by Shahid Sattar 

Private investment has been declining in Pakistan for several years, which is no surprise given how rapidly private investors have been losing confidence in the economy. Investment is heavily based on perceptions, and hurting industry sentiments with frequent policy changes serves to destroy business confidence and break the pillar of trust in the government. Market perceptions and demand are two critical factors for encouraging investment, and while the demand is present for now, perception is quite poor thereby putting export growth at risk and giving our competitors an advantage. The government needs to take measures to rebuild confidence which has largely been sullied by the energy sector with its frequent and illogical policy distortions.

Fundamentally, the traditional sources of equity capital for investment are business profits, savings and through the stock exchange. In Pakistan’s case, the country suffers from one of the lowest gross savings rates in the world. As of 2019, Pakistanis saved 12.3% of GDP. For comparison, the world and South Asian average is 24.69% and 27.97%, respectively. The country’s current account has been in near-constant deficit throughout the last 15 years. The trend can be coincided with the degree of savings (as a % of GDP). Despite maintaining a stable trajectory, savings rate has never been adequate enough to compensate for the current account deficit. In fact, it has actually declined since reaching its peak in 2003 at 24.5%, resulting in a low savings-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 the historically low savings rate in the country.

The main impediment to a higher savings rate is by and large the limited availability of disposable income. To increase savings, minimum wages must be increased to at least PKR 25000 – a policy recently announced by PM Imran Khan and supported by APTMA. In 2021, the Patron in Chief of APTMA proposed to Imran Khan’s government that the best way to serve the poor and disadvantaged working classes was to raise the minimum wage by at least 20%, which is expected to improve not only standards of living but also the savings rate. Incentives to invest and access to stock market need to be significantly increased for the industrial sectors to prosper. With a more fulfilled workforce, productivity improves, and this productivity coupled with the government’s provision of RCET have contributed to higher profitability, thereby leading to a surplus and driving investment, creating a cycle conducive to economic growth. Furthermore, in Pakistan the average firm size tends to be much smaller than the global standard, while other regional textile players benefit from much larger and more integrated firms. The government must take measures to incentivize larger, amalgamated firms which can access the stock exchange and raise more capital for expansion and investment.

In addition to Pakistan’s imports being greater than the exports, they are also more expensive, since exports largely comprise raw materials while imports mainly consist of finished goods which have higher values. This persistent current account deficit has had an adverse impact on the country’s GDP, foreign exchange as well as employment levels. Furthermore, the export sector experiences several barriers in the form of taxes, high tariffs, poor and inconsistent policies, lack of technological advancement and poor diversification, all of which have rendered Pakistan’s exports somewhat uncompetitive. To a large extent the RCET policy offset these disadvantages; however, despite global trade increasing rapidly, Pakistan’s exports have still been unable to make a notable share in the global market.

Investments in the textile sector will enable the sector to expand and diversify, while creating jobs in the process, thereby increasing employment in the country and moving towards sustainable growth and economic prosperity. However, this target cannot be achieved if the energy tariffs in the country are not regionally competitive. Pakistan already experiences lack of investment, both domestic and foreign, owing to the unstable political and business environment. Yet, in the last year $5 billion investment was made in the textile sector due to higher profitability, increasing orders, RCET and TERF.

The industrial sector of Pakistan can be characterized by limited resources, lack of technology, unskilled labor force and lack of investment. Moreover, there is increasingly high foreign debt which has put continuous pressure on the economy. Therefore, it is crucial to support industries with export capacity in order to improve their productivity and provide them with an environment where they can work at their full potential. The textile industry in Pakistan contributes more than 60% to the country’s exports and is a major source of employment in the country, driving the country to a path of sustainable economic growth.

Development of value chain relationships is an essential part of the modern-day economy. Now that Pakistan has been able to establish an industrial base, its needs to make efforts to develop vital supply chains. For this purpose, it particularly needs to focus on its cotton sector keeping in view the ever-rising demand for cotton by the textile industry. Pakistan is the fifth largest cotton producer in the world; however, inconsistent policies, low investment and lack of technological upgradation have created bottlenecks in the sector, resulting in heavy reliance on cotton imports to meet the industrial requirement. Efforts should be made to improve global value chains by strengthening industrial and agricultural connections to foster innovation and productivity.

Fundamental changes are required in the country’s agriculture policy in order to enhance production and conserve the forex lost to excessive agricultural imports. Should Pakistan’s agricultural sector achieve 50% of the productivity that is the norm of neighboring countries with comparable soil conditions, the GDP of Pakistan stands to rise by many trillions of rupees which would pave the way for an exportable surplus and a secure economic future for Pakistan. At present 50% of Pakistan’s cotton is imported, even though we have the capacity to produce more than we need and under normal circumstances, should be exporting it.

Growth in the domestic market and other prospects like Free Trade Agreement with China, the regional Textile Production-Consumption Hub and CPEC, all provide investments opportunities.  The China Pakistan Economic Corridor in particular provides a unique opportunity for Pakistan to boost its strategic and economic position. It has the potential to transform Pakistan into a regional hub for trade and investment. The project covers four key economic areas which include energy, transportation, infrastructure and industrial cooperation. CPEC, once fully implemented, has the potential to transform Pakistan’s economy from a low growth mode to a high and sustainable growth economy by removing key infrastructural bottlenecks and promoting balanced regional growth and connectivity.

Regional and global connectivity is crucial to meet technological requirements, improve marketing and branding and eventually creating global recognition. The quality of exports must be improved by minimizing inefficiencies and enhancing productivity. Measures to expand and diversify the country’s export market will in turn result in employment opportunities in the country. Moreover, the export earnings, necessary for balancing import payments, will increase, thereby, reducing the trade deficit. This requires correct and favorable policies that would lead to sustainable growth in the export market and overall uplift the country’s economy.

To maintain the pace of industrial expansion and increase in exports, there must be continued investment in upgradation and expansion, as well as new projects. Profitability and competitiveness must be maintained, with a focus on export-led growth in order to maintain Pakistan’s economic and political sovereignty through the implementation of a long term policy of uninterrupted energy supply and regionally competitive energy tariffs. Furthermore, measures are required to ensure access to capital funds and availability of credit. Policies should target and facilitate young innovative companies in order to build them up and help to modernize Pakistan’s business environment.

Shahid Sattar and Amna Urooj

The fastest-spreading virus known to humankind till today – Omicron, is not only hitting the global population but also the global economy. The newly emerged strain of COVID-19 virus was first detected in Southern Africa in late November 2021 and is on its way towards a further debilitation of the already crippled world economy. The world economists have a widespread agreement amongst themselves that the virus which is here for over two years now has severe negative impacts on the global economy by impacting global stock markets, affecting industries, disturbing travel and tourism, influencing oil prices, and most importantly jolting the international trade which is highly dependent upon supply chain spanning the globe.

Previously, COVID-19 has obstructed international trade considerably and in several ways. The upshot of the damage in an importing country was principally due to a decline in the aggregate demand in that importing country. The reduction in demand occurred due to a reduction in people’s earnings and also their visits to retail outlets due to restriction on movement. On the other hand, in the case of exporting countries, the subsequent damage exhibited as a drop in the production scale and the export stock in that particular country. The main cause of this was that in exporting industries such as textiles, where remote work is less or not feasible at all, exports fell consequently. This is because the governmental response included introducing lock downs to curb the spread of the virus. Such phenomenon can be backed up by conclusions of various research studies such as that of Meier and Pinto (2020) which concluded that American industries with a hefty coverage to intermediate goods imported from China incurred a great loss in manufacturing sector. This, however, doesn’t stop here as the continual emergence of different strains and their sub-strains are disturbing the global economy and the latest, most contagious strain Omicron is no different. Different countries are facing different economic issues with regard to it and are using different economic policy measures to curb the impacts.

China, the epicenter of the virus, succeeded in controlling the pandemic and downward sloping economic growth quickly by its “zero-COVID tolerance policy” which it still holds on to. This meant quite stringent lockdown measures. The second-largest economy, documented the first contraction in decades due to the epidemic in the first quarter of 2020. Until now, policy easing persisted with a rate cut. However, an official growth target may or may not be published in March. According to Capital Economics, as of now, it is not clear yet that how the new variant will impact China’s manufacturing sector. Meanwhile, the country will review its policies regarding issues and difficulties faced by foreign trade companies in a timely manner through scientific ways as it has done previously.

The clothing factories and gas deliveries around one of China’s biggest seaports in Ningbo have already started facing shutdowns due to the increased outbreak of the new variants in the country, directly affecting the exports in the near future. The main hub of exports production Guangdong is also getting affected causing lockdowns in Beijing which is on its way towards organizing the Winter Olympics. China continues to follow its zero-COVID tolerance policy as the vaccinations are not considered effective enough to deal with the accelerating infection rate, the country’s hospital capacity is also lower. However, equally important is the fact that another nationwide lockdown coupled with a real estate sector slowdown, is expected to leave a negative impact on the country’s economy by dampening the growth rate. Economists predict that China’s zero-tolerance policy is expected to do more bad then good in the current fiscal year. For example, Goldman Sachs, has just slashed its forecast for Chinese economic growth in 2022 from 4.8% to 4.3% which is coarsely equivalent to half of last year’s growth rate. Morgan Stanley is of the similar opinion.

Interestingly, as a response to this, the leaders are ensuring that economic outlook is stabilized through easing out the policy stance for the upcoming important Party Congress in October 2022 whereby the Chinese President Xi Jinping is also extensively anticipated to pursue a historic third term in office, emphasizing the prerequisite of stability in the meantime.

The easing out of policy stance includes an easing of monetary policy e.g. marginally lowering various interest rates along with cutting banks’ reserve requirements. The central bank has also proclaimed additional set of rate cuts. The lack of electricity has also eased since the onset of October 2021. Consequently, so far, there doesn’t seem to have been a long-term effect on trade. Customs data show that the China’s trade surplus was $676 billion in 2021 which was an all-time high indicating that China’s strategy might actually be aiding. According to Pinpoint Asset Management, a possible reason for this can be a shift of export orders to China from other developing countries. To wrap up, the country does not seem to have any tangible exit strategy from the pandemic.

 China’s neighbor, Vietnam, has taken fewer heavy-handed policy actions so far, but like China has levied some of the stringent COVID-related policy measures as revealed by the University of Oxford through its COVID-19 stringency index. The Southeast Asian nation ensured that its factories keep running in the course of its deadliest COVID wave last year. This included lodging workers on site. It is probable that it will do alike in the most recent wave. Since, it is estimated that Omicron variant could augment further burden on supply chains disrupted by the pandemic, Vietnam is also imposing updated border controls to seal themselves off in an attempt to curb the spread.

Quite recently, it has admonished millions of its workers to relinquish trips home during the Lunar New Year holiday due to qualms that mass travel will increase the infections and consequently lead to a probable shutter of factories in one of the world’s key manufacturing powerhouses. The country is a linchpin in the global supply chain while being a pertinent manufacturing base for top companies such as Intel and Samsung, and with a large export turnover from the textile sector the local governments are trying hard to keep the factories open.

Quite recently, the factory activity appeared to be on the restoration with Manufacturing Purchasing Managers’ Index (PMIs) presenting growth in Vietnam recently. The country’s PMI jumped to 53.7 in January 2022, recording one of the highest growth in the ASEAN region. Moreover, the Central Institute for Economic Management forecasts that Vietnam’s economy will grow by 6% in 2022. On the other hand, World Bank, predicts it to be 6.8%. However, if the Omicron remains uncooperative, the labor demand of the Ho Chi Minh City will be around 255,000-280,000 staff members which would be the maximum at more than 78,000 in the year’s first quarter directly affecting the exports of the country. Moreover, the government is keen to enhance more debt to boost growth, even if it essentially raises its deficit ceilings. If this happens, Vietnam will be treading on a road to economic recovery.

Bangladesh, the world’s second-largest exporter of apparels is most likely to suffer in exports in the current wave only if its export destinations impose lockdowns and businesses shutdown. For example, if the pandemic continues in the next two to three months, the country’s export to Germany will suffer as after the USA, Germany is the second-largest export destination of Bangladeshi export goods. The country exported over $5.6 billion worth of goods to Germany last fiscal year of which more than 95% were apparel articles. Unfortunately, Germany reported record 208,000 new COVID-19 cases on 2^nd February 2022 and also expects a rise in death cases. This suggests that not only German economy will be hit hard but it will also impact the exports of Bangladesh as this may result in fewer procuring of consumer goods like leather goods, readymade garments and jute products.

An export earnings target of $51 billion has been announced by the Bangladeshi government for the fiscal year 2021-22, projecting a 12.37% year-on-year growth. $43.50 billion of the target will be achieved from goods consignment with a growth of 12.23% and the rest $7.5 billion from services with a growth of 13.15%. On the contrary, recently the prices of fabrics, yarn, transportation and energy have amplified, accelerating the cost of production of the Ready Made Garment (RMG) sector making it go through tough times. The Bangladesh Textile Mills Association (BTMA) has also reported a loss of $ 1.75 billion to the textile sector in the last three months due to energy crisis. Similarly, although apparel exports are on the rise, indicating no Omicron effects yet, the retailers are witnessing high footfalls in the two pertinent export destinations even in the post-Christmas lean period, as conveyed by industry insiders.

On the bright side, the Bangladeshi apparel industrialists are hopeful that despite the Omicron, new orders will continue to flow in and the export growth trajectory will sustain for at least the following few months in United States and European markets. Not only this, because of increasing freight costs, the retailers are also attaining 5%-6% higher prices and no exporters have been confronted with any withdrawal or hold-up of orders yet.

India has witnessed few signs of instability and ambiguity due to ongoing Omicron wave and despite that, it intends to stabilize it by tapping appropriate, economy friendly policy measures through provision of cushion to trade and businesses by the government. The country’s exports hit an all-time high amounting to $37.81 billion in December 2021 which is more than 10 times the monthly amount at the turn of the epoch. However, the latest threat of Omicron has affected the currency and stock markets indicating a probable disturbance of exports in the future through soared raw material prices and costs of logistics. Voices are being elevated for the government to tackle this issue.

The reason for this confidence is that it has loosened its fiscal and monetary policy so that it can power through the pandemic-induced slump. Not only this, but it has also loosened up both its monetary and fiscal policies to power through the pandemic-induced slump. It vows to keep this stance as it is for as long as it will be required to support growth. On the other hand, it is expected that the Reserve Bank of the country will also not update its interest rate in the upcoming monetary policy which will consequently drive growth and extend support despite Omicron. The afore mentioned economic policies along with a more rapid pace of vaccinations, decrease in cases, has ensured growth and consistent, robust exports.

Finally, Pakistan, for whom the International Monetary Fund (IMF) has just approved $1bn loan tranche and has projected a real GDP growth rate at 4 percent for 2022, is toiling hard to rectify its economic conditions. The country has gone to great lengths to stabilize its already debilitating economic growth, already hit by the pandemic, by implementing smart lock downs since the start. This measure has not only supported the exports in the country through pandemic but has also contributed positively to the national economy by diverting the export order from the closed industries of the neighboring countries especially for the textile sector such as from India and Bangladesh. The sector is all set to witness a surge in export orders again through movement from rivals, as reported by Bloomberg. The government is also planning to roll out incentives for exports to capture new markets.

The textile sector exports, which is one of the country’s bright spots economically, are poised to increase by 36 percent from previous year, making a record of $21 billion for a period of 12 months ending June. The country’s Commerce Adviser, Mr. Razak Dawood has also predicted a whooping expansion to $26 billion in the upcoming calendar year. Owing to current statistics, the country is also becoming competitive with Bangladesh.

A proposal is lined up for the upcoming month to provide incentives to Pakistani export sectors amidst the surge of the new wave of Coronavirus. This includes measures such as tax breaks, cheap loans and provision of electricity at competitive regional rates and trade agreements with Central Asian nations are also intensifying for free logistics. This will further dampen the effect of the Omicron on the economy of Pakistan while getting out of its repeated boom-bust cycles. On the other hand, it is feared that if oil hits $100 barrel, Pakistani exports will come under pressure.

To conclude, although a broad based development in fundamental economic activities with reference to trade exists but the Omicron blow-out still “remains a risk” for global nations. Overall, Pakistan is doing better than its regional competitors which can largely be attributed to the Government Coronavirus Policy, the Temporary Economic Relief Facility (TERF) loans and the Regionally Competitive Energy Tariff (RCET) Policy for the exporting sectors of the country. Omicron is a blessing in disguise for Pakistan as it has allowed a time barred opportunity to capture greater market share. Pakistan’s Policy direction should be focused on capturing maximum market share through increased competitiveness, as a result of continued RCET’s, which will consolidate the increasing export trend while reducing dependence on foreign loans.