The International Monetary Fund (IMF) has called on Pakistan to immediately halt preferential treatment, tax exemptions, and other protections for its agriculture and textile sectors, which have hindered the country’s economic growth for decades, according to a report published on Monday by The Dawn newspaper.

In its recent staff report, the IMF blamed these two key sectors for not only underperforming in terms of revenue generation but also for consuming a significant portion of public funds while remaining inefficient and uncompetitive. The IMF argued that these practices have stifled Pakistan’s economic potential and contributed to its recurrent boom-and-bust cycles.

The IMF's assessment comes as part of the recently approved USD 7 billion Extended Fund Facility (EFF), under which Pakistan has committed to breaking away from its past economic practices. The IMF emphasised that these outdated policies have prevented the country from modernising its economy and improving living standards, leaving over 40.5% of the population living below the poverty line.

According to the IMF’s report, released on October 10, Pakistan lags behind other countries in its peer group in terms of economic complexity and innovation. The country has struggled to diversify its export base, remaining reliant on agriculture and textiles, such as cotton yarn, rice, woven fabrics, beef, and leather goods. This focus has limited Pakistan's ability to produce more technologically complex and knowledge-intensive goods, the report said.

In 2022, Pakistan ranked 85th in the Economic Complexity Index, the same position it held in 2000, signalling little progress over the past two decades. The report pointed out that while Pakistan does export some high-value products like medicines, medical instruments, and plastic goods, these industries operate in a "heavily distorted economic environment."

Tariffs on intermediate and final goods were also highlighted as obstacles to competitiveness and domestic market expansion. The IMF warned that these tariffs were hampering Pakistan's transition toward more advanced manufacturing sectors.

The textile industry, in particular, was singled out as having the highest tax gap relative to its value added. Between 2007 and 2022, the sector benefited from subsidies, preferential tax treatment, concessional financing, and favourable input pricing. The IMF noted that as of May 2024, 70% of outstanding concessional loans from the central bank were tied to the textile sector.

The IMF recommended that Pakistan focus on simplifying its trade policies under the upcoming National Tariff Policy (2025-29). It urged the government to avoid using tariffs as a tool for industrialisation, stating that such policies weaken exports, hinder integration into global value chains, and promote rent-seeking behaviour.

Additionally, the IMF warned that trade policies aimed at supporting specific domestic sectors, such as export subsidies and local content requirements, should be discontinued as they contribute to resource misallocation and may violate international agreements.

Comparing Pakistan's export performance to other regional peers, the IMF observed that its export growth has remained weak, particularly during the 2010s. It identified several complex products that are within reach of Pakistan’s current export base, including glassware, paints, chemicals, industrial fabrics, cosmetics, and rubber products.

However, the report stressed that for these industries to flourish, Pakistan must create a level playing field for businesses, remove targeted policies, and enhance integration into global trade. This includes improving access to imports, both for intermediate inputs and final goods, to stimulate domestic competition.

The IMF concluded that removing fiscal incentives and protectionist policies would help reallocate resources more efficiently, promote price discovery, and unlock Pakistan's economic potential.