Shahid Sattar and Emaan Ahmed
“Business Recorder”
December 24, 2019
Pakistan is unique in many ways and possesses many attributes which should have made it an economic and political powerhouse. We possess immense potential in terms of natural resources, a budding youth population with potential to form an energetic workforce, high quality educational institutes, a highly venerated and nuclear-armed military and a long-standing bureaucracy.
However, the country has failed to capitalize on these capacities and has thus been left far behind its Asian brethren, who just a decade or so ago were at par with it in terms of development. Samuel Huntington in 1993 alluded to Pakistan’s immense potential to project itself as a “natural leader of the Islamic world.” However, we have yet to take off from the starting block in the economic race.
A serious effort was undertaken by the Planning Commission of Pakistan in 2011 to identify why this is so, and these findings from the crux of Pakistan: Framework for Economic Growth (FEG).
Pakistan is now on the brink of the third decade of the 21st century, along with its 8th decade of existence, so it is reasonable to try to assess its standing with respect to economic challenges of decades past and how they have been countered. The FEG outlines a number of crucial economic challenges, and proposes effective strategies for each of them. Although each policy recommendation warrants individual attention, and each aspect of the economy deserves a detailed appraisal, the purpose of this analysis is to provide a holistic overview of the economy with respect to its standpoint a decade ago.
The first challenge identified was a long drawn-out struggle in terms of macroeconomic stabilization; a result of unsustainable policies. During the year of publication of the report, Pakistan’s real GDP had grown by 3.7 percent, as compared with 3.0 percent in FY11. However, the economy underperformed compared with the growth target of 4.2 percent, given the energy shortages, security concerns, and floods in two consecutive years.
Nevertheless, growth was more broad-based compared to FY11, evenly distributed across agriculture, industry and the services sector. On the other hand, investment remained sluggish.
Fast forward to the dawn of a new decade and a look back at a comprehensive growth strategy formulated for Pakistan. In 2018, Pakistan’s economic growth was accelerating but at the cost of widening macroeconomic imbalances – outlining a structural fault in the means of achieving economic growth. The purpose of the 2011 strategy, reiterated multiple times in the report, was to focus on medium to long-term sustainable growth. Yet the means employed in FY19 have primarily revolved around high interest rates, double digit inflation, deterioration of primary and fiscal deficits, continuous private sector losses, cutbacks in investments, large scale unemployment and losses in consumer purchasing power. These can be considered to fall under the unsustainable policies that the report warned against. The graph below shows a decline in real GDP, with the most recent high being 5.83% and the 2019 figure amounting to 3.34%.
A recent assessment of credit ratings by Moody’s Investors Service deems Pakistan’s economic wellbeing to be on the rise, re-categorized from negative to stable, and thus on the road to recovery. Yet this stability is highly conditional upon certain factors, such as a high interest rate, which implies a compromise on long-term economic growth and a drop in investments. Textiles account for the bulk of the country’s exports, and low investment levels are likely to hinder the march towards much needed
rapid growth in exports. With the resulting lack of upgraded technology, our exports and trade deficit will remain bleak in comparison with regional players. There also remains unutilized capacity for immediate expansion in the textile industry, and a policy of rapid growth in exports for economic stabilization can only be applied once the interest rate is suitably set with an aim to facilitate investment.
Apart from high interest rates, there is the issue of double digit inflation which policies aim to target. The hampered process of job creation, low investments, low exports and high imports all are causes as well as outcomes of economic instability.
As pointed out in the FEG, we have historically under-traded with our neighbours and not adopted an appropriate geopolitical approach given our strategic location in South-East Asia. Economic progress has been further hampered by a low level of productive diversification and a weak value-added industry. The country’s position in world trade has barely changed over the past four decades, and has in fact declined recently, despite numerous opportunities to expand exports, particularly manufactured goods, in developed countries.
It’s almost as if the roadmap to economic growth has been read upside down. If the level of trade as a percentage of GDP seemed alarmingly low in 2011, it is lower now, having fallen from about 33% in 2011 to 28% in 2018, following a period of being largely stagnant with and then declining post-2015.
The trajectory of economic policymaking and the ways in which it tends to be unsustainable brings us to another challenge outlined in the FEG, in the form of a legacy of economic distortions. The FEG defines competitive markets as the “starting point towards increasing efficiency and sustained economic growth.” However, Pakistan has faced economic distortions hindering market competition, with the added pressure of high government intervention in business. The role played by the public sector has thus been considered too great, to the extent where it impedes market development. This was the case in 2011, and it is very much still the case today. Government intervention can be quantified by expressing public spending as a proportion of total GDP (Gross Domestic Product). In 2011, this was around 9% and it now stands at roughly 12%. (World Bank).
One effective means of stimulating economic stability and growth is an industrial policy which provides support to exports. Pakistan’s textile exports are currently valued at USD 13.5 billion out of the total exports (23.5 billion), but still account for a very minimal share of 1.7% in the world market for textiles. If we achieve the figure of USD 30 billion in textile exports, we will only have captured only 3% of the market for textiles. For reference, the total trade in textiles as of last year was worth USD 800 billion, so this is not an unrealistic target.
Another factor stifling our intended increase in market share is the illogical level of anti-dumping as well as other duties, rendering the local MMF-based apparel uncompetitive in the world market. Pakistan’s exports should be able to compete in world trade, which is now 70% MMF-dominated. Restricting exports to 30% of the cotton trade is a completely irrational model.
Private sector proliferation can be instrumental in achieving economic growth, as has been the case with Vietnam, a formidable regional competitor which has achieved milestone levels of growth in a short time by giving its textile sector space to flourish through private sector growth and investment. A 2017 resolution in Vietnam allowed for the private sector to be the driving force of Vietnam’s market economy. Given that private businesses experienced volatile growth in Vietnam in the past, this has been a highly effective strategy. Pakistan can achieve similar levels of rapid expansion by following a model of private sector growth and reduced government intervention, so that the textile sector not only attracts higher investments, but is also better equipped to take on the international market. This calls for international market-based pricing for all inputs, notably cotton and energy, in the textile chain.
The FEG also emphasizes pressures of demography. We have a rapidly growing population as well as a youth bulge to address. A large youth component is a very positive aspect, as younger populations have the most potential in terms of innovation, fresh ideas, productivity and entrepreneurship.
With increasing youth comes a greater need to develop our education system, create valuable opportunities for employment, encourage social cohesion and collaboration, and effectively train the youth so that we can unlock their full potential in leading the way to sustainable human development.
Recent developments in the form of the Kamyab Jawaan programme address the youth entrepreneurship factor appropriately. It has reserved a 25% quota for women and also accommodates the transgender community, ensuring the involvement of marginalized and deprived societal groups, and showing progressive thinking in the field of sustainable development.
However, factors which are yet to be structurally addressed include education and industrial employment for youth. Pakistan’s expenditure on education was merely 2.4 percent of the GDP in the fiscal year 2018-2019, whereas neighbouring India allocated 4.6 percent, particularly announcing a 10% increase in the education budget for the year.
Globalization, technological advancements and the development of key industries have created new job opportunities for young people across the globe, while our growing population is continually met with scant opportunities and hampered living conditions. Gone are the days when the state could even think of providing lifelong careers, given the changing economic dynamics of the world. The resulting phenomenon of “brain drain” is defined in the FEG as a loss of high skilled human capital, which is better off migrating to the developed world as there is a dearth of opportunities in Pakistan. We urgently need a policy to retain our educated and skilled youth, with a focus on encouraging entrepreneurial initiatives by fresh graduates.
A majority of the human capital that remains in Pakistan comprises low to medium skilled labor. The largest employer of the country is the textile sector, which accounts for countless jobs at every stage of the textile production process. There exists an array of opportunities where small units of garmenting factories can spring up and capture market share while creating much needed jobs for youth. A small increase in garmenting units can result in an exponential increase in employment, particularly for the unskilled youth that makes up a large proportion of our demography.
Furthermore, skilled workers can be of immense value in ensuring that Pakistan’s textile sector captures the maximum market share globally and achieves a competitive edge. Human resource development must be prioritized, with a specific focus on textile specialization and targeted programs by institutes such as the National Textile University, which can appropriately equip graduates with the initiative to start up their own businesses. Small firms take up minimal capacity and result in higher returns for the economy at large in the form of substantial job creation. These startups can possibly be state-sponsored in order to target rapid employment generation and rapid growth in exports.
There is no other industry or service sector with existing immense potential that the textile sector has to benefit the economy, with a direct impact on foreign currency earnings and new job creation. If synergy is developed amongst different sub sectors and a particular focus is lent to the garmenting industry, economic growth can achieve record heights, as has been the case in the flourishing industries of Vietnam and Bangladesh.
As shown below, Pakistan will have almost 200 million additional people to contend with in 80 years. With a focus on education and creation of job opportunities for youth, these statistics can possibly translate into high productivity and a competitive advantage, rather than a deteriorating standard of living due to scant opportunities and resources.
The FEG sheds light on impacts of external events, including terrorism, political instability and conflicts up until 2011.
It is comforting to see that the wave of terrorism has declined since 2009, as result of military operations conducted by the Pakistan Army. According to South Asian Terrorism Portal Index (SATP), terrorism in Pakistan has declined by 89% in 2017 since its peak years in 2009. Furthermore, action against corruption has been on the rise, and accountability is being given the crucial importance it deserves.
External events and conflicts since the publication of the FEG have included sectarian violence, and clashes with India, particularly in 2019 following unrest in Indian-controlled Kashmir. Such events have a tendency to disrupt economic progress, as priorities need to be reassessed in such cases. An overview of these factors shows that the constraints to economic growth outlined a decade ago still hold true today. The FEG emphasized that the problems in Pakistan related more to software than hardware i.e. there is more hindrance in terms of management and productivity than physical infrastructure. While progress in economic stability and youth engagement is laudable, there remains a need to tackle economic distortions and to formulate effective policies for economic sustainability. This requires a specific focus on supplementing the textile sector’s role in maximizing exports, along with greater efforts to empower, educate and harness the potential of our youth, to encourage investment in human capital and to develop a system whereby external shocks and political instability do not hamper economic progress.
(https://www.brecorder.com/2019/12/24/555974/framework-for-a-sustainable-economic-future/)

Exports: key to sustainable economy
Shahid Sattar, Asad Abbas and Emaan Ahmed
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December 17, 2019
It is encouraging to see evidence that Pakistan is on the road to recovery in terms of economic stability and growth. With a26% quantitative increase in textile exports, the first current account surplus in decades amounting to $20 million, and a place among the best performing stock markets in the world, Pakistan seems to be doing surprisingly well. A recent assessment of credit ratings by Moody’s Investors Service reforms these statistics, deeming Pakistan’s economy to be stable and on the road to recovery.
This news is reassuring, given that the incumbent government was met with the task of reviving an economy in tatters, with an unsustainable balance of payments and complications in financing of external obligations.
How did the economy landed in these dire straits in the first place? The faulty consumption-led growth policies, irrational tariff structures, imposition of duties on import of raw materials and artificially set exchange rates are to blame. In addition to all this, the unsustainable mechanism of borrowing beyond our means precipitated an inevitable day of reckoning.
This reckoning revealed itself in the form of a high interest rate, double digit inflation, deterioration of primary and fiscal deficits, continuous private sector losses, cutbacks in investments, large-scale unemployment, losses in consumer purchasing power and a subsequently lower standard of living.
Taking the worrisome state of affairs into account, the strategies employed to revive the economy included floating the exchange rate to a more realistic level, providing regionally competitive energy to major exporting sectors and issuing pending refunds accumulated under previous governments. These initiatives all played a significant role in spearheading the stability we see today.
This stability has not been attained without a price, and given that we are now at a much better vantage point, there is a need to steer towards a sustainable growth strategy primarily based on exports. This is a crucial step in quelling future dependency on loans.
Progress, particularly in terms of necessary expansion and development, is likely to be difficult if the aftershocks of the recent imbalances in our economy are not systematically addressed. The oft-repeated mantra that the export sector has not shown the desired growth despite the reduced cost of doing business blatantly disregards the root cause.
The aftershocks are broadly two-fold: quantitative and qualitative.
An assessment of quantitative impediments to the textile sector becoming regionally competitive highlights certain urgent causes for concern, along the lines of inhibitory energy tariffs, a renewed set of zero-rating woes, avoidance of crucial refunding and forced duties on cotton imports – all of which inhibit the urgent need to restore a sustainable Balance of Payments and to curtail the dependence on external funding.
Although the Ministry of Energy’s efforts to aid industrialists should not be dismissed, the elephant in the room is yet to be addressed: a sustainable energy tariff for industries. The 25 percent increase in electricity tariffs as a quarterly adjustment coupled with further add-ons is likely to be debilitating. Despite notifications clearly stating that an all-inclusive tariff will be implemented, these developments
will not only shatter confidence in government policies but will also seriously hamper viability. Furthermore, the energy rates have to be fixed for a minimum period of 5 years so that investments in expansion and modernization can be planned and executed.
The withdrawal of zero rating has resulted in the constriction of investible capital in the market, while the cost of borrowing to meet such capital demands has also significantly risen, giving investors little to no incentive to carry on their business activities. Profit margins in the industry are currently around 5-6 percent at most, whereas the funds blocked in GST are of the order of 12 percent of sales, leading to the current liquidity crisis.
As a consequence, there is a dire need to sensitize the FBR regarding its delayed provision of refunds on income and sales tax over the last couple of years. A sum of Rs.100 billion has been collected over a period of five months as sales tax from the textile sector and is yet to be refunded, while the payments for the technological upgradation scheme 2009-14 is also pending. The majority of these refund applications are rejected by the system due to Form-H and unannounced boundaries for acceptance in the FASTER system. Moreover, those applicants whose sales tax returns and forms have been accepted are not being refunded within the stipulated time of 72 hours.
Collectively, these factors give way to lowered market confidence among the industry and a reluctance to subscribe to these subsidized loan schemes in the future. Meanwhile, there are factors such as fully utilized capacities of textile mills, and order books that are overflowing with unmet requirements. Many of our exporters have decided to close their production lines due to a lack of sufficient funds to run these lines feasibly, rendering the opportunities created for an increase in market share unattainable.
Another quantitative impediment to the thriving of our textile sector is the much decreased volume of cotton crop. The current cotton arrival estimates fall far short of what is needed to fulfil domestic requirements of the textile industry, and these shortages force the entire value chain to rely on imported cotton, resulting in further inefficiencies in the manufacturing process. This year alone, the import of a record 6 million cotton bales is required to maintain the previous year’s production and export levels.
This has caused losses worth over Rs 1 trillion to the economy and resulted in the need to import cotton, which is further tainted by a 3 percent customs duty, 2 percent additional customs duty and 5 percent sales tax on its import.
With the increased burden of paying these duties on cotton imports, sustaining competition with giants like China, India, Bangladesh, Vietnam and Sri Lanka becomes an impossible task. It is therefore crucial that these duties be removed if the objective of increasing exports is to be achieved.
This brings us to a qualitative assessment of the inhibiting factors. The cotton crisis is not only stiffing our growth when it comes to numbers, but also due to the deteriorating quality of locally produced cotton. This deterioration can be attributed to seed quality and ginning practices, which are far behind those adopted by other regional players. Most industries have institutionalized advanced scientific methods such as genetically modified seeds and modern ginning practices that have a far higher potential.
Additionally, regional players have acquired more advanced machinery that is cutting edge and has immense potential to maximize productivity at lower costs, while Pakistan’s investment in technical machinery has dropped to the dismal level of 44 percent of what it was in 2005-2006. Investment in technology showed only a 1 percent improvement, whereas regional competitors achieved impressive increases from 2006 to 2015.
================================================================= Investment in Technology (2006-15) ================================================================= Countries Spindles % Change Shuttle Less % Change (Mins) Looms (000) ================================================================= China 55.7 63% 465 78% India 25 28% 78.6 13% Bangladesh 4.29 5% 42.9 7% Pakistan 2.95 3% 7.3 1% ================================================================= Total 88 100% 594 100% =================================================================
Technology upgradation programmes that boost capacity and modernization are essential if we wish to globally competitive. The government support in the form of tax incentives is to be a crucial factor in attracting investments in this regard. Such incentives are widely available to our competitors like Vietnam, China, India and Bangladesh.
Other qualitative factors which need to be considered include a global shift in consumer preferences, from cotton-based apparel to synthetic manmade fibers. In the world market, the consumption of MMF against cotton has tilted to a ratio of 70:30, whereas a decade ago it was quite the opposite. Presently, the most dominantly consumed man-made fabric is polyester. Meanwhile, polyester is heavily taxed at the input stage in efforts to protect the Lotte Purified Terephthalic Acid (PTA) plant. This plant is still running on outdated technology which is no longer used in the manufacture of PTA anywhere in the world, bringing us back to the crucial matter of technological upgradation and how the lack thereof can prove to be disastrous.
Given the importance of considering consumer preferences in an industry like textiles, the protection given to Lotte needs to be reduced to an appropriate level, and the duty on MMF yarn needs to be adjusted to provide incentive for the domestic MMF industry to thrive and fulfill industry requirements. A flourishing MMF industry has the potential to play a crucial role in enabling Pakistan to compete internationally, and would prevent job losses for over 100,000 people.
The amalgam of these unresolved issues is resulting in immense pressure for the textile industry to remain competitive, and this by default will have grave consequences for our economy. There is an undeniable need for a broader long-term policy that ensures investors’ confidence and provides them with a business and investment friendly environment, in order to actualize the goal of export-led growth in the foreseeable future.

High interest rates, low investments
Shahid Sattar and Emaan Ahmed
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December 12, 2019
Sustainable technology and Industry 4.0-enabled technologies, most recently presented at the ITMA 2019 in Barcelona, Spain, are taking the global textile industry by storm. The tech world is rapidly moving forward and R&D in textile machinery continues to make remarkable leaps which, once availed, would prove to be instrumental for Pakistan, given the large share of exports associated with its textile sector. Yet somehow our textile machinery continues to be stagnant at the level of primary level equipment and outdated looms, coupled with the alarming decline in machinery imports.
To textile industrialists’ dismay, the crucial need for machinery upgradation remains unmet, and the fruitful benefits associated with recent technology sadly continue to be a remote prospect for the industry. The Pakistan Bureau of Statistics shows textile machinery imports to have fallen by around $60 million during the fiscal year 2019. The data below depicts a consecutive decline in textile machinery imports since April 2018, and this trend has spilled over into the current year with an 8% drop from the previous period. (Source: Business Recorder, 2019).
It is clear that factors impacting the textile industry have a direct bearing on Pakistan’s economic health, turning textile machinery into an issue of national importance which requires urgent attention. Therefore, the urgent requirement of technological upgradation in the textile industry cannot be emphasized enough, given that textile outputs account for the vast majority of Pakistan’s exports. These outputsare valued at about $13.5 billion, making up for 61% of the country’s total share of exports.
It is essential to consider the structural impediments to textile sector growth if there is any hope of restoring Pakistan’s economic health in the foreseeable future.
The most crucial aspect hindering our textile sector from achieving its true potential is the imbalance in the economy: a direct result of the high level of interest rates. The consecutive hike in interest rates in recent times can be attributed to desperate attempts to counter high inflation, which is yet another matter of contention.
The bar chart below depicts the rising inflation over the last few months.
The strategy of countering high inflation with high interest rates brings to mind the idiom fighting fire with fire, and it is none other than the path to a healthy economy that burns as a result.
An economic formula whereby interest rates are raised for a certain period in order to stabilize the economy can possibly be deemed effective in certain Highly Developed Economies: a title which Pakistan’s economy is a long way off from attaining. HDEs tend to have surplus currency tied up in mortgages or consumer financing. Therefore, it is only logical that such a formula be limited in its application to those economies which are in a similar state, while a policy more suited to developing economies should be used in Pakistan’s case.
Furthermore, high interest rates belie the impression of a stable economy in the short run, while long-term economic health continues to be endangered due to the volatile nature of an economy with an interest rate as high as 13.25%.
The high interest rate and resulting influx of “hot money” into the Pakistan economy has several negative implications for Pakistani industry, and the textile sector is bearing the brunt of the pressure given the expectation to contribute largely to the country’s exports.
Presently, the textile sector has its order books at full capacity, and has managed to identify gaps where there is potential for additional capacity and upgradation, yet filling these gaps is proving to be an elusive task, given the high interest rate. Investments of $3-4 billion have been planned but no endgame is in sight when it comes to their implementation.
Furthermore, high interest rates not only curtail investment, but also make it virtually impossible for the concerned industries to remain profitable. The spike in interest rates has all but put a complete stop to investment, upgradation and technological advancement in various industries.
Subsequently, the low level of investment has worsened the state of affairs, particularly for productive sectors which are now struggling to maintain productivity. The abrupt rise in factory shutdowns and closing of textile businesses are causes for concern.
Furthermore, the cost of doing business increases indefinitely with the rise in interest rate, which also implies hindrances in access to capital, leaving businesses to fend for themselves and struggle to make ends meet with no fallback option. Investors are also less likely to put money into active projects as the high interest rates make these options volatile and high-risk.
All these factors result into a spillover effect with mass downsizing, stifled economic activity and stagnation in GDP growth. Thus, it comes as no surprise that technological advancement is rendered a distant fantasy for an industry facing an economic crisis.
A vicious cycle emerged where policymakers begin to scramble for shortterm solutions to dig their way out of their present misery – only to find themselves in a bigger conundrum in the long run.
Below is a comparison of two graphs depicting interest rates over the last 20 or so years, those in highly developed economies as well as those in Pakistan:
Through a comparative assessment, the Pakistan economy appears to be trapped in the preliminary stages of a crisis not unlike the one faced by East Asian countries in the late 90s, and more recently by Egypt. If history is any indication, there is no easy way out of this grave Pakistan has dug itself into.
The natural tendency for policymakers at this stage seems to be advocating for the maintenance of the prevailing interest rate. This is because lowering it will undoubtedly lead to an abrupt withdrawal of “hot money” funds by investors, who will instantly seek out higher rates of return via other economies. This will translate into short term chaos, owing to the collapse of what appears to be holding up our economy at the surface level.
However, what is truly required is an analysis of the grassroots level implications of lowering the interest rate, and the long term factors which make it essential to do so.
Although the withdrawal of hot money financing will result into a massive short term burden that may appear difficult to fall back from, given the increased pressure on the Rupee and on the foreign exchange reserves that will remain, this reduction is crucial for restoring Pakistan’s economic health.
Due to the resulting decrease in the overall import bill, a lowered interest rate will allow for greater capital investments, eventual job creation and improvements in technology, research and development.
This will have particular advantages for the textile industry, and will be a welcome shift from the prevalent method of concessional financing and the challenges it presents. Given that around 90% of the textile industry consists of indirect exporters, the textile industry operates in a largely fragmented chain structure wherein separate entities exist for each function, be it printing, dyeing, weaving etc. The concessional financing that is set aside for the textile sector can thus not be availed by each of these separate fragments in the textile industry again, and therefore, it is not producing the desired impact.
A more suitable policy needs to be adopted that caters to this issue at the grassroots level. If certain funds are being allocated to the textile industry, it should be in a manner that allows for them to be availed by the entire chain.
A more adaptive financial model and a focus on more productive capital investments, particularly in technology, will have a wide, far-reaching impact that will bear fruits for generations to come. It will allow for a much-needed increase in our presently abysmal level of exports, and will also tackle the increasing burden of unemployment at the root. As we have often heard, good things come to those who wait, and desperate shortcuts towards stability make for long delays.
Therefore, the need for a long-term policy featuring lower interest rates cannot be underestimated. Its implications for a brighter economic future which generates foreign currency, employment and the economic betterment for the people of Pakistan cannot be denied.