ADB says Pakistan lacks industrial strength to withstand prolonged high inflation

Pakistan's economy lacks the industrial capacity, export diversification and productivity needed to withstand prolonged periods of high inflation, making it more vulnerable to economic shocks than countries such as Türkiye, according to a policy brief released by the Asian Development Bank (ADB).

The report, titled Beyond Inflation: Industrial Capability and External Resilience in Pakistan and Türkiye, argues that inflation rates alone do not determine economic resilience. Instead, a country's ability to cope with inflation depends on factors such as industrial strength, export competitiveness, productivity, logistics infrastructure and fiscal capacity.

According to the study, Pakistan faces greater economic pressure under inflationary conditions because of structural weaknesses, including a narrow export base and limited industrial capabilities.

The report notes that Türkiye has continued to record economic growth despite experiencing exceptionally high inflation due to its diversified industrial sector, which includes automotive manufacturing, machinery and equipment production. Pakistan, by contrast, remains heavily reliant on traditional industries such as textiles, leather products and food processing.

These three sectors account for more than 73% of Pakistan's exports, while the country's share in global exports has remained around 0.2% despite repeated currency depreciations aimed at improving competitiveness.

The ADB said currency depreciation generates different outcomes in the two economies. In Türkiye, a weaker currency often boosts exports and foreign exchange earnings as firms can quickly expand production and compete in international markets. In Pakistan, however, depreciation primarily raises the cost of imported fuel, machinery, raw materials and other essential inputs, contributing to inflation without producing a comparable increase in exports.

“Pakistan's tradable sector is too narrow to offset rising import costs through higher exports,” the report stated.

The study also highlighted differences in fiscal capacity. Türkiye's tax-to-GDP ratio stands at approximately 17-18%, compared with Pakistan's 9-10%, providing Ankara with greater room to support industry and respond to economic shocks.

Foreign direct investment was identified as another key difference between the two countries. The report said Türkiye consistently attracts larger and more stable investment inflows, helping domestic firms integrate into global value chains and adopt new technologies. Pakistan, meanwhile, continues to receive relatively modest levels of FDI, limiting technology transfer, productivity gains and access to export markets.

The ADB acknowledged the role of workers' remittances in supporting Pakistan's external position, noting that they have contributed between 6% and 9% of GDP over the past decade and helped the country avoid more severe balance-of-payments pressures.

However, the report cautioned that remittances cannot replace export-led industrialisation. While they support consumption and help cushion economic shocks, they do not directly create industrial capacity, productivity improvements or export competitiveness.

The study also pointed to weaknesses in logistics and connectivity. While Türkiye benefits from integrated supply chains and transport links connecting Europe, the Middle East and Central Asia, Pakistan continues to face transport bottlenecks, weaker logistics networks and higher trade costs that limit its ability to expand exports.

The report concluded that strengthening industrial capability, broadening the export base, improving productivity and enhancing logistics infrastructure would be critical for improving Pakistan's resilience to future inflationary and external-sector shocks.