Trade between the two nations has declined from $11.2 million in 2022-23 to $5.18 million in 2024-25. Leghari stressed the need to reverse this trend.. photo: file
KARACHI:
The debate on the economic structure and its consequences for the balance-of-payments crisis has become ever more prevalent as imports start increasing, subsequently leading to a higher trade deficit.
Policymakers often start to panic as calls are made to curtail imports. Several key studies on the topic have highlighted low productivity, the inability to accumulate knowledge and generate the necessary human capital, and, more importantly, the failure to attract efficiency-driven investment as the major impediments to economic development in Pakistan.
It is imperative that any agenda to bring about major economic reforms and structural transformation begins with an understanding of these key impediments. Trade statistics for November 2025 reveal a year-on-year increase of approximately 33% in the trade deficit, with exports declining by 15% and imports increasing by 5%. Total exports in the first five months decreased by 6.4%, while imports increased by 13.3%, resulting in a 37.2% increase in the trade deficit.
The widening deficit, as exports plummet while imports continue on an upward trend, has once again shifted the focus to a looming balance-of-payments crisis. It is important to point out that falling global oil prices, the recent favourable completion of the review of the Extended Fund Facility by the International Monetary Fund (IMF) Executive Board, and the expected increase in remittances as Ramazan and Eid approach are likely to provide some leverage to policymakers on the external front.
However, it has become necessary to ensure that the government introduces economic reforms to boost economic transformation, rather than resorting to measures that curtail imports and return the economy to the vicious cycle involving a balance-of-payments crisis followed by steps to suppress growth and import demand. The Economic Advisory Group has published several data stories on how restrictive Pakistan’s trade policy is relative to other countries in the region.
A recent article by Atif Mian emphasised the lack of productive investment in Pakistan, which inhibits the transformation of the economic structure and limits the capacity to boost output. Pakistan’s gross fixed capital formation as a percentage of GDP, which indicates the level of net fixed assets acquired relative to total output, stood at 11% in 2024, compared with 28% for South Asia and 35% for East Asia and the Pacific.
This places Pakistan among the lowest not only in the region but also globally. Net inflows of foreign direct investment in 2024 amounted to $2.7 billion, according to the World Bank’s World Development Indicators, compared with $30 billion for South Asian economies and $480 billion for East Asia and the Pacific.
One-third of global foreign investment flows into East Asia and the Pacific region, which is correctly labelled the global manufacturing hub. Integration into regional production networks complements the flow of foreign investment into manufacturing. While the lack of both domestic and foreign investment is concerning and requires a holistic approach to ensure substantial improvement, a less highlighted but critical issue is the low level of trade openness in Pakistan, which speaks volumes about weak trade integration with comparable regional markets.
One indicator of integration into global and regional supply chains is participation in global value chains (GVCs), where gross exports are decomposed into forward and backward linkages. Forward linkages account for exports that are re-exported either to third countries or back to Pakistan after processing in the importing partner, while backward linkages capture imports that are processed and re-exported either to the original trading partner or to third countries.
In essence, GVC-related exports involve multiple border crossings and are heavily dependent on strong trade linkages between trading partners. High levels of GVC participation not only require products to meet internationally acceptable standards and quality, but also to be produced at highly competitive costs to attract consumers and producers across multiple countries.
According to United Nations ESCAP data on global value chain participation, Pakistan performs poorly in both forward and backward linkages, with less than a quarter of its exports being GVC-related. More than 40% of exports from the Asia-Pacific region and over 45% from Southeast Asian countries are GVC-related.
In these economies, exports in high-value-added sectors such as transport equipment and electrical machinery are driven by backward linkages, where imported inputs are converted into exportable output. Only about a quarter of Pakistan’s textile and textile product exports are GVC-related, with the majority classified as forward linkages.
By comparison, GVC-related exports account for one-third of Bangladesh’s gross textile exports, with more than two-thirds categorised as backward linkages. Pakistan typically supplies intermediate goods, while Bangladesh imports inputs and processes them into final goods for export. This helps explain Bangladesh’s stronger focus on value addition within the textile sector.
Pakistan must therefore introduce policies that encourage participation in global value chains, prioritising tariff reduction and regional trade agreements with economies that can provide much-needed industrial inputs. The National Tariff Policy 2025-2030 is a step in the right direction, but more must be done to achieve deeper trade integration.
Improved trade engagement with the ASEAN region, for instance, could provide impetus for greater participation in GVCs. Consequently, higher levels of trade openness would allow efficiency-seeking domestic and foreign investment to expand.
A more open economy geared towards global value chain participation would, in turn, attract longer-term and sustainable investment in manufacturing. A vibrant trade policy based on deeper integration is essential if Pakistan is to become a viable destination for foreign investment.
The writer is an Assistant Professor of Economics and a Research Fellow at CBER, Institute of Business Administration, Karachi. He also chairs the Economic Advisory Group.
