Pakistan’s growth failure is often explained by familiar clichés: low productivity, weak exports, lack of innovation or insufficient entrepreneurship. These are symptoms, not causes. The real problem lies deeper: in a state-designed cost structure that has made doing business prohibitively expensive and structurally irrational.
A recent private sector analysis published by Nikkei Asia has quantified what companies have been saying for years: operating a business in Pakistan is 34% more expensive than in comparable South Asian economies. That single statistic is not simply a criticism of the policy; It is a post-mortem of Pakistan’s growth model.
According to the study conducted by Pakistan Business Forum (PBF), cost overruns are neither incidental nor cyclical. It is structural, cumulative and policy-induced. Fuel taxes, electricity tariffs, interest rates, currency depreciation and an extraordinary effective tax burden together form a lethal cocktail that drives the national industry out of regional and global markets. This is not the failure of capitalism. It is the State that is failing the economy.
The PBF conclusions, based on industry data through December 2025, expose a simple but devastating reality. Pakistani companies operate with energy and tax costs that no competitor in the region is forced to bear.
Electricity rates average Rs 34 per unit, while the regional average is around Rs 17. Fuel is levied with an additional oil tax of approximately Rs 80 per liter, making energy not an input but a fiscal extraction mechanism.
Interest rates remain at 12.5%, almost double that of neighboring economies where capital is treated as an enabler of growth rather than a source of income. Add to this a currency that has plummeted from 110 rupees to the dollar in 2018 to around 280 rupees in December 2025, and imported inputs (raw materials, machinery, intermediate goods) become prohibitively expensive. Calling this a “challenging business environment” is an understatement. It’s a designed handicap.
The most alarming thing is the effective tax burden, which according to PPD estimates can reach up to 55% for companies, well above regional norms. These are not taxes in the classic sense of financing public goods. It is fiscal overreach that systematically cannibalizes the investable surplus.
One of the most revealing aspects of the data reported by the Nikkei has not to do with companies but with people. Gallup Pakistan shows that wage employment now accounts for 60.1% of the workforce, up from 53.4% in fiscal year 2010-11, while self-employment has declined from 24.4% to 21.8% over the same period.
This change is often misinterpreted as modernization. It is not. In the context of Pakistan, it reflects the risk aversion induced by a hostile business climate. When the cost of compliance, energy, finance, and taxes exceeds potential returns, rational individuals prefer employment to business. This is a policy result.
A young business graduate in Islamabad, quoted by Nikkei, abandoned his plans to open a restaurant after being “persecuted by so many government departments.” Your experience is systemic. The state’s obsession with licensing, regulatory fragmentation and the compliance fetish raise fixed costs to levels that extinguish small and medium-sized businesses before they are born.
Data on the distribution of the workforce over almost three decades reveals a quiet but profound structural change in Pakistan’s economy. In 1996-97, self-employment constituted around 28% of the workforce, along with a significant proportion of family and unpaid workers, categories that traditionally reflect small business activity, family businesses and informal entrepreneurship. In 2010-2011, self-employment had already decreased to 24.4%, while wage employment increased sharply.
The latest figures for 2024-25 complete this transformation: more than 60% of the workforce is now salaried, while self-employment has fallen further to just 21.8% and unpaid family work to around 14%. This is not a benign modernization trend. In the context of Pakistan, it points to the systematic erosion of entrepreneurial space, where rising energy costs, punitive taxes, regulatory harassment and expensive credit have made independent entrepreneurial activity economically irrational.
Instead of producing a dynamic class of risk-taking entrepreneurs, Pakistan’s political environment is steadily turning potential job creators into job seekers, an outcome fundamentally incompatible with sustained growth, export expansion and productivity-driven development.
Gallup Pakistan’s Bilal Ghani correctly identifies another structural distortion: Pakistan’s trade and industrial policies systematically restrict access to cheaper foreign inputs in the name of protecting domestic producers. This is import substitution without competitiveness, protection without productivity.
Instead of integrating Pakistani companies into global value chains, the policies force them to rely on more expensive domestic inputs, raising production costs without generating gains in quality or scale. The result is a manufacturing sector that is simultaneously protected and uncompetitive, a contradiction that no economy can sustain.
Add to this the perception of Pakistan as a high-risk jurisdiction (due to terrorism, money laundering concerns and geopolitical tensions), and companies face levels of due diligence, certification and compliance costs unknown to competitors in other developing economies. These non-tariff costs disproportionately punish exporters and technology companies, the very sectors Pakistan claims it wants to promote.
The impact on exports is severe and predictable. Pakistan’s export performance has stagnated since 2021, with particularly detrimental consequences for textiles, which still account for around 60% of total exports. Hundreds of medium-sized textile companies have closed in recent years, as noted by PBF chief organizer Ahmed Jawad. This collapse is not the result of inefficiency alone. When electricity costs are double those of competitors, when financing costs are punitive, and when regional trade agreements (such as the EU-India deal) tilt the playing field even further, survival itself becomes uncertain. Pakistani exporters are not losing markets because they are incompetent; their own state is discarding them.
At the root lies a deeper contradiction: the State has turned energy prices and taxes into instruments of short-term fiscal stabilization, ignoring their consequences for long-term growth. Oil taxes replace structural tax reform. Electric rates plug budget holes created by inefficiencies elsewhere. High interest rates offset fiscal indiscipline. This is a survival strategy, and a deeply flawed one at that.
By extracting maximum income from a shrinking formal sector, the State accelerates informality, discourages investment and erodes the tax base it seeks to protect. The result is a vicious cycle: higher taxes to cover falling incomes, higher costs to sustain inefficient systems, and lower growth to justify greater extraction.
In December last year, the PBF wrote to Prime Minister Shehbaz Sharif, urging him to set regionally competitive electricity tariffs and impose more rational corporate taxes. These demands are prerequisites for survival.
Pakistan must unlearn three dangerous assumptions. First, that energy can be priced as a fiscal tool without destroying the industry. Secondly, that companies will continue to operate regardless of cost asymmetries. Third, that entrepreneurship can flourish under regulatory hostility and financial repression.
Growth does not occur in political speeches or five-year plans. It arises when the cost of risk is less than the reward. Pakistan has reversed this equation.
The data reported by Nikkei Asia does not simply diagnose a problem; forces you to make a decision. Pakistan can continue to impose taxes, tariffs and regulations until it reaches stagnation, or it can realign its fiscal, energy and regulatory architecture towards competitiveness.
High taxes and expensive energy are not neutral policy instruments. In Pakistan’s case, they have become weapons against growth, quietly dismantling entrepreneurship, hollowing out exports and turning a nation from potential producers into reluctant employees. Until this reality is recognized and corrected, no rhetoric on investment, exports or innovation will revive Pakistan’s growth model. The arithmetic is relentless and the evidence is now incontrovertible.
The author is a Supreme Court attorney who specializes in studying the global narco-weapons economy and its links to terrorism.
Disclaimer: The views expressed in this article are those of the writer and do not necessarily reflect the editorial policy of PakGazette.tv.
Originally published in The News
