Gohar Ejaz, Shahid Sattar and Eman Ahmed

The majority of people in developing economies do not have bank accounts, creating an inequitable economic world that impacts the individual’s social and economic well-being (Donner and Tellez, 2008; Duncombe and Boateng, 2009). Financial inclusion in Pakistan is rudimentary compared to other countries that follow export-led growth models. The country’s regional competitors have performed better in most areas pertaining to access to finance.

Pakistan, a developing country with a population exceeding 220 million, boasts a high mobile phone penetration of 73% (Pakistan Economic Survey, 2014/15). However, 88% of the total population is unbanked and financially marginalized, out of which 63% of the population resides in rural communities (World Bank, 2014). There is consensus amongst policy-makers to increase financial access through financially inclusive banking practices (Anwar, 2013).

In addition to financial exclusion, there are other roadblocks to entrepreneurship and innovation that need to be mitigated so that we can empower our youth and our disenfranchised talent to bring about a grassroots level economic revolution. We must rid our policymaking of the economic formula whereby interest rates are raised in order to stabilize the economy, as this can only be 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. The best mechanism is through supply-side interventions, bringing more individuals into the economy and increasing the labor supply – for which entrepreneurship and financial inclusion is critical.

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 15%. 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. Pakistan’s interest rate is now the highest in the region – even higher than that of Sri Lanka, which is reeling from a default on its debt.

Source: tradingeconomics.com

Subsequently, the low level of investment has worsened the state of affairs, particularly for productive sectors which are now struggling to maintain productivity and. The abrupt rise in factory shutdowns and closing of textile businesses are causes for concern. 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 makes these options volatile and high-risk.

All these factors result in 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 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.

When a bank account is opened, it’s a step towards joining the economic mainstream. It is a sustainable mechanism to fast-track grassroots entrepreneurship, innovation and economic stimulus from the bottom up. With financial inclusion as the ultimate goal, Pakistan’s government should follow in the footsteps of Modi’s PMJDY, whereby the State Bank of Pakistan opens up accounts with a pre-approved overdraft facility of PKR 10,000 that can be used as seed money for entrepreneurship. It is proposed that the State Bank may also provide overdraft facility and debt moratorium for those unable to repay the loan in time.

In order for Pakistanis to be eligible for this scheme they must currently have no bank account. The only document required to be presented when opening the account should be the individual’s CNIC, verifiable through NADRA biometric. As for cases of overdraft, interest can be charged on the PKR 10,000 amount. However, in case of default, the government should step in to cover the amount. If this scheme is successful, an estimated 50 million accounts will be opened, with a potential disbursement of PKR 500 billion. The current scenario wherein charges are applied to accounts with balances below a certain minimum is detrimental to efforts for financial inclusion, so this scheme will be free of any such charges.

Investing PKR 500 billion into the people of Pakistan who are currently unbanked and at the lowest rung of the economic ladder, is bound to have a multiplier effect on the economy, simultaneously enhancing opportunities for employment, entrepreneurship, value addition, education, gender parity and effective resource allocation for economic growth – enabling a sustainable exit from the path of recession upon which the country is currently treading.

The impetus behind this proposal is the success of India’s revolutionary banking scheme, which continues to improve financial inclusion even now. In 2014 Indian Prime Minister Narendra Modi launched a plan to provide a bank account for every household, in a landmark initiative to help the poor. (BBC) Pradhan Mantri Jan-Dhan Yojana (PMJDY) is India’s National Mission for Financial Inclusion to ensure access to financial services, namely, a basic savings & deposit account, to access remittance, credit, insurance, pension in an affordable manner. Under the scheme, a basic savings bank deposit account can be opened in any bank branch by persons not having any other account. Under the banking scheme, account holders receive a debit card and accident insurance cover of up to 100,000 rupees ($1,654; £996). They also get an overdraft facility of up to 5,000 Indian rupees.

Benefits under PMJDY:

• One basic savings bank account is opened for unbanked person.
• There is no requirement to maintain any minimum balance in PMJDY accounts.
• Interest is earned on the deposit in PMJDY accounts.
• Rupay Debit card is provided to PMJDY account holder.
• Accident Insurance Cover of Rs.1 lac (enhanced to Rs. 2 lac to new PMJDY accounts opened after 28.8.2018) is available with RuPay card issued to the PMJDY account holders.
• An overdraft (OD) facility up to Rs. 10,000 to eligible account holders is available.

As per latest government data, PMJDY now has 42.89 crore beneficiaries (basic bank account holders) with ₹1,43,834 crores total balance. More than half of the beneficiaries are women (23.76 crore) while 28.57 crore are from rural and semi urban areas.

A senior official of State Bank of India said the average balance in the accounts which is hovering around ₹3,000-3,500 across banks is ‘an indication’ that the scheme has now become a channel for savings for the low income families. The Global Findex data base of the World Bank has also shown ‘substantial’ increase in financial inclusion in the country after 2014. As per the index, 80 per cent of people above 15 years of age in the lower-middle income group have a bank account now compared to 53 per cent in 2014.

Morawczynski et al. (2010) argues that financial inclusion success should not only be limited to the withdrawal of payments from bank accounts. The term should also incorporate the usage of accounts for undertaking economic activities. Therefore, ‘full financial inclusion’ entails participating in a wide spectrum of financial transactions, such as depositing savings, accessing credit/insurance and making payments in the banking sector (Ehrbeck, 2011; Bold, Porteous and Rotman, 2012).

Meanwhile in Pakistan, penetration in the financial sector is extremely low, with only 2.4% of the population having access to credit from formal financial sources. Out of the total adult population of Pakistan, the financially excluded population make up 53%.

Although financial inclusion is usually categorized as access to formal financial services, in developing countries including Pakistan, a significant proportion of people prefer and have access to informal finance. Informal access can occur through the organized sector (though committees, shopkeepers, moneylenders etc), or through friends and family. An estimated 19 percent have voluntarily excluded themselves through lack of understanding or need, due to preference, poverty or religious reasons.

BISP holds the largest database of underprivileged families in Pakistan – recorded by the National Database and Registration Authority (NADRA) after conducting the largest and first ever door-to-door poverty survey. Since we seek to propose a similar scheme, it is important to analyze the benefits and constraints of BISP so that we are able to utilize an upgraded version of a tried and tested model for Pakistan. Dr. Atika Kemal’s research paper, titled “Mobile Banking in the Government-to-Person Payment Sector for Financial Inclusion in Pakistan” provides a comprehensive framework for us to develop a new and improved model based on an understanding of the impacts of BISP.

The poverty score card survey assisted BISP in identifying 7.7 million households categorized as the ‘poorest of the poor’ (BISP Report, 2014). Primarily funded by the Government of Pakistan, BISP disbursements crossed PKR. 70 billion (USD $667,908,500) by 2015. It continues to receive unprecedented financial and technical support from multilateral and bilateral donor agencies such as the World Bank and DFID as well (BISP Report, 2014).

Known for being the country’s main safety net program, BISP provides transfers of Pakistani Rupees (PKR) 26000 per person annually (approximately $113/year) that are received by around 5.3 million women from low-income households.

Many governments in developing countries have set financial inclusion as a fundamental policy goal, in digitizing G2P flows (Bold, Porteous and Rotman, 2012). A case study of the BISP in Pakistan showcased that transparency in delivering G2P payments was the primary objective for digitizing BISP payments, while financial inclusion was a secondary goal. Therefore, digital innovation is not always the perfect solution or ‘silver bullet’ for development.’ Incentivizing the disenfranchised segments to open bank accounts and enter the formal economic system, thereby boosting entrepreneurship is a sustainable mechanism to enable an uplift to the economy.

The need for a long-term policy featuring lower interest rates cannot be underestimated, and its implications for a brighter economic future which generates foreign currency, jobs and international recognition cannot be denied. We need more investments in Pakistan, alongside holistic policy reforms that lend confidence to investors and the markets. This need cannot be met with an interest rate of 15%.

Dr. Gohar Ejaz

With the glaring example of Sri Lanka defaulting on its debt, the risk of Pakistan facing a similar fate should be an impetus to spur ambitious reforms in almost every area of the economy. A default situation results in a damaged relationship with investors that will have far reaching consequences, so we must take a hard look at our policies, institutions and markets in order to identify roadblocks and inefficiencies. Only then can we enable economic stability and sustainable growth.

Pakistan needs to nurture an export culture, focus on investment, productivity, and exports, while removing bottlenecks such as sludge, financial, energy, and tariffs.

It is troubling to note the pace with which long-term growth is declining. This decline is taking place on multiple fronts. On the front of productivity and investment, there has been a negative trend implying a less efficient economy over time. Pakistan does not have an export culture, despite the fact that export-oriented units have a 30% higher productivity rate than companies serving domestic market. The export trend remains quite flat, and growth is volatile.

Furthermore, there is little room for markets. The overbearing government footprint currently stands at 67 % of GDP. This makes progress extremely difficult, as the government is an active player in various sectors: Pakistan’s state-owned enterprises include energy, transportation, financial, trading, and manufacturing. Rather than allowing market forces to do their job, the government assumes the role of fixing prices: wheat, electricity, gas, medicines, milk, petrol.

‘Sludge’ is defined as the ‘excessive or unjustified frictions’ that make it harder for customers to achieve their goals, such as complicated forms and websites that are hard to navigate. This accurately describes most market activity in Pakistan, with the over-regulation characterizing 39 % of GDP. Unnecessarily bureaucratic and time-consuming processes abound in seeking registration, licenses, certificates, and other permissions.

Due to the ongoing IMF Program, there is no fiscal space available to the government, making it difficult to increase public investment. Taxes remain high, and the country finds itself in a long-term Balance of Payment crisis. In short, the available policy choices are limited.

Historically, we focused on taxation, not on growth. We have to shift this focus to growth by prioritizing investment, productivity, and exports. In attempting to do so, we face a number of bottlenecks. The energy sector is in particular need of reform, as mismanagement and weak reform is rampant. One reform that should be seriously considered is limiting households to a single point supply of energy, so that limited resources such as gas are prioritized for more productive uses. The gas crisis is worsening as international exploration companies have left Pakistan and local companies are not performing, leading to lower domestic gas production. There are massive transmission & distribution losses to be addressed (Rs. 473 billion during 2021 out of which Rs. 402 was recovered through tariff and Rs. 71 billion was added to circular debt). Meanwhile, LNG imports are hampered by Government Regulation/PPRA.

In order to address the inefficiencies of gas companies, it is recommended to unbundle downstream monopolies between ‘pipeline’ and ‘retail’ business.  The business model for gas companies should be based on profits from operational efficiency, by investing in the maintenance of the distribution network and banning domestic expansion projects.  Furthermore, we must do away with politically motivated gas allocation policy, and rethink the policy of importing LNG and injecting more gas in a leaking distribution system. In order to achieve gas market liberalization, there is a need for third-party access to regasification terminals, transmission, and distribution systems.

When it comes to the electricity sector, the economy would benefit from DISCOs being divided into smaller units (city-wise) for better administration and management. Listing of DISCOs on the Pakistan Stock Exchange should be mandated with a condition that a single party cannot hold a share of more than 5%. The billing system at the DISCO level should be decentralized.

Given the current situation, we are not prepared to implement CTBCM. Independent evaluation of CTBCM is needed. It is best to facilitate ‘wheeling’ at the marginal cost to make it attractive for sellers (generation companies) and buyers (bulk power consumers). This will decrease the cost of energy for the industry

Moving on to financial issues, we see that Pakistan has the lowest ratio of credit to the private sector among the developing countries. Moreover, we have the highest currency in circulation (40% as compared to the maximum of 20% in other countries), which also impacts the banking multiplier by limiting liquidity available for the private sector.

Taxation reforms are also greatly needed. A lower uniform rate for GST will foster compliance and lower the incentive to cheat. The distinction between filers and non-filers should be abolished as it just creates a nuisance and does not contribute to improving the tax net.

In Pakistan, a fundamental structural issue is insufficient forex earnings to sustain the economy. To this effect, the country has huge export potential that is not being adequately leveraged. To tap this potential, policy must be formulated to:

• Simplify Taxation Regime (online portal or one window operation)
• Allow currency to depreciate
• Provide credit on simple terms (minimal documentation) linked to export receipts
• Sunset clauses for protection given to industries
• Any tax levied must be on net profits, not revenue / no turnover taxes.

The ideal way forward is through developing an export culture wherein all investments and operations are focused to maximize exports. To this end, the textile sector is the key player, since it contributes 62 percent of all exports.

The sector has performed exceptionally well in the last 2 years, with textile exports increasing by 43 percent in FY22 as compared to FY18. The industry has invested a sum of $5 billion over the past few years in new plant & machinery and upgradation.

Further expansion and increase in exports is limited by the sustained availability of energy both gas & electricity at Regionally Competitive Energy Tariffs (RCET).

This export spur has occurred due to the focus of the government to provide regionally competitive terms for the sector to remain competitive.

However, to maintain this momentum and to increase exports exponentially what is required is:

• Implementation of Textile Policy (2020-25)
• Assurance of uninterrupted energy at regionally competitive energy tariffs for a sustained period.
• Removal of all hindrances for setting up of new factories & upgradation.
• In line with stated government policy of no duties on raw material, duty on PSF to be abolished to enable Pakistani export products to compete internationally.
• Availability of long-term Financing as well as working capital at competitive rates.
• Rationalization of GST applicability through a lower rate. According to a very recent IMF report, the cascading impact of GST has harmed Pakistani exporters’ competitiveness.
• Improving standard duty drawback schemes
• The government to simplify regulation related to exports; cumbersome bureaucratic procedures negatively affect new exporters.
• Export subsidies such as DLTL, where given, must be linked to the performance of the recipient firms and be automatically withdrawn when thresholds are crossed.

Pakistan’s domestic cotton production has declined over the last decade, dropping to 7.42 million bales in 2021-22, which is about half than the textile sector requirements. The sector has therefore had to resort to importing cotton from a number of countries in order to compete in the textile export industry; in the past two years, this bill has reached $3 billion.

Cotton, once Pakistan’s favorite cash crop, had its area under cultivation decline by over 1 million acres over the course of ten years. Decline in cotton crop caused by a number of variables involved. To offset this decline and reduce the crop to its former glory, we must encourage the textile industry to grow its own cotton, reform variety approval system to speed up the process as well as to support private sector R&D organizations. Identification and development of new areas for cotton can also provide great returns.

As we are targeting holistic reform, we must also emphasize the role of the real estate market, which has huge potential to bring growth once it is effectively deregulated. We must also prioritize improvements in public life, by rethinking cities to better serve as engines of growth, removing car use subsidy to reduce the burden on city development, and enabling alternative in-city mobility policies from public transport to walking. Making the internet widely and cheaply accessible, possibly by fully funding access in 2023-24, will maximize job opportunities.

There remains a need to tackle economic distortions and to formulate effective policies for economic sustainability. This requires a specific focus on supplementing the export sector’s role in steering growth, 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.

A strong export base serves as the baseline to strengthen the economy without reliance on any external force such as foreign aid. In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated from back-to-back loans and relief packages. Earnings through enhanced exports can strengthen the economy significantly, bringing Pakistan out of its current account deficit and economic stagnation.

Shahid Sattar and Eman Ahmed

Pakistan’s immense economic potential will remain elusive as long the most productive sectors that enable export-led growth are deprived of energy availability and consistency. Despite the textile exporting sector’s capacity to deliver over $2 billion per month in exports, recent government decisions to suspend gas supply to the sector have jeopardized the sector’s capacity to deliver.

Gas/ RLNG to the textile industry has been suspended from July 1st to July 8^th, which will be followed by shutdowns for Eid from 9th to 14^th July. This shutdown of 15 days will translate to a loss of at least $1billion that would have otherwise positively impacted the Balance of Payments. More than 50% of output is likely to be lost in the month of July, with the very real risk of losing orders on a permanent basis.

The textile industry has achieved a new record in terms of exports reaching $19.5 billion from $ 12.5 billion just two years ago. This fantastic growth was enabled by implementation of Regionally Competitive Energy Tariff (RCET), investment of over $ 5 billion in expansion and establishment of 100 new textile units resulting in enhanced export capacity of $ 500 million per month.

Textile exports were expected to increase to $25 billion plus in the coming fiscal year. If this momentum is lost due to energy supply and cost constraints, Pakistan will be forced to seek additional $6 billion in loans from abroad which under the circumstances may not even be possible. Textiles have repeatedly delivered their commitments and proven that they are a viable and long-term solution towards economic stability. However, energy unavailability, uncompetitive pricing of critical inputs and unjustifiably high taxes continue to jeopardize export-led growth.

The government has been no stranger to taking bold steps that are intended for economic stabilization, such as increasing the fuel price substantially over the past several weeks. In the same vein, we urge the government to consider its misallocation of resources as a detriment to this very goal of stability. There must be an equally bold decision to aptly prioritize the gas supply for export-oriented sectors which are the greatest contributor to economic stability and growth, rather than allowing heavy gas usage in the domestic sector, which is unproductive and does not make any contribution to the national exchequer.

Gas remains the major or only source of energy for 75 percent of the textile industry in Pakistan but still consumes only 8.6 percent of the total national gas supply. Processing mills have the highest use of gas and accounts for 75 percent of their energy mix—while 67 percent of the electricity in composite firms is being generated through gas.

Source of Power Generation for Textile Industry-Pakistan (Survey Sample)

Average Use of Gas in Energy Mix (Survey Sample)

The full potential of our energy resources is not unlocked because of overuse in non-exporting sectors. A policy to ensure pure economic use of the scarce resource has to be implemented in order to ensure a sustainable economic future. For domestic users, single point source i.e. electricity should be implemented to prevent overuse and wastage.

Good business sense dictates that policy needs to be holistic and prioritize the largest value addition to society, so that economic disasters can be prevented. However, policymakers in Pakistan tend to be caught up in rectifying mistakes of the past and by the time a useful policy is implemented, plenty of damage has already been done e.g. exports have already sunk and buyer relationships have been destroyed due to an inability to meet orders.

While the manufacturing and consumer goods sectors have a moderate need for reinvention and innovation, what they really need is minimal disruptions in the form of regulatory limitations, to be empowered to keep up with new technologies, and the ability to stay abreast of the competition, and the role of the government is central in each of these aspects. It is no surprise that Pakistan ranks low in the ease of doing business and competitiveness indices, as many potential startups are burdened by overregulation that hinders them from taking off. Meanwhile, the textile sector remains under immense pressure to maintain the majority of Pakistan’s exports, and therefore must be considered critical for Pakistan’s economic prosperity. These policy recommendations are synergistic – they can only be fruitful if implemented simultaneously. As the textile value chain is fragmented, there is a need for uniformity and facilitation at each step of the process, and any incentives that are provided must be available across the chain.

Earnings through exports serve as a crucial inflow to the economy. Policy support is an absolute requirement that ties into this, but the measures taken by the government are often insufficient. It is essential to direct our confidence and incentives towards our local business community as well as our entrepreneurs. We must also push for improvements in quality education, training and job opportunities for the youth. Considering the export-led economic prosperity that is taking Bangladesh and Vietnam to new heights, Pakistan must mitigate its reliance on primary and traditional commodities, prioritize free trade agreements, rationalize tariff structures and fast-track the shift towards manufactured, value added services and nontraditional goods for export.

The textile sector of Pakistan exports over 80% of its products, and the export-oriented industries are 25 percent more productive than non-exporting firms, and their productivity increases as exports increase. However, inefficiencies cannot be exported, so these must be mitigated from all input materials before results can be seen. Since exports in Pakistan are labor-intensive, expansion in this industry is a way to ensure large-scale job-creation, and an increase in foreign currency to pay for required imports. With the right policies in place, a diversified set of high quality exports will provide a crucial uplift to economic activity and lead to a cycle of development and improvement in perception. In the coming fiscal year, textile exports were expected to increase to over $25 billion. For this mission to be successful, consistently supportive energy policy is absolutely essential. Only then can we prevent the need to seek $6 billion in foreign aid in the coming year – a scenario which would lead Pakistan to default and sink the economy further into the debt trap.