KARACHI: Exports as a percentage of GDP have consistently declined while poor Foreign Direct Investment (FDI) could not generate higher economic productivity, said the State Bank of Pakistan (SBP).

In a detailed research in the half-yearly report on the State of the Economy 2024-25, released on Monday, the central bank observed that one of the key underlying issues facing Pakistan’s economy was weak competitiveness.

“From a macroeconomic perspective, this is reflected in consistently declining exports (as a percentage of GDP), low FDI, and overall insufficient integration with global value chains (GVC),” said the report.

From a micro perspective, this is reflected in the low quality of products, the higher unit cost of production, inability to create brands in international markets, and other ancillary indicators, the report added.

Pakistan’s labour productivity is the lowest among peer economies

The country’s productivity growth has been declining, even though productivity has featured in the government’s broad economic policy frameworks since at least the late 1990s, according to the report.

Pakistan’s economy has been caught in boom-bust cycles for more than five decades, with recurring episodes of high inflation and external account pressures, said the report, adding that historically, these cycles comprised three to six years of relatively high growth followed by a crisis — particularly balance of payments crisis — that necessitated urgent stabilisation measures.

“In recent decades, however, the frequency of boom-bust cycles has increased with the boom periods getting shorter. Moreover, access to external support has become challenging, warranting implementation of deep-rooted and long-pending structural reforms to address the underlying issues,” said the report.

Labour productivity

Pakistan’s labour productivity (LP) growth, measured as a change in GDP per worker, is among the lowest compared to its peer economies.While average annual growth in GDP per worker in the last two decades increased by about 1.0 percentage points over the average growth in the preceding decade, it remains low compared to peer economies by income — lower-middle-income countries (LMIC).

Labour quality in Pakistan accounted for 21pc of the improvement in labour productivity during 2000-2022, compared to 61pc in ASEAN economies.

Several attempts have been made in Pakistan to increase exports and attract FDI to kick-start economic growth. With some exceptions, most such attempts have been based on the low road model (short-term approach) coupled with the protection of domestic industries on the premise of infant industry.

However, these approaches have not delivered desirable outcomes; nor have foreign aid, grants, loans, privatisation and other windfall or external endowments sustainably driven long-term growth prospects, said the report.

It is productivity growth, which is the biggest structural driver of competitiveness, that boosts the economy’s ability to continue to export competitively, attract FDI, and sustain economic growth, said the report.

An important dimension is that while the short-term offers quick gains, it is inherently unsustainable.

Similarly, solely relying on exchange rate undervaluation to compensate for the high cost of production, lack of innovation, low product quality, etc., could be counterproductive, said the report.

Published in Dawn, May 2nd, 2025