Pakistan at a crossroads: trade and industrial policy dilemma

Record remittances have reduced debt pressures, with the current account deficit at $98 million as of August 2026 and foreign exchange reserves at highest-ever levels of more than $21 billion after the receipt of Eurobond sale proceeds, according to an analysis by an assistant professor of economics and research fellow at CBER, IBA. The writer attributes the relatively low deficit to record remittance inflows, noting that oil price volatility and the closure of the Strait of Hormuz have added to regional complexity. Debt obligations in FY26, however, were above $21.5 billion, of which $10 billion is expected to be rolled over. The analysis says this cushion is providing shock absorbers at a time of growing global uncertainty, and that it may be the right time to address long-term balance of payments issues, especially as the IMF programme approaches its latter phases. True economic sovereignty, it argues, will only be realised if Pakistan can structurally transform its economy into one that is productivity-driven, generates export competitiveness and reduces dependence on external financial support and funding from its diaspora.

Pakistan is at a crossroads with its new trade and industrial policies that propel the manufacturing sector while making local producers globally competitive, the analysis says. It notes that Pakistan has one of the lowest levels of value addition in the manufacturing sector as a percentage of GDP, gross fixed capital formation as a percentage of GDP, and exports and imports as a percentage of GDP in the Asian region. The lack of capital accumulation, poor levels of industrialisation and an inward-looking industrial strategy have not only affected its ability to produce and export output effectively but have created an industrial sector that is unproductive and uncompetitive, as regional competitors investing in their physical and human capital continue to propel industrial growth and diverge away in terms of economic activity and growth. The recent draft of the Auto Policy 2026-2031 sets export and localisation targets to increase domestic exportable production, while the National Tariff Policy 2025-2030 is being implemented. A clearly laid path to tariff reforms will help reduce uncertainty and allow businesses to implement long-term decisions, with less competitive businesses likely to exit, leaving a larger playing field for the more competitive and efficient ones. The new auto policy also provides significant incentives to new electric vehicles, offering them tax incentives that would increase their penetration, which will help reduce the oil bill and lower the adverse environmental impact as Pakistan relies mostly on petrol and diesel consumption to power its transportation sector.

To understand the potential for growth in the auto industry, the analysis points to Vietnam and Morocco, two developing countries that have undertaken massive restructuring of their auto sectors. While Pakistan produces approximately 200,000 units, Morocco produced more than 500,000 units in 2025. Morocco primarily manufactures and exports cars to the EU, with more than 80% of its OEM production exported, while Vietnam has strong linkages in parts and accessories trade with the EU, US and Japan. Both countries take advantage of almost negligible tariff rates offered by their trading partners on their exports, and both have developed a vast network of deep trade agreements with their major trading partners that involve lower tariffs on both imports and exports and ensure that the burdening costs associated with non-tariff measures (NTMs) are significantly reduced. Unfortunately, Pakistan has not only failed to integrate itself with its major trading partners by creating a more extensive network of free trade agreements, especially within the Asian region, but has also made little progress to remove the costs associated with the non-tariff measures. The resistance to the National Tariff Policy 2025-2030 is a clear indication of the challenges in propelling productivity and trade growth.

The analysis of GVC-related data extracted from the UN ESCAP's Regional Integration and Value-Added Database paints a stark picture for the auto industry. Pakistan's gross exports, which crossed borders more than once, in the transportation equipment sector was about $100 million, of which 32.8% was foreign value added. Approximately $58 million of direct value-added exports were consumed in the export destination. Vietnam reported a massive increase of GVC-related exports from about $3.6 billion in 2015 to $11.5 billion in 2024. A larger proportion of its exports are intermediate parts and accessories rather than final goods, which are assembled downstream in its trading partners. More than $4 billion worth of its exports in the auto sector incorporate foreign inputs. Vietnam's focus is mainly on the supply of parts and accessories, which is vastly different than other Southeast Asian countries, which focus on exports of final product. Their localisation rates remain low, with parts and accessories produced mainly for export. Unfortunately, ESCAP does not report data on Morocco.

Morocco did not try to reinvent the wheel by adopting an inward-looking strategy as it focused on attracting FDI, offering a predictable and low tariff regime as well as free zones to encourage investments. Vietnam ensured that its local producers meet the same requirements that are expected from foreign companies in terms of standards of production, while creating an effective ecosystem to support local production. However, Pakistani producers have focused on extracting benefits from a captive market without any desire to compete and innovate as they have been successful in locking out foreign competition. Although some of the concerns of manufacturers, such as security-related issues, are valid and require a long-term geopolitical solution, many of the concerns regarding high costs of business must be tackled through business reforms and better industrial strategies. Policies must compel OEM to allow participation of their local vendors in regional and global value chains and contracts that limit export sales must be discouraged. This will require incubation of smaller-sized vendors with better financing, R&D facilities and easier access to quality certifications. Pakistan must harmonise its global standards to ensure that its exporters are able to more easily access more competitive markets. The current SRO regime has done significant damage to industries across the economy and the plan to dismantle it must continue. In essence, the approach must be holistic with wide-ranging reforms that can structurally improve the industries and provide a platform to boost export sales.