Pakistan’s failure to grow 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-engineered cost structure that has made business activities prohibitive and structurally irrational.
A recent private sector analysis reported by Nikkei Asia has now quantified what businesses have been saying for years: operating a business in Pakistan costs 34% more than in comparable South Asian economies. This simple statistic is not simply an indictment of politics; it is an autopsy of Pakistan’s growth model.
According to the study conducted by the Pakistan Business Forum (PBF), the additional cost is neither incidental nor cyclical. It is structural, cumulative and policy-driven. Fuel taxes, electricity tariffs, interest rates, currency depreciation and an extraordinary and effective tax burden together form a deadly cocktail that excludes national industry from regional and global markets. This is not a failure of capitalism. It is the State that is failing the economy.
The PBF findings, based on industrial data through December 2025, reveal 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 hovers around Rs 17. Fuel is burdened with an additional oil tax of around Rs 80 per litre, converting energy not into an input but into a tax extraction mechanism.
Interest rates remain at 12.5%, almost double those in neighboring economies where capital is treated as a facilitator of growth rather than a source of income. Add to that a currency that has collapsed from Rs 110 per dollar in 2018 to around Rs 280 in December 2025, and imported inputs – raw materials, machinery, intermediate goods – become prohibitive. Calling this a “challenging business environment” is an understatement. This is a technical drawback.
Most alarming is the effective tax burden, which, according to PBF estimates, can reach up to 55% for businesses, well above regional standards. This is not a question of taxation in the classic sense of financing public goods. It is budgetary excess that systematically cannibalizes investable surpluses.
One of the most revealing aspects of the data published by the Nikkei concerns not companies but people. Gallup Pakistan shows that wage employment now accounts for 60.1% of the workforce, up from 53.4% in the 2010-11 financial year, while self-employment declined from 24.4% to 21.8% during the same period.
This change is often misinterpreted as modernization. It’s not. In the Pakistani context, this reflects risk aversion induced by a hostile business climate. When the cost of compliance, energy, finance, and taxation exceeds potential returns, rational individuals choose employment over business. This is a political result.
A young commerce graduate from Islamabad, quoted by Nikkei, abandoned his plan to open a restaurant after being “hounded by many ministries”. His experience is systemic. The state’s obsession with licensing, regulatory fragmentation, and compliance fetishism increase fixed costs to levels that extinguish small and medium-sized businesses before they are born.
Data on labor distribution over nearly three decades reveals a discrete but profound structural change in Pakistan’s economy. In 1996-97, self-employment accounted for around 28% of the labor force, alongside a significant share of family work and unpaid work – categories that traditionally reflect small business activity, family businesses and informal entrepreneurship. In 2010-2011, self-employment had already fallen to 24.4%, while salaried employment increased sharply.
The latest figures for 2024-25 complete this transformation: more than 60% of the working population is now employed, while self-employment has fallen further to just 21.8% and unpaid family work to around 14%. This is not a trivial trend towards modernization. In the Pakistani context, this speaks to the systematic erosion of entrepreneurial space, where rising energy costs, punitive taxation, regulatory harassment and expensive credit have made independent business activity economically irrational.
Instead of producing a vibrant class of risk-taking entrepreneurs, Pakistan’s policy environment is gradually transforming potential job creators into job seekers – an outcome fundamentally incompatible with sustained growth, export expansion and productivity-driven development.
Gallup Pakistan’s Bilal Ghani rightly identifies another structural distortion: Pakistan’s trade and industrial policies systematically restrict access to cheaper foreign inputs in the name of protecting domestic producers. It is import substitution without competitiveness, protection without productivity.
Instead of integrating Pakistani companies into global value chains, the policy forces them to rely on more expensive domestic inputs, which increases production costs without bringing gains in quality or scale. The result is a manufacturing sector that is both sheltered 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 businesses face levels of due diligence, certification and compliance costs unknown to competitors in other developing economies. These non-tariff costs disproportionately penalize exporters and technology companies, the very sectors Pakistan claims to want to promote.
The impact on exports is both serious and predictable. Pakistan’s export performance has stagnated since 2021, with particularly damaging consequences for textiles, which still represent around 60% of total exports. Hundreds of mid-sized textile companies have closed in recent years, as PBF chief organizer Ahmed Jawad noted. This collapse is not just due to inefficiency. When electricity costs double those of competitors, when financing costs are punitive, and when regional trade deals – such as the EU-India deal – further distort the playing field, survival itself becomes uncertain. Pakistani exporters are not losing markets because they are incompetent; their price is set by their own state.
At its core lies a deeper contradiction: the state has transformed energy pricing and taxation into short-term fiscal stabilization instruments, ignoring their consequences for long-term growth. Oil levies replace structural tax reform. Electricity rates fill budget holes created by inefficiencies elsewhere. High interest rates compensate for fiscal indiscipline. It’s a survival strategy – and a deeply flawed one.
By extracting maximum revenue from a declining 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 revenues, higher costs to maintain inefficient systems, and lower growth to justify continued extraction.
In December last year, the PBF wrote to Prime Minister Shehbaz Sharif, calling for regionally competitive electricity tariffs and more rational corporate taxation. These requirements are prerequisites for survival.
Pakistan must unlearn three dangerous assumptions. First, this energy can be priced as a fiscal tool without destroying the industry. Second, businesses will continue to operate regardless of cost asymmetries. Third, entrepreneurship can thrive in a context of regulatory hostility and financial repression.
Growth doesn’t happen in political speeches or five-year plans. It appears where 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; it forces a choice. Pakistan can continue to tax, tariff, and regulate to the point of stagnation, or it can realign its fiscal, energy, and regulatory architecture toward competitiveness.
High taxes and expensive energy are not neutral policy instruments. In Pakistan’s case, they have become anti-growth weapons, quietly dismantling entrepreneurship, gutting exports and transforming a nation of would-be producers into reluctant employees. Until this reality is recognized and corrected, no amount of talk about investment, exports or innovation will be able to revive Pakistan’s growth model. The arithmetic is merciless and the evidence is now indisputable.
The writer is a Supreme Court attorney and specializes in the study of the global narco-weapons economy and its links to terrorism.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the editorial policies of PK Press Club.tv.
Originally published in The News
