Shahid Sattar and Zainab Malik

According to Nadeem Akhtar, a political analyst, “Double-digit growth in India and China were unimaginable 40 years back. It was only when they finally embraced the market economy and opened up for international trade the pace of development gained momentum. Pakistani economy has to break free of the political shackles for the sake of the future of the teeming millions.”

The economy of Pakistan has been hovering at a growth rate of about 4%, which is well below the rate required for meaningful economic growth. The country is experiencing rapidly increasing population, which, unfortunately, has not been exploited to its true potential. In order to create employment opportunities for this growing population, there is need for growth to be sustained at approximately 7-8% for at least another decade. Therefore, issues that have kept the growth rate in the country undesirably low need to be actively addressed and solutions must be sought.

GDP growth rate of Pakistan from the period 2012-2021

Economic performance in the country can be characterized by structural bottlenecks, low savings and investment and persistently high circular debt. Additionally, political challenges, bureaucratic procedures, lack of security and the undesirable situation of the domestic industry, due to lack of effective government policy and reforms have constrained ease of doing business in the country and have led to high costs and lack of productivity and innovation in the domestic industry.

There is government intervention in the marketplace which has strained businesses and has sabotaged their capacity to work at their full potential. It exercises control through various state-owned enterprises, direct market interventions and mass ownership of land and capital. Industries in Pakistan experience lengthy and time-consuming government regulatory frameworks which result in excessive paperwork, rent-seeking, high transaction costs, trade barriers and overall strain the business environment in the country, ranking Pakistan low on the ‘Quality of Regulation’ Index. Furthermore, excessive protectionist policies by the government have inhibited the growth of competitive markets, leading to deep-rooted inefficiencies.

An evolving and perhaps the most pressing issue prevalent in the country is that of persistently high energy related accumulated costs, better known as circular debt. The last 4-5 governments have failed to resolve this issue and it has been continuously mushrooming so much so that it has now reached an alarming atomic catastrophe level. There is an extremely high circular debt of Rs 2.5 trillion in the power sector and that of Rs 1.2 trillion in the gas sector. Fundamentally, this has arisen because of a skewed energy pricing structure in the country which makes recovery difficult from consumers cross-subsidizing uneconomic supplies. These discrepancies strongly signal towards the inefficiencies, mismanagement, corruption and inadequate planning exhibited by the government owned distribution companies and agencies in the country.

The recent Competitive Trading Bilateral Contracts Market (CTBCM) power sector initiative, aimed at creating wholesale competition in the power sector, is a classic case study on how to not develop a framework of reforms. The initiative severely lags on practical grounds. With long-term generation contracts in the power sector, there is no place for free suppliers; therefore, generation competition is not likely to be achieved in the near future. Renegotiation of all Power Purchase Amending agreements of existing Independent Power Plants is one way to free up some power generation and guarantee 50% of capacity, with the balance traded through wheeling or sold directly from a power exchange on B2B basis. Wheeling or third-party access in gas and power sector is the first step towards development. However, NEPRA has long been unable to implement wheeling, despite repeated directives to Discos to implement. Obstructions such as unreasonable and irrational costs in wheeling charges under CPPA’s proposal have hindered the formation of a free and competitive power market.

In Pakistan, the government is immersed in almost all major sectors such as agriculture, power and gas sector, banking, construction, as well as daily market activities. Additionally, government regulations carried out by the FBR (Federal Board of Revenue) in the form of Statutory Regulatory Orders are a regular source of government intervention and hinder the competitiveness of markets in the economy.

A paper published by Raja Rafiullah and Dr Nadeemul Haque reveals that the government’s total footprint is as high as 67% of the total economy. This confirms the un-ignorable, dominant presence of the government and the consequent crowding out of private investment. Pakistan has long been caught in a low saving-investment trap. Factors such as low income, high double-digit inflation, persistent macroeconomic instability and a low growth rate in Pakistan have all led to historically low savings rate in the country. A low income denotes that there is not enough money to save and generally, a lower propensity to save, especially in the presence of increasing costs and heightening inflation. Moreover, the country’s growing population and a large degree of unemployment have resulted in a high dependency ratio, which has further put pressure on savings. Other important determinants of saving behavior include culture and preferences which reveal that in Pakistan people have a higher tendency to spend than save. A low savings rate in turn degenerates the volume of funds available for investment, resulting in lack of capital accumulation, which is an important prerequisite for much needed industrialization and economic growth in the country.

Another major reason for low investment rates in the country is the inordinate government regulations in the country which deter the ease of doing business. “Although a range of factors amalgamate together to cause low investment rates, one reason that hinders private investment is the heavy footprint of the government on the economy”, according to a paper published by Raja Rafiullah and Dr Nadeemul Haque. All of these factors, along with the political and economic instability in the country, have led to exorbitantly low savings and investment in the country.

To set foot on the path of sustainable economic growth, it is vital to increase investments in the country by way of enhanced savings which can be brought by encouraging a saving culture within the country through financial schemes and better incentives for saving. Provision of employment opportunities for the large bulk of unemployed population will reduce the dependency ratio in the country and people will have enough income left to be able to save. Enhanced savings will lead to higher investment and capital accumulation in the country, both of which are significant facets of economic growth and prosperity. Furthermore, ameliorating the overall business environment in the country is of utmost importance. There is a need to put an end to the inefficient practices of the government in order to ensure productivity, efficiency, innovation and competitiveness, which would only be possible by way of deregulation, decentralization and privatization in the marketplace and eventually adopting a free market economy.

In a market economy, there is free interplay of supply and demand which is driven by businesses and consumers, each of whom work towards their best interest, inducing lower cost of goods and innovation, in the absence of disruptions caused by government regulations that artificially inflate costs. Sellers have an incentive to reap the benefits of innovation, in the form of increased profits, by selling creative new products that have an edge above their competitors. Hence, free markets give rise to competition and thereby, induceefficiency, improving the overall state of businesses in the country. This is evident from the enlightening performance of the textile industry in the country, which is a reflection of a true market,with a large share of goods sold internationally. Bulk of textile products are exported, fostering high innovation,technological advancement and value addition, higher than any other sector in the country.

Innovation can further be attained through better management, which can be ensured through investment in human capital in the form of training programs for employees. Looking at China as an example, the number of workers in the textile industry manning 100,000 spindles is 1/10th that of Pakistan. This reveals a huge gap in the labor force efficiency of the two countries. Therefore, learning from Chinese workers, under the CPEC (China Pakistan Economic Corridor) umbrella, will be especially beneficial for the country’s workers. Pakistan’s foremen need to be trained in order to adopt Chinese work practices and methodology. In Pakistan, the textile sector provides employment to approximately 40% of the total labor force. In light of proper training by Chinese workers in the country, employed under the China Pakistan Economic Corridor, the textile workers can further enhance productivity and ensure resourceful outcomes at a faster pace, leading to an even larger share of the country’s textile exports.

Provision of such conducive environment to all sectors in the country is vital for their growth and prosperity, enabling them to increase their export capacity and thereby, rescuing Pakistan’s economy from persistent trade imbalances due to significantly lower exports than imports. Without undue government intervention, firms will move towards open competition and will strive to stay in business. Free markets precipitate lower costs, innovation, rapid advancement, increased competitiveness, improved productivity, improved brand recognition, new partnerships, increased turnover and through this channel, enhanced profitability. Businesses and industries need to be provided with a growth enhancing environment that would allow them to flourish and expand capacity, thereby, creating a larger market share of Pakistan’s products across the globe.

Shahid Sattar and Amna Urooj

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.

Paul Krugman, The Age of Diminishing Expectations (1994)

Productivity is frequently demarcated as a ratio between the output volume and the volume of inputs. More specifically put, it revolves around the notion of measuring the efficiency of production inputs including but not limited to labor, capital inter alia in order to generate a certain degree of output in a given economy. It is considered a pertinent source of economic growth and thereby enhances competitiveness in the market. Moreover, it is an important indicator when cross country comparison is being done in terms of economic performance. This can be elucidated by the fact that productivity data sets of any country are majorly used to explore the influence of product coupled with the market regulations on the economic performance of the country, as stated by the Organization for Economic Co-operation and Development (OECD). Using such data sets, a projection of future productive capacity of different economies is made possible. Likewise, analysts and policy makers are in a vibrant position to effectively determine and regulate how to utilize this capacity while appraising the locus of economies in the business cycle, consequently, forecasting the economic growth. It is also used to evaluate demand and inflationary compressions.

Considering the aforementioned background information, the importance of productivity is crisp and clear. Unfortunately, for a developing country like Pakistan, productivity is an issue that it has been facing since decades now, even after its inception seventy-four years ago in 1947. The current situation of productivity in Pakistan is catastrophic in nature whereby the country is running low on productivity. This can be reinforced through the fact that according to Global Economic Data, Indicators, Charts & Forecasts by CEIC most recently Pakistan Labor Productivity dropped by 2.54% YoY in June 2019, compared with a growth of 3.09% in the previous year as can be seen below. On the contrary, Bangladesh’s Labor Productivity improved by 6.05% YoY in Dec 2019, compared with a growth of 5.61% in the previous year. The stark difference can be reinforced through the Global Competitive Report 2019 whereby the per worker labor productivity in Pakistan grew 1.4% annually between 2000-2017. On the contrary, Bangladesh grew by 3.9% and other regional competitors such as India (5.8%) and China (8.5%) also reflected greater growth within the same period as compared to Pakistan. Additionally, Pakistan ranked 107 out of 141 countries with reference to competitiveness and a ranking of 120 in Labor Market Efficiency. The scores are debilitating and require attention from the policy makers to make any meaningful response.

A quick glance at the solutions to uplift the productivity of the country revolve around an in-depth analysis of the productivity indicators across the value chains of its key industrial sectors in order to attain sustainable productivity as well as a high economic growth (Asian Productivity Organization – APO). The industrial sector of Pakistan is largely comprised of the manufacturing sector with few players such as the textiles whereby its production grew by almost 6% in the nine months through March 2021 and the sector accounted for 60% of total exports according to Finance Division, Pakistan. Moreover, the sector displayed double digit growth in December 2021 (17%) in comparison to the same month of 2020 amounting up to 1.64 billion dollars.

Source: PBS/PRAL

The overall performance of the manufacturing sub-sector i.e. Large Scale Manufacturing (LSM) was influenced by the textile sector majorly with the highest weight of 20.91 in Quantum Index of Manufacturing (QIM) recently. The woolen segment contributed largely to the production hike. On the other hand, COVID-19 brought many American and European importers at the helm of Pakistani textile exporters due to turbulence in trade of regional countries.

According to Pakistan Bureau of Statistics (PBS) data, total yarn production in the year 2020-21 was 3.44 million tonnes, on the contrary, 0.39 million tonnes of cotton yarn was exported in the same period that accounted for only 11.33% of total production for that year. Therefore, roughly 89% of cotton yarn produced in the country is available for the domestic market which has been converted into higher value “productivity exports”.

Subsequently, in quantitative terms, cotton yarn exports have lessened by 25%, from 0.522 million tonnes in FY18 to 0.390 million tonnes in FY21, which accounts for 26% in terms of value. The textile industry of Pakistan’s exports comprises of synthetic blended and specialized cotton yarn, fabrics, and finished fabrics to international market, which results in economies of scale and subsequently makes Pakistani textile products competitive in global markets. The drop in yarn and cloth exports is obvious from the fact that value-added exports have remarkably augmented and revealed extraordinary growth during FY21, cataloguing 37% in knitwear, 29% in bed wares, 32% in towels, and 19% in garments. This is a result of better utilization of resources, in other words “productivity.”

Productivity and exports are profoundly and directly proportional as the latter not only brings foreign exchange into the economy but is also indispensable for financing the desired imports and additionally reducing macroeconomic risks such as exchange rates, unemployment rates and interest rates etc., thereby creating quality employment avenues while pulling labor out of informal economic activities pertaining to low productive gains. Most importantly, exports lead towards productivity gains via an increase in scale and exposure to new sophisticated global clients/consumers (Varela, 2021).

Another area in the textiles that requires attention is the diversification of products. Since the sector comprises of the longest production chain, it is also inherently blessed with a potential of value addition at almost each stage of the chain. Immense potential lies in the cotton production stages ranging from ginning to finishing and everything in between. Product diversification has dynamic effects as reinforced by many countries as well as various studies. One case is that of Japan specifically in the 1990’s whereby its textile firms adopted technological modernizations along with product diversification which favored profitability and led to an increase in productivity. This leads to a long-term growth path that yields sustainable productivity (Colpan, 2006).

The COVID-19 pandemic has brought an ever expansive market growth of Non-Woven Fabrics, primarily used in the making of masks, PPE and many other medical-grade products. Such fabrics are arranged in patterns and fused using chemicals, heat and pressure. The global market of Non-Woven fabrics is projected to reach $26 billion by 2026 which promises a bright future for the Pakistani textile industry as can be seen below. Pakistan just needs to tap into the Non-Woven Fabric Market.

The global markets are more skewed towards textile trades (almost 60%) in Man Made Materials (MMF) now. The reason for this expansionary alteration in the demand is the advantages of MMF such as elasticity, strength and resilience etc. Unfortunately, Pakistan is being denied an opportunity to prosper in this flourishing market of MMF, both internationally as well as domestically, because of the duty protection given to obsolete plants. Likewise, the MMF tariff regimes in Pakistan also avert it from coming at par with global MMF markets. This can be elucidated by the fact that global textile trade comprises of 30% cotton and 70% MMF, whereas in Pakistan it’s the opposite i.e. 70% cotton and only 30% MMF which needs to be reversed. We are still stuck with producing short-staple fiber raw cotton majorly rather than moving forward with MMF according to global demands.

This highlights another issue that is of polyester staple fiber which dominates the global synthetic fibers industry. It is irrational to apply any duties upon it. Yet, startlingly, there is a 7% customs duty on the import of polyester staple fiber right now, racking up the total import duties. This subsequently falls in the range of 20% meanwhile including antidumping duty as well. This aspect alone is accountable for the dearth of diversification into new synthetic materials and hence productivity.

The effective and efficient management of the supply chain of the textile industry is an important factor that promises a bright spot for productivity. The long supply chain consists of production of raw materials and clothing production, inter alia. Stricter supply chain management (SCM) lead towards manufacturers striving hard to amplify their product quality, decrease the product and service costs and shorten the product delivery plus response time in an ever evolving, globalized world with a highly competitive market. The Bangladeshi textile industries have successfully managed through lower inventories leading to improved productivity, lowering costs and shortening lead times, gaining greater customer loyalty and witnessing higher profits adopting effective SCM (Ali M. & Habib Md., 2012). SCM should be the primary focus of Pakistani textile industry to augment competitiveness and productivity.

Finally, various studies have revealed that improvements which target labor productivity in factory conditions and services to workers by increasing incomes of workers, their welfare and skillsets consequently have a multiplier effect on the productivity (Ahmed, N. 2009). Working on this model, APTMA proposed a 20% increase in the minimum labor wage in March 2021, which was positively implemented by the government. The remaining thing to be done, however, is chalking out a comprehensive and rigorous technical and non-technical training module for the textile sector labor according to professional suitability to improve their skillset and hence productivity. This would require a close liaison with a public-private partnership of training institutes such as Technical Education and Vocational Training Authority (TEVTA), National Vocational and Technical Training Commission (NAVTTC), Institute of Professional & Technical Training Private Limited (IPTTPL) etc.

A multidimensional policy approach to restructure the textile sector of Pakistan is sine qua non for any meaningful change in terms of national productivity. The sector is trailing its competitiveness in the international market because of the impediments discussed in this article. Therefore, it is absolutely necessary to improve productivity for a sustainable future.

Shahid Sattar

Any increase in exports is always a function of the elasticity of the inputs that make up the goods exported. These inputs are multifaceted, subject to factors including but not limited to technological advancement, research and development, education and skill level, economies of scale, law and order situation, political stability, and most importantly, competitive advantage in the production of goods. In a recent analysis published on Twitter, it was posited that a “favorable exchange rate” explains the increase in export quantity in recent years.

However, this analysis fails at many levels; firstly, as it is outdated, neglecting to account for the monumental export growth achieved in the past year alone, only considering values up until a certain date in 2020; and secondly, by making a false attribution between exports and exchange rate where no clear link is present. Above all, considering a sole factor such as exchange rate results in a unidimensional and therefore fallacious analysis, contrary to which there is extensive literature revealing that the relationship between the indicators of exports and exchange rate is statistically insignificant.

Numerous studies cover the theoretical as well as empirical aspects in order to demonstrate the complex relationship that exists between currency level in a country and its trade, making it near to impossible to chalk out a clear causal effect. In one study, Hooper and Kohlhagen (1978) established a trivial and negative association between exchange rate of a country and its trade. Furthermore, all inputs of Pakistan’s exporting sectors are dollar based, including but not limited to raw materials, energy, dyes & chemicals, machinery and spare parts etc, and it has been ensured that they are measured in dollars in order to reduce risks posed by currency volatility, thereby providing an unwavering and secure economic and investment climate. Being a developing country with a high inflation rate, Pakistan implements full dollarization for its industrial imports. This itself refutes the concept of debilitating exchange rates affecting the trade of the country.

In FY21, Pakistan’s goods and services exports amounted to nearly $31 billion. This growth was shown to be aided mainly by three factors: lower interest rate, regionally competitive energy prices, and a lower cost of doing business. While there have been, to a certain degree, supportive policies for the export industry over the past 3 years, this support has given back to the economy manifold, due to the multiplier effect of export growth. As an example, Bangladesh’s export-oriented industry benefits from unwavering government support, competitive energy and exemplary DLTL system which strengthens its exporting industry as the mainstay of the economy. This is why the economy of Bangladesh is now ranked the fastest growing in the world, in stark contrast to Pakistan’s case where government support for industry is deemed to be a “subsidy.” To the contrary, a subsidy is defined as financial aid or support in order to bring costs below the market rate, while the exporting sector in Pakistan flounders to obtain the very basic market rate and nothing below that.

Competitive energy rates are not subsidies; they are the minimum requirement for the industry to remain at par with regional competitors. Supportive policies that included competitive energy enabled the industry to attract sufficient investment to begin expansion in capacity and technological upgradation. However, recent policy instability threatens to reverse the industry’s progress. It is critical to prevent this from happening, by continuing the provision of energy at regionally competitive tariff rates, for the country’s long-term economic stability and GDP growth. Even with these minimum requirements, Pakistan’s export based industry is far from achieving the necessary upgradation and innovation. Systemic inefficiencies, administrative delays, and ever increasing cost of doing business all have contributed to an unsustainable business environment, and each of these factors must be considered each time there is talk of export numbers.

Pakistan relies on very limited items for its exports, rendering its export base very narrow with a focus on low value-added products. These include products related to textiles, agriculture, pharma sector etc. These prominent categories of exports contribute to more than 70% of total exports with textile exports solely contributing more than 60%. Pakistan has not increased its export base as it lags behind in terms of product diversification, with narrow market capture and a low-tech based production competing against constantly evolving global players. This signifies that a factor like exchange rate has no significant effect on a narrow base export economy like Pakistan, a point emphasized previously in a study by the National Tariff Commission of Pakistan titled “Impact of Exchange Rate on Pakistan’s Exports”.

It is important to note that prior to any assessment of the

impact of exchange rate depreciation on exports, imports and employment, one must consider the overall state of the country’s economy and policies. The rupee plunged over 58 percent against dollar in 2021 as compared to 2015 on average (from Rs 103 to Rs 163). Following this currency devaluation, the cost of doing business rose due to increasing prices of energy, raw materials and freight. This devaluation served as beneficial for one group in particular: domestic producers such as cotton farmers, who benefited from both the devaluation of currency and the rise in international prices of cotton. In the last season, cotton farmers were paid Rs 400 billion additional payments on account of higher international cotton prices.

The export sector experienced a period of stagnancy up until recently, as the costs of doing business far outweighed government support, leading to an unsustainable environment for export-led growth. The costs of doing business were racked up by persistent issues in pending refunds of exporters (some of which still remain pending), load shedding, high energy costs, high interest rates, all of which reversed any supposed positive impact of rupee devaluation.

Three primary factors influence the impact of depreciation on external trade and related sectors. Domestic pricing, inflation in other countries and macroeconomic conditions and policies during the devaluation phase. The first two components determine the real effective exchange rate and external competitiveness. The nature of exports and imports, as well as export capability, determines the benefits. The amount of depreciation that contributes to greater economic activity and hence increased export capacity is determined by macroeconomic conditions and policy. The profits from depreciation would be compromised if any of these aspects were lacking.

There was no rupee depreciation during the PML-N’s tenure when inflation was low. Even a small depreciation of rupee then could have effectively lowered the exchange rate. The damage in terms of lower exports had been set in motion when the rupee began to fall in 2018 with the change in government. Similarly, the problem with the Balance of Payments started to get out of hand and the state of the economy began to deteriorate. Following that, the country implemented contractionary policies. To combat inflation and attract foreign money to manage FX holdings, the interest rate was increased from 6.5 percent (in May 2018) to 13.25 percent (from July 2019 to March 2020), followed by a Covid-19 reversal. After July 2019, the government began implementing the IMF’s expanded strategy, which includes lowering subsidies, hiking energy and petroleum costs, and raising interest rates, etc.

Slow economic growth, high inflation, a decade-high interest rate, and rising energy prices have all contributed to higher production costs, lowering any supposed gains from impulsive devaluation. The private sector’s ability to simulate economic development and increase investment has been limited as a result of the high interest rate. Any benefits of depreciation in recent years were outweighed by the economic downturn and rising production costs. Overall goods and services exports in FY20 were $ 28 billion, down from $ 30.62 billion in FY18 and $ 30.22 billion in FY19, according to data from the State Bank of Pakistan. Despite the depreciation of the rupee, Pakistan’s exports fell in 2020, which is testament to the fact that there is no link between the two.