Smuggled goods, high energy costs cripple economy

KARACHI: The recent reduction in the State Bank of Pakistan’s policy rate to 11 per cent, nearly half of what it was in July 2024, has failed to generate enthusiasm among the country’s traders and industrialists.

While the rate cut is seen as a step towards easing the cost of doing business, many in the sector argue that it remains uncompetitive compared to regional rates and does little to address the core challenges hindering economic growth.

Industry leaders point to the high cost of production and the rising influx of smuggled goods from countries such as Iran, China, and Bangladesh, which continue to undermine the competitiveness of Pakistani products in both domestic and international markets.

“The market is flooded with smuggled goods — everything from high-quality shoes and garments to food products. New shopping centres popping up around Karachi are full of these imports, and shop owners openly advertise their smuggled stock,” said one frustrated currency dealer. He attributed the failure of anti-smuggling efforts to the foreign exchange used to fund the illegal imports, making it difficult for authorities to crack down effectively.

Despite a sharp rate cut, industry remains sceptical about unresolved policy issues as barriers to economic growth

State Bank data reflects a concerning trend: private sector borrowing remains sluggish, with banks receiving more debt repayments than new loans. This lack of borrowing underscores the reluctance of businesses to invest in a climate where the cost of doing business remains prohibitively high.

“How can we borrow from banks when the cost of doing business here is still far higher than in neighbouring countries?” questioned Javed Bilwani, President of the Karachi Chamber of Commerce and Industry. “Electricity and gas prices are exorbitant, taxes are stifling trade and industry, and policymakers are focused on extracting more revenue while the economy stagnates.”

Mr Bilwani expressed doubt that Pakistan could achieve even 3.5pc economic growth this year, predicting a further decline in exports due to high production costs and the lack of an active Export Financing Scheme. He also criticised the 19pc tariff imposed by the United States on Pakistani goods, which, he believes, will push Pakistan further out of the international market. “Our regional competitors — except India, which faces a 50pc tariff — are in a better position to compete,” he added.

The industrial sector also expressed disappointment over the government’s failure to provide gas to captive power plants, a move that could have alleviated some of the high energy costs for manufacturers.

Instead, a 2pc levy has been imposed. Pakistan continues to rely heavily on expensive imported Regasified Liquefied Natural Gas (RLNG) for electricity generation, while local gas resources remain untapped. The Energy Authority has reported declining electricity consumption, a sign that industry has yet to experience any significant recovery.

“The falling consumption is a clear indication that the industrial sector is not improving. The prospects for growth in FY26 look increasingly bleak,” said another industrialist. He further highlighted the growing shift towards solar energy, particularly among residential users who are turning to alternative sources to mitigate the burden of costly electricity and frequent overbilling.

Former Finance Minister Miftah Ismail recently noted that solar power production in Pakistan has reached 23,000MW, with the sector expanding rapidly as more people opt for cheaper and more reliable energy sources.

Despite the drop in interest rates, some exporters remain disillusioned. Amir Aziz, an exporter of finished textile products, noted that while the 11% rate is half of what it was last year, it has failed to stimulate business activity. “The trade and industry are bogged down by issues like the expanded powers of the Federal Board of Revenue (FBR) to arrest businessmen, excessive taxation, overbilling, and political uncertainty.

Published in Dawn, August 10th, 2025