Pakistan has reduced industrial electricity charges and expanded export financing. Yet its trade deficit continues to widen. The challenge is to make manufacturing competitive without creating another expensive subsidy system.

By Muhammad Munaeem Jamal | 19 October 2026

A textile exporter in Faisalabad receives an inquiry from a European buyer. The customer wants garments at a competitive price, with consistent quality and delivery on schedule.

Before quoting a price, the manufacturer must calculate the cost of fabric, labour, electricity, gas, financing and transport.

The buyer may also be considering suppliers in Bangladesh or Vietnam. Those manufacturers have their own difficulties, but the European customer will compare their offers with the Pakistani quotation.

Pakistan’s government has recognised the problem. In January 2026, Prime Minister Shehbaz Sharif announced a Rs4.04-per-unit reduction in industrial electricity tariffs. The government has also expanded export financing and introduced incentives for additional export earnings.

These measures deserve examination rather than dismissal.

If Pakistan is already offering relief, why does export competitiveness remain such a difficult problem?

The latest trade figures provide some context.

According to revised Pakistan Bureau of Statistics data, merchandise exports reached approximately $8.45 billion during July–September 2026, an increase of 11.13% over the corresponding period a year earlier.

Imports reached approximately $19.21 billion, growing by 13.20%. The merchandise trade deficit widened to roughly $10.77 billion.

Exports are increasing, but their growth has not been sufficient to offset the larger import bill.

This does not prove that electricity prices caused the deficit. Imports respond to many factors, including fuel prices, domestic demand and industrial input requirements.

It does show why Pakistan needs businesses capable of earning substantially more foreign exchange.

For manufacturers, energy is one of the costs that determines whether they can compete.

Why industrial electricity remains expensive

Pakistan’s electricity problem cannot be explained by fuel prices alone.

A factory’s bill reflects several costs: generating electricity, maintaining transmission and distribution networks, contractual payments to power producers, taxes and government-imposed charges.

Some expenses are necessary for reliable supply. Others reflect inefficiencies accumulated over many years.

Capacity payments are frequently blamed for high tariffs. Under many power-generation contracts, producers receive payments for making electricity-generating capacity available, even when plants are not operating at full output.

Such arrangements are not inherently improper. Power systems require sufficient capacity to meet peak demand, and investors need predictable mechanisms for recovering capital costs.

Difficulties arise when expensive generating capacity has been contracted, electricity demand is lower than anticipated or contracts provide limited flexibility.

Pakistan also faces electricity theft, poor bill recovery and distribution losses.

These problems contribute to circular debt when the system cannot collect enough revenue or receive sufficient funding to meet its payment obligations.

Capacity payments and circular debt are not the same thing. One is a contractual cost; the other is an accumulated financing shortfall.

That distinction matters because reducing tariffs without addressing the underlying costs can simply move the burden elsewhere.

Pakistan has already cut industrial tariffs

The January 2026 industrial tariff reduction was a significant policy intervention.

IMF programme documents also describe the removal of part of the cross-subsidy previously imposed on industrial consumers.

Historically, higher industrial charges have helped finance lower tariffs for certain residential consumers.

Protecting vulnerable households is a legitimate responsibility of government. But financing that protection through industrial electricity bills can raise the cost of goods sold abroad.

A more transparent approach would provide targeted household assistance through the budget.

The government has also introduced an incremental electricity pricing arrangement.

Under the conditions described in IMF documents, eligible additional industrial and agricultural consumption could qualify for a rate of Rs22.98 per kilowatt-hour.

That figure is not the final, all-inclusive tariff paid by every factory.

The actual bill depends on eligibility, consumption, fixed charges, adjustments and taxes.

This is why international electricity-price comparisons require care. A special incremental tariff in Pakistan cannot fairly be compared with a standard industrial tariff elsewhere without considering the full bill.

Pakistan should publish representative industrial electricity costs by consumer category, including all applicable charges.

Exporters need to know whether the reforms have reduced their actual production costs, not merely whether a lower tariff has been announced.

Lower tariffs are useful only if the system becomes more efficient

The government faces a difficult choice.

Industrial electricity must become more competitive. Yet the power sector also needs sufficient revenue to pay its legitimate obligations.

If tariffs are reduced without a corresponding decline in costs, the difference must be financed.

The government may increase budget subsidies, transfer costs to other consumers or allow liabilities to accumulate.

None is a durable export strategy.

The IMF’s October 2026 assessment continued to emphasise cost recovery, distribution efficiency and preventing renewed circular-debt accumulation.

Pakistan should therefore concentrate on reducing avoidable costs.

Distribution companies need measurable targets for bill recovery, network losses and supply reliability.

Private participation may improve performance where contracts create strong incentives and regulators enforce service standards. Ownership changes alone will not eliminate theft or poor management.

Factories also need dependable supply.

An industrial consumer facing frequent interruptions may have to purchase backup generators, maintain fuel stocks or schedule additional production shifts.

Those expenses are not captured by a simple comparison of electricity tariffs.

For an exporter, a delayed shipment can damage a customer relationship that took years to develop.

The government should publish industrial outage statistics alongside electricity prices. A cheaper tariff has limited value if manufacturers still cannot rely on the supply.

Gas costs are a separate industrial problem

Electricity is only part of the energy burden.

Textile dyeing, washing and finishing require substantial heat. Food processing, ceramics and chemical manufacturing also depend on thermal energy.

These processes may use gas or alternative fuels.

Pakistan’s gas sector has accumulated large financial liabilities, while manufacturers face uncertainty about future supply and pricing.

The government must reduce gas losses, improve collections and provide clearer information about industrial supply arrangements.

Factories also need incentives to invest in efficient boilers, heat-recovery systems and commercially viable alternative fuels.

Solar electricity can help reduce daytime power purchases. It does not automatically replace the thermal energy required for industrial processing.

Nor can rooftop solar eliminate every factory’s dependence on the grid.

A garment workshop operating during daylight hours has different requirements from a textile mill running continuously.

The sensible policy is to encourage efficient self-generation while improving the public electricity system.

Pakistan should not expect every manufacturer to build an independent energy infrastructure simply to remain competitive.

What Bangladesh and Vietnam can teach Pakistan

Pakistan frequently compares its exports with those of Bangladesh and Vietnam.

The comparison is useful when it focuses on industrial organisation rather than isolated electricity prices.

Bangladesh has developed a substantial garment-export industry through specialised production networks and long-standing relationships with international buyers.

Vietnam has attracted investment into electronics and other manufacturing activities, integrating its factories into international supply chains.

Neither country is free from energy or infrastructure problems.

Their experience shows that exporters need an industrial environment in which different services work together.

A garment producer requires dependable fabric suppliers, efficient customs procedures, trained workers, financing and transport.

An electronics manufacturer depends on access to imported components, technical capabilities and sophisticated logistics.

Pakistan’s electricity tariffs are important, but they are only one part of the final export price.

The country should compare the complete cost of producing and delivering similar goods rather than relying on headline tariff figures.

That would produce a more useful assessment of where Pakistani firms are losing competitiveness.

Textiles need productivity, not just tariff relief

Textiles remain Pakistan’s largest merchandise export sector.

But spinning, weaving, processing and garment manufacturing have different cost structures.

Spinning and weaving consume substantial electricity. Dyeing and finishing also require thermal energy. Garment production depends heavily on labour productivity, quality control and delivery management.

A single electricity concession will therefore affect these businesses differently.

Pakistan should evaluate support according to the economics of each activity.

The textile industry also needs investment in higher-value production.

Technical fabrics, specialised garments and advanced finishing offer opportunities to earn more from export orders.

Such investment requires modern equipment, skilled employees and predictable operating costs.

Manufacturers are unlikely to commit substantial capital if electricity arrangements, imported-input duties or tax rules change repeatedly.

The European market also brings regulatory and compliance requirements. As discussed in my earlier article on Pakistan’s changing GSP+ relationship with the EU, market access depends on more than offering a low price.

Export policy should help manufacturers improve productivity and meet buyers’ requirements rather than simply compensate them for existing inefficiencies.

Are export rebates and cheaper financing enough?

Pakistan’s Performance Based Rebate on Incremental Exports, effective from July 2026, rewards eligible increases in export earnings.

Under the State Bank’s framework, qualifying incremental exports can receive a rebate of 1% for annual growth up to 10%, or 2% when growth exceeds 10%.

Consider a hypothetical exporter whose annual foreign sales rise from $10 million to $11 million.

The additional exports amount to $1 million.

Subject to the scheme’s eligibility and reconciliation rules, growth of exactly 10% would produce a rebate of $10,000.

The payment is calculated on the increase, not the company’s entire export turnover.

This may provide a useful incentive. But it cannot necessarily compensate for a persistent disadvantage in energy, financing or transport costs.

The government has also announced an increase in the Export Finance Scheme envelope from Rs1 trillion to Rs1.5 trillion for FY2026–27, including Rs300 billion earmarked for SMEs, agricultural SMEs and new borrowers.

That could help smaller firms finance raw materials, production and shipments before receiving payment from foreign customers.

The key issue is implementation.

How much financing actually reaches smaller exporters? At what cost? Does it generate additional orders?

The government should publish utilisation data and assess whether firms receiving assistance expand exports beyond what they would have achieved without it.

Announcing a larger financing envelope is not the same as demonstrating additional export earnings.

Imported inputs and services also matter

Pakistan has often treated imports primarily as a burden on foreign exchange reserves.

But exporters need imported machinery, components, chemicals and raw materials when domestic suppliers cannot provide them competitively.

High duties on essential production inputs can make the finished export product more expensive.

The National Tariff Policy aims to reduce the weighted average applied tariff from 10.6% in FY2025 to 7.4% by FY2030.

That direction could improve competitiveness if implemented consistently.

The objective should be to help firms obtain inputs at internationally competitive prices while encouraging domestic suppliers to improve.

Pakistan also needs to broaden its export base.

Software development, engineering services and other professional activities can earn foreign exchange without the same industrial energy requirements as textile processing or heavy manufacturing.

These businesses still need dependable electricity, internet connectivity, skilled workers and practical international payment arrangements.

Manufacturing and services require different policies. Both can contribute to a stronger export economy.

What Pakistan should do next

The government’s priorities should be specific enough to measure.

First, publish the actual cost of industrial electricity. Representative bills should include fixed charges, adjustments and taxes. Reliability indicators should accompany tariff figures.

Second, hold electricity distribution companies accountable. Recovery rates, network losses and outage duration should be published regularly. Any private-sector participation should be judged against these outcomes.

Third, separate household protection from industrial pricing. Assistance for vulnerable consumers should be transparent and targeted, rather than hidden in charges imposed on productive businesses.

Fourth, address industrial gas and process-heat requirements. Manufacturers need predictable supply arrangements and support for commercially viable efficiency investments.

Fifth, remove avoidable export costs outside the energy sector. Customs delays, expensive imported inputs, delayed refunds and limited working-capital access can undermine the benefits of tariff reductions.

Finally, government incentives should be evaluated against additional export earnings, productivity improvements and the number of firms entering or expanding in foreign markets.

A quarterly public scorecard would make these commitments easier to assess.

Pakistan needs a competitive industrial system

Pakistan has begun reducing some industrial energy charges and expanding export financing.

Those measures may help, but the country’s wider competitiveness problem remains.

A manufacturer cannot control electricity distribution losses, power-sector liabilities, customs procedures or national tariff policy.

Yet those decisions influence the price it must quote to a foreign customer.

The government should reduce the costs created by inefficient systems rather than repeatedly compensate exporters through temporary concessions.

That means reforming electricity distribution, improving energy reliability, facilitating imported production inputs and measuring whether incentives produce additional exports.

Pakistan will increase its export earnings sustainably when more businesses can win foreign orders through competitive prices, dependable quality and reliable delivery.

The test of export policy is not how much assistance the government announces.

It is whether Pakistani firms can compete without continually needing that assistance.