Exports remained stagnant despite the fall in the rupee

For years, Pakistan relied on traditional levers such as currency devaluation and energy subsidies to boost exports. However, despite multiple rounds of rupee devaluation, the country’s export earnings have remained largely stagnant.

According to an empirical analysis by the Lahore School of Economics (LSE), it is not price adjustments, but innovation, diversification and access to high-income markets that really drive export growth.

The comprehensive study, covering product-level data from 2003 to 2024, found that Pakistan’s exports, both in US dollar terms and as a share of GDP, have remained mostly stable over three decades. The report said that repeated exchange rate depreciations have failed to achieve the desired increase in exports, whether in textiles, non-textiles or services. “Exchange rate movements, once considered the main policy tool to promote exports, no longer have the same bite,” the report observes.

In contrast, the study highlighted that the diversification of export products and markets, as well as the increasing sophistication of exported goods, have a stronger and more consistent impact on export performance. “Greater export diversity is associated with higher merchandise exports, highlighting the importance of expanding the export base,” the report said.

The textile sector, the traditional backbone of Pakistan’s exports, has seen limited growth despite many incentives and subsidies. The analysis revealed that lower corporate taxes tend to support textile exports, while high tax rates have a moderating effect. Meanwhile, the non-textile and ICT sectors, though smaller in scale, responded more favorably to the lower import duties. The report noted that a 1% reduction in average tariff rates led to an increase of $0.07 billion in non-textile exports and $0.27 billion in ICT exports.

However, the report warned that broad tariff cuts could exacerbate balance of payments pressures if not properly targeted. It recommended that reductions in import duties be focused on capital and intermediate goods used in export industries rather than across-the-board cuts.

Energy pricing, often cited as a major constraint, did not appear as crucial in the analysis as many policymakers assumed. The report found only a weak negative relationship between natural gas tariffs and export volumes, and virtually no relationship between electricity tariffs and export performance. This suggests that energy costs, although burdensome, may not be the main obstacle to export growth.

The report also highlighted the role of foreign demand as a critical factor driving exports. It found that an increase in foreign earnings, particularly in developed economies, has a significant positive effect on Pakistan’s exports of textile, non-textile products and services. This means that tapping into high-income markets and moving up the value chain could have a much greater impact than domestic price interventions.

From a policy perspective, the report called for a paradigm shift in Pakistan’s export strategy, from reactive price-based measures to proactive capacity-based industrial policies. He argued that while short-term fixes such as depreciation and energy adjustments may provide temporary relief, they cannot sustain long-term export growth without innovation and technological upgrading.

The report cited firm-level studies showing that exporters that invest in new products and processes tend to be more productive and competitive internationally. However, the country’s overall productivity has stagnated due to limited technological depth and weak links between industry, research institutions and export markets.

Pakistan’s export basket is dominated by low value, low complexity products such as cotton yarn, basic textiles and unprocessed food. The report recommended expanding into related but higher complexity products such as technical textiles, electronic components and knowledge-based services to unlock greater export potential.

Ultimately, LSE’s analysis challenges the conventional wisdom about Pakistan’s export stagnation. It suggests that exchange rate management and tariff modifications can no longer substitute for the structural transformation urgently needed by the economy. The report concludes that a true export-led growth model will depend on fostering innovation, building human capital and developing industries capable of competing in global markets, not just the cheaper rupee.