Former finance minister warns of unsustainable policies, low growth

Former finance minister and economist Dr Hafeez Pasha described the State Bank of Pakistan’s (SBP) foreign exchange interventions as unsustainable in an interview on private television. He explained that the SBP purchases dollars entering the system through informal money transfer systems to ensure that the rupee does not depreciate too much against the dollar, while also building foreign reserves.

Currently, the rupee operates under a managed float regime relative to the  dollar, effectively trading within a range of Rs278 to Rs280 per dollar. For reference, a managed float regime is a system in which a currency’s value is loosely pegged to another currency, allowing it to fluctuate within set limits.

However, Pasha has outlined how this will serve to the detriment of domestic exports as artificially inflating the value of the rupee reduces export competitiveness. If the SBP moves from a managed float regime to a purely floating system, the rupee may depreciate significantly. Experts, on the other hand, believe that it could cause export growth to skyrocket.

He further critiqued the policy against exporters, highlighting how they now face a 29 percent income tax, which sat at just one percent prior to the International Monetary Fund’s (IMF) austerity measures. Reports quoting Pasha indicate that the government has rescinded its support for exporters while countries such as Bangladesh and India are granting tax cuts to their exporters. 

He outlined how economic growth will likely remain below two percent for fiscal year (FY) 2024-25 despite the federal government’s efforts. However, projections from the World Bank indicate that Pakistan's economy is expected to grow by 2.7 percent during the current FY.

According to Pasha, the reason for the abysmally low growth rate lies in the shrinking of sectors such as large-scale manufacturing and cotton. As per reports, cotton production has witnessed a 28 percent fall, which spells bad news for a textile exporting nation, as cotton is a major input material in textiles. 

The decline in cotton production could stem from the domestic textile sector’s increasing reliance on imported cotton. Recent reports indicate that millers and ginners were opting to buy imported cotton, which, up until recently, would arrive duty-free into the country, while local cotton farmers were subjected to an 18 per cent General Sales Tax (GST).

However, reports from April 2025 suggest that the federal government withdrew the GST on the sale of domestically produced cotton. Analysts believe that the government will have to reshuffle its policies to witness economic revival.