While China, Vietnam, Bangladesh, South Korea, and Turkey ran competitive currencies and steadily upgraded what they produced, Pakistan did neither — and then added high energy costs and tax friction on top. The result is three decades of stagnant exports, lost manufacturing employment, and a debt cycle that remittances temporarily paper over but cannot fix.

Pakistan’s export problem is often explained through a familiar list: high energy costs, policy instability, weak infrastructure. These are real. But they are not the root cause.

The deeper problem is structural — and it comes from two forces that have worked together, quietly, for three decades. An uncompetitive real exchange rate. And a failure to move up the value chain.

Individually, each of these can be managed. Together, they create a trap from which no amount of short-term adjustment escapes. That is the twin deficit — and it is why exports have not grown.

The first deficit: price competitiveness

For nearly three decades, Pakistan has run a persistently higher real effective exchange rate — REER — than every serious export competitor it is measured against.

In simple terms, Pakistani goods have been more expensive in global markets before they even left the factory.

Using BIS broad index data averaged from 1994 to 2020, the record is damning:

Pakistan’s average REER of 116 is not a rounding error. It is a structural verdict. While China averaged 83, Bangladesh 87, South Korea 88, Vietnam 91, and India 94 — Pakistan ran 22 to 33 points higher than every one of them. Pakistani exporters were pricing their goods out of global markets before a single container left port.

An overvalued currency is a silent tax on every exporter and a subsidy to every importer. Pakistan levied that tax for thirty years and then wondered why its factories could not compete.

China managed the renminbi at a REER of 62–70 through the 1990s and 2000s while building the world’s largest export machine. Vietnam held around 91 and grew exports from $4 billion to $282bn in a generation. Bangladesh kept the taka competitive at 87 and built a $33bn garment sector employing four million women. The sequence in every case was the same: compete first on price, appreciate later once manufacturing was globally entrenched.

Pakistan’s sequence was the opposite. Real appreciation through inflation. Protection via tariffs instead of exchange rate discipline. Devaluation only under International Monetary Fund (IMF) pressure, after competitiveness had already been destroyed. Each cycle of collapse-and-adjust left exporters weaker and more uncertain than before.

The second deficit: complexity

Price is only half the story. The second deficit is what Pakistan actually produces.

Countries that transformed their export base did not just sell more — they sold more sophisticated things. South Korea moved into semiconductors, advanced electronics, and precision engineering. China climbed from basic assembly to high-value industrial production across almost every category. Turkey diversified into automotive manufacturing, defence equipment, and machinery — products that require deep supply chains, technical capability, and sustained investment. Even Vietnam, starting from a very low base, steadily expanded into higher-value electronics and manufacturing.

Pakistan did not. Its export basket remains concentrated in low to moderate complexity products — primarily textiles and a narrow range of commodities. The Harvard Growth Lab’s Economic Complexity Index tells the story clearly:

South Korea scores +2.04 and ranks 3rd globally. China sits at 18th with a score of +1.33. India, at 44th with a score of +0.48, is climbing steadily. Pakistan scores −0.57, placing around 100th — with roughly 280 distinct export products, heavily concentrated in textiles, against South Korea’s 650 and China’s 590 spanning every major industrial category.

While others upgraded, Pakistan largely stayed where it was.

A competitive currency wins you the order today. A more sophisticated export basket means you keep winning tomorrow in higher-margin products that fewer countries can simply copy. Pakistan lost on both.

Bangladesh is an important nuance here. It has not dramatically improved its complexity either — its growth remains driven by garments and moderate-complexity goods. However, Bangladesh won through relentless price competitiveness, scale, and focus. That model has a ceiling, but it works within its lane. Pakistan has not matched even that. And unlike Bangladesh, Pakistan has the engineering base, the technical workforce, and the industrial heritage to move higher — if it chooses to.

This is where the real damage happens.

The structural logic is simple and brutal. If you compete in low-value products, you need to be cheaper than everyone else. If you are not cheap, you must be more sophisticated than everyone else. Pakistan is neither. It is relatively expensive in simple products, and not yet competitive in complex ones.

That is the worst possible position for export growth — stuck in the middle, with no advantage in either direction.

The compounding effect: costs on top of costs

If the twin deficit were the full picture, recovery would still be possible. But Pakistan added a third layer.

Formal manufacturers face energy costs that are among the highest in the region — driven by circular debt, inefficient distribution, and cross-subsidisation that penalises industrial users. They face a tax structure that reduces retained cash for reinvestment and scale, and policy inconsistency that makes long-term planning a gamble rather than a calculation.

The compounding effect is what makes this particularly damaging. The exchange rate makes exports less price-competitive. Energy raises the factory cost base further. Taxes limit the reinvestment that would allow firms to move up the complexity ladder. And low complexity keeps margins thin, leaving less to reinvest. Each factor reinforces the others. The result is not just slow growth — it is structural stagnation.

The illusion of stability

There is one more factor that has allowed this to continue: the illusion that things are manageable.

Pakistan receives $38–40bn in annual remittances — roughly 10 per cent of GDP. These inflows support the currency, ease external pressure, and create the appearance of balance-of-payments stability. Remove them, and the current account swings to a $28bn deficit. The rupee would find its equilibrium far lower. The overvaluation problem would be impossible to ignore.

Vietnam earns its dollars by making and selling things. Pakistan earns a large share of its dollars by exporting its people. One of these is a development model. The other is a symptom of development failure.

Each time remittances slow — as they did during Covid and will again — the balance of payments unravels, the rupee collapses, inflation spikes, and the IMF arrives. We have watched this cycle four times in fifteen years. The underlying cause is never addressed as a deliberate policy failure. It is treated as a weather event

What must change

The solution is not complicated. But it requires a consistency of commitment that Pakistani policymaking has not yet demonstrated.

Firstly, restore price competitiveness — by crawling, not crashing. Pakistan must commit to a sustained, managed REER of 90–95 — in line with where successful exporters operate — through a credible multi-year strategy. The critical word is managed. A sudden devaluation is not the answer. Each time Pakistan has allowed the rupee to collapse under pressure, the gain in competitiveness was absorbed by inflation within 12 to 18 months, leaving exporters no better off and the economy worse.

The right approach is a crawling realignment of approximately 0.5pc per month — slow enough to avoid triggering panic, import repricing, or inflationary expectations, but consistent enough to move the REER to a competitive level over 18 to 24 months. This is not a devaluation as a crisis response. It is exchange-rate management as deliberate industrial policy.

The goal is not depreciation. It is realignment, and there is a difference. It should realign the REER to restore exports, while using monetary discipline, fiscal restraint, and targeted relief to ensure depreciation does not simply feed through to prices.

Making that combination work requires five things operating in parallel:

Keep real interest rates positive. The State Bank must not cut rates ahead of the inflation data. Premature easing turns depreciation into a wage-price spiral. Monetary discipline is the anchor that makes a crawling REER credible.

Sterilise excess liquidity. Depreciation paired with fiscal slippage or government borrowing from the banking system amplifies inflation. The two must be decoupled: the rupee moves on the exchange rate; money supply remains disciplined.

Cut import duties on essentials and industrial inputs. As the landed cost of fuel, pulses, edible oil, medicines, and raw materials rises with a weaker rupee, reduce duties selectively. This offsets the pass-through to consumer prices without distorting the competitive signal for exporters.

Handle petroleum pricing carefully. Petroleum is the fastest inflation channel. Do not use a weaker rupee as an opportunity to over-collect through levies simultaneously. The fiscal gain is not worth the inflationary damage to the export case.

Build foreign exchange reserves before moving. A credible crawl requires a credible buffer. Markets must believe there is no free fall at the end of the trajectory. The State Bank’s commitment to a market-determined exchange rate is meaningful only if there are reserves to defend the floor when needed.

The lower REER must also be paired with what exporters actually need to convert competitiveness into orders: Export Facilitation Scheme restoration, faster duty drawbacks and refunds, energy pricing that reflects regional benchmarks, and raw material access without the current delays and duties that erode the margin the exchange rate is trying to create.

Secondly, lower the cost of production. Energy must be priced regionally for export sectors. Cracking down on theft, introducing time-of-use industrial tariffs, and channelling efficiency subsidies to formal manufacturers would reduce the cost penalty without requiring fiscal transfers Pakistan cannot afford. Tax policy must incentivise reinvestment and scale rather than treating every formal business as a revenue extraction opportunity.

Thirdly, build a complexity roadmap. Pakistan does not need to leap into advanced technology overnight. But it must move deliberately beyond its current base — into adjacent industries, value-added manufacturing, and export segments where margins are thicker, and competition is narrower. Complexity is not accidental. It is built through industrial policy, human capital investment, and export incentives that are aligned with where the economy needs to go, not where it already is.

Finally: sterilise remittance inflows rather than consuming them.

When remittance surges push the rupee up, the State Bank should intervene and accumulate reserves — precisely as China managed its trade surpluses — building the foreign exchange buffer that breaks the recurring balance-of-payments cycle.

The cost of another decade

Pakistan’s labour force is expanding by 2m to 3m people annually. That employment will not come from remittances or services alone. It will come from manufacturing and exports — or it will not come at all.

If current trends continue, Pakistan arrives at 2035 with exports still around $25–30 billion, while Vietnam approaches $500 billion and Bangladesh crosses $60 billion. The countries that passed us did not have better geography, more resources, or more stable governments. What they had was a sustained commitment — to keeping their currencies competitive, and to keep moving up the value chain — over a long enough time horizon to matter.

The path forward is not a mystery. It is a choice between continuing to manage symptoms or finally correcting the structure that has held Pakistan back for a generation.

The twin deficit is real, it is measurable, and it is the primary reason Pakistan’s export story reads the way it does. An overvalued currency that taxed every exporter for 30 years. A complexity trap that kept them stuck in thin-margin products with no way up. Energy and tax costs compounded both, and remittances made it all look survivable until the next crisis arrived.

The lesson from the last three decades is clear. Countries that succeed in exports keep their currency competitive, and they keep moving up the value chain. Pakistan did neither, and then added high costs on top. That is the twin deficit. And that is why exports did not grow.

The writer is a business leader and policy advocate focused on export-led growth, employment generation, and competitiveness in emerging economies.

Published in Dawn, The Business and Finance Weekly, May 11th, 2026