiscal year 2026 reveals that exports have fallen by over seven percent, the trade deficit has widened by twenty-eight percent to $22.04 billion, and the current account deficit has returned after a brief surplus. The rupee, held artificially stable around 280 to the dollar through administrative controls, has become what economic analysts call a “silent killer” of export competitiveness. This is not stability, it is an illusion sustained by intervention, and like all illusions, it will eventually shatter.
To understand the contradiction between Pakistan’s apparent stability and its deteriorating trade fundamentals, one must examine how the exchange rate has been weaponized as a political tool rather than treated as an economic instrument. Since early 2024, the State Bank has maintained the rupee at approximately 280 to the dollar through administrative controls, multiple exchange rate windows, and delayed adjustments. This policy was ostensibly designed to contain imported inflation and create a predictable environment for business. And in narrow terms, it has succeeded, inflation has moderated, and the currency has not experienced the dramatic swings that characterized 2023, when the rupee lost nearly thirty percent of its value in a single year.
But this stability has come at a tremendous cost. Over the same period, domestic costs for Pakistani exporters have surged, energy tariffs, wages, financing costs, taxes, and compliance burdens have all risen sharply. When domestic inflation runs higher than that of trading partners and the exchange rate is held rigid, exports steadily lose competitiveness. Pakistani goods in dollar terms have become more expensive, and international buyers have shifted to cheaper suppliers in India, Vietnam, and Bangladesh.
The damage is most visible in price-sensitive sectors. Textiles and ready-made garments, once Pakistan’s pride, are struggling. Basmati rice, a geographical indicator and premium quality product, is rapidly losing shelf space to Indian Pusa varieties because Pakistani prices are no longer competitive. Sesame seeds, maize, fruits and vegetables, and light engineering goods have all suffered. Official data confirms the trend. In the first seven months of FY26, exports to nine regional countries fell 16.86 percent to $2.307 billion, while imports from these markets rose 23.69 percent to $11.31 billion. Trade with Afghanistan remains suspended since October 2025, further impacting regional export flows. Even exports to China, Pakistan’s closest economic partner, slipped 1.02 percent while imports from China climbed nearly twenty-five percent to $11.097 billion.
The Standing Committee on Commerce, meeting in February 2026, heard frank assessments from members who expressed concern about “long standing structural loopholes in Pakistan’s export framework that have remained unresolved for almost two decades”. Persistent challenges in domestic production, reliance on imports, high cost of doing business, taxation policies, provincial cess, and energy constraints were all identified as structural impediments that no amount of currency manipulation can solve.
The Anatomy of the Crisis
First, the artificially stable rupee functions as a tax on exports and a subsidy to imports, directly undermining the government’s stated goal of export-led growth. The logic is straightforward: when the exchange rate is held at levels that do not reflect economic fundamentals, Pakistani goods become more expensive in international markets while foreign goods become cheaper for domestic consumers. A strong rupee has simultaneously eroded export competitiveness and made imports more lucrative. The data bears this out, exports fell over seven percent while imports rose more than nine percent in 7MFY26. The trade deficit with regional countries widened 41.37 percent to $9 billion. This is not a temporary blip but a structural consequence of policy choices that prioritize political optics over economic reality.
Second, Pakistan’s exchange rate policy ignores the successful models of regional competitors who have used gradual depreciation as a strategic tool for export growth. Vietnam has pursued gradual adjustments that avoid prolonged overvaluation and limit volatility, giving exporters the confidence to invest and integrate into global value chains. Bangladesh has adopted a steady crawl rather than crisis-driven devaluations, preserving export competitiveness and market share. China has long maintained a competitive currency aligned with its export objectives. These countries understand what Pakistan’s policymakers seem to have forgotten: that exchange rate competitiveness is not a source of national shame but a legitimate instrument of economic strategy. As former finance minister Dr. Hafeez Pasha observed, “across Asia, successful economies have treated exchange rate competitiveness as a strategic tool, not a source of pride.”
Third, the private sector continues to face structural disabilities that no amount of currency manipulation can overcome. The Lahore Chamber of Commerce and Industry recently welcomed reform initiatives but highlighted the persistent challenges: high and volatile electricity and gas tariffs, fragmented taxation, advance income tax deductions, delayed refunds, working capital constraints, frequent policy changes, and weak inter-agency coordination. These issues disproportionately affect small and medium enterprises and limit value-addition. The Standing Committee on Commerce similarly noted “persistent challenges in domestic production, reliance on imports, high cost of doing business, taxation policies, provincial cess, and energy and foreign exchange constraints.” Pakistan’s cost of doing business remains structurally high due to distorted input tariffs, overlapping regulations, excessive audits, and logistics bottlenecks including high inland freight costs, port congestion, and slow customs clearance.
Fourth, historical patterns suggest that artificial stability inevitably ends in disruptive crisis, yet policymakers continue to repeat the same mistakes. During the Musharraf era, the rupee was held stable at around sixty to the dollar throughout much of the 2000s, concealing growing external imbalances until reserves collapsed and an IMF intervention became necessary. The pattern recurred between 2013 and 2017, with the rupee held between 100 and 105 per dollar despite widening current-account deficits. When adjustment finally came, it was abrupt and disorderly. The last three years have proven even more damaging, with administrative controls, delayed adjustments, and multiple exchange rates pushing pressure into informal markets. As Ehsan Malik noted, “prolonged artificial stability acts as a tax on exports and a subsidy to imports. This encourages consumption and rent-seeking while discouraging investment in tradable sectors.”
Fifth, the government’s own export promotion initiatives face implementation challenges that undermine their effectiveness. The National Assembly Standing Committee on Commerce reviewed two major PSDP projects, the Expo Centre Quetta and the Export Accelerator for SMEs, and raised concerns over cost escalation, prolonged delays, changes in project location, lack of provincial coordination, and accountability gaps. The Ministry of Commerce sought additional funding of three billion rupees while Planning advised that allocations be managed within existing resources. On the Export Accelerator for SMEs, members stressed the need for clear outcomes, financial commitment, and inter-ministerial coordination . Even the timely allocation of fifteen billion rupees from the Export Development Fund to support rice exporters, while welcome, cannot offset the structural disadvantages created by an overvalued currency combined with high production costs and tax burdens.
It would be incomplete to suggest that exchange rate adjustment alone would solve Pakistan’s export crisis. Currency depreciation is not a magic solution. As economist Dr. Kaiser Bengali has noted, “a weaker rupee does not automatically boost exports if key inputs are imported; energy remains expensive; taxes continue to rise; refunds are delayed; productivity stagnates; and market access remains limited.” Some countries experience repeated depreciation without export growth, simply importing inflation instead. The issue is not choosing between a strong or weak rupee, but abandoning the belief that administrative controls can substitute for competitiveness. Pakistan requires a comprehensive strategy that includes competitive energy pricing, predictable taxation, efficient logistics, skills development, and genuine trade facilitation. The government’s commitment to export-led growth is welcome, but as the Minister of Commerce himself acknowledged, “sustainable economic stability requires a significant increase in exports” beyond what remittances can provide. Policy predictability, transparency, and a rule-based regulatory environment are indispensable for attracting long-term domestic and foreign investment.
Pakistan stands at a critical juncture. The government can continue pursuing artificial stability, holding the rupee at politically convenient levels, celebrating superficial improvements in headline indicators, and hoping that somehow exports will recover without fundamental reform. Or it can embrace the difficult but necessary path of genuine structural adjustment: allowing the rupee to reflect economic fundamentals, reducing the cost of doing business, rationalizing energy tariffs, reforming taxation, and systematically supporting exporters with predictable policies and timely implementation. The choice is not between stability and instability. It is between an illusion that will eventually shatter and a sustainable foundation for long-term growth. As the Prime Minister himself emphasized at Davos, Pakistan must move toward “sustainable and export-led growth.” The question is whether the government has the courage to pursue that vision even when it requires abandoning the comfortable illusions of the present.
