Reviving Pakistan’s industry: Bold policy or business gamble?

If all goes as planned, Pakistan is set to unveil its first-ever industrial policy in August. The draft, currently under review by the stakeholders, outlines a range of incentives and structural reforms to nudge the reluctant business community to invest in industrial expansion.

Haroon Akhtar, Special Advisor to the Prime Minister on Industries and Production, is leading the government’s effort to reverse the what some business leaders describe as ‘premature deindustrialisation’. His team aims to expand Pakistan’s industrial base, widely viewed as too narrow for a country its size and economic potential.

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Haroon Akhtar recently confirmed that the policy is still being finalised. “All key areas have been thoroughly debated by stakeholders, including officials from relevant ministries, regulators, policy experts and representatives of the business community. We are now very close to consensus on all major points. Once finalized, the policy will be presented to the Economic Coordination Committee of the Cabinet, and upon approval, it will be formally announced”, he stated.

Senior official sources involved in the process revealed that, since some proposed concessions could impact the revenue stream, the IMF must be kept in the loop. However, they stated that many elements of the policy do not have fiscal implications.

“Any changes to the existing framework, especially those affecting revenue, require the IMF’s nod”, one source noted. “It’s well known that the Fund is wary of special tax breaks for select groups or sectors, viewing them as market distortions that have previously led to revenue leakages without results desired”.

Proponents of the proposed concessions in the policy draft point to a range of factors behind the manufacturing sector’s underperformance and limited capital flow into industrial projects. These include high utility costs coupled with poor service quality, high interest rates, mismatched loan products, and weak consumer demand.

External shocks, such as Covid-19, floods, political and security instability, have further compounded challenges. They also cite an excessive compliance burden, a heavy tax load and inconsistent tax regime (particularly unresolved sales tax issue), inadequate and costly logistics, complex regulations and inefficient, expensive contract enforcement as key obstacles to industrial growth.

“Concessions are essential given Pakistan’s cost disadvantages in energy, taxation and interest rates compared to regional competitors”, argued a member of the official team.

“Recognising the industrial sector’s critical role in capital formation, economic growth, job creation and improving the current account, the government is committed to reversing its decline”, he added.

Pakistan has made significant industrial progress, growing from just 34 industrial units at independence in 1947 to over 265,000 registered manufacturing units today. However, this growth has been uneven and fallen short of the country’s potential in terms of scale quality and export volume.

While manufacturing has consistently featured in development plans, Pakistan has never adopted a stand-alone national industrial policy, not under civilian governments, quasi-military setups or martial laws regimes over the past 78 years.

In contrast, peer countries like India and Bangladesh introduced industrial policies soon after independence and have revised them multiple times, six times in India and eight in Bangladesh. India’s 1991 industrial policy remains in effect, while Bangladesh adopted its latest policy in 2022.

Historically, Pakistan’s industrial growth has seen sharp fluctuations. During the first two decades after independence (1948-1968), the sector experienced a robust expansion, with large-scale manufacturing growing at an average rate of 9.1 per cent.

Growth slowed considerably in the 1970s, averaging just 3.9 per cent, due to the loss of East Pakistan, the global oil crisis, and nationalisation policies. The 1980s saw a recovery under the Zia administration, with growth averaging 8.1 per cent.

Between 1988 and 2008, Pakistan’s industrial growth remained volatile, marked by alternating periods of expansion and stagnation. The average growth rate during 1988-1998 was 3.5 per cent rising to 4.5 per cent between 1998-2008.

From 2008 to 2018, industrial output grew at an average rate of 4.7 per cent. Since 2018, the trajectory has again been erratic. Based on official annual data, the average industrial growth rate from 2018-25 stands at 3.5 per cent. A series of shocks, including Covid 19, floods, economic crises, political turmoil and inconsistent policies, contributed to this subdued performance.

Growth fell from 5.8 per cent in 2018 to negative 5.7 per cent in 2020, rebounded sharply to 7.8 per cent in 2021, then dropped again to negative 3.7 per cent in 2023. It has since recovered modestly, with a reported rate of 4.7 per cent in FY2025.

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When approached, most business leaders were reluctant to comment formally on the policy process or its reported contents. Some expressed scepticism, particularly those displeased with the government’s strong-arm tactics during the renegotiation of power purchase deals with independent power producers.

“Who can guarantee that the next government will honour the commitments made by this one?” said one prominent business leader on condition of anonymity. “Industrial investment is a long-term commitment, and no one I know is eager to tie up capital under such uncertainty. It will take significant effort from the government, and time, for the business community to recover from recent setbacks and take official assurances seriously.”