Dr Gohar Ejaz

The World Bank’s latest Pakistan Development Update released in October 2022 highlights the rapid rise in inflation in Pakistan over the past year, and aptly identifies its key drivers:

* External factors, including rising global food and energy prices
* Domestic economic conditions and policy settings, including a weaker Rupee and an overheating economy
* More recently, the floods with agricultural losses and disruptions of supply chains

This unprecedented inflation has disproportionately affected the poor, given their declining real incomes and their inability to meet even basic household expenditures. Energy and food have become unaffordable, and acknowledgement of the human element is essential to recognize how immediate and dire the need for economic revival has become.

Pakistan has historically sought loans to achieve economic stability. These loans come with conditions that tend to restrict growth and affect the poor disproportionately. Meanwhile, the export-oriented industry is neglected, despite having the potential to steer sustainable economic growth as long as it is provided with basic policy support. The high priced energy for industry is a particular case in point. The country has historically suffered from some of the highest energy tariffs in South Asia. These tariffs have not only served as a means to transfer the costs of inefficiency to consumers and industries without considering affordability, but have also given way to premature deindustrialization. Meanwhile, the current stock of circular debt hovers around Rs 2.5 trillion ($11.4 billion) while in the gas sector an additional Rs 1 trillion ($4.6 billion) has accumulated – an alarming figure, which has gradually built up as a result of the poor planning that has characterized Pakistan’s energy sector over the years.

The situation is exacerbated by the misinformed and regressive policy of maintaining a high interest rate to counter inflation. Exporters’ working capital requirements have increased immensely and the requisite finance is not available, and when available it is extremely costly given the unreasonably high interest rates which no industry can afford. Without the operation of textile exporters, there will be no means of meeting the country’s forex requirements or balancing the current account.

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 serve as a valuable inflow to the economy, and can pull Pakistan out of its current account deficit and economic stagnation. The expansion and development of exporting industries not only reduces unemployment in the long term but is the only sustainable way out of Pakistan’s debt trap.

For sustainable business activity, there is a need for upgraded infrastructure, a strong workforce, legal and governance support. The supply of regionally competitive energy has been emphasized time and again but the lack of policy continuity in the country results in an unstable environment for businesses to thrive. This brings us to a notable difference between rapidly developing economies and those where growth is stagnant: those which prioritize growth set aside sums of public money and ensure policy continuity to support industries, particularly LSM and exporters. Pakistan has consistently failed in this regard.

Meanwhile, imports have been allowed to run amok. Non-essential goods imports must be discontinued, especially where substitutes are made in Pakistan. Pakistan is a strong producer of both wheat and raw cotton so their imports should be cut down drastically while strengthening domestic production.

In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated because of consecutive loans. The most effective mechanisms to sustain export-led growth include product and market diversification, improvements in quality, and integration into global value chains. The government support is naturally an essential component in ensuring these policies are implemented and institutionalized, leading to a successful economic future for Pakistan.

Rising food and energy prices decrease the real purchasing power of households, disproportionally affecting poor and vulnerable households that spend a larger share of their budget on these items. Meanwhile, excess government borrowing from the financial sector crowds out the supply of credit to the private sector and deepens the sovereign-bank nexus.

Resolving these constraints in the medium to long term requires concerted efforts by the government, regulators, and other stakeholders, and the most sustainable way to counteract them is by building Pakistan’s export-culture. Export enhancement has proven time and again to be the only effective economic solution, as exhibited by the ability of the textile sector to achieve record numbers despite the constraints and lack of an export culture in Pakistan.

Job creation is another crucial metric for an economy in the growth stage, as yearly increases in unemployment must be catered to. The private sector provides us with a viable means to achieve this, as export-oriented sectors are highly labour intensive. The textile sector creates jobs in every tier of the economy, as different skills are required at each stage, be it cotton picking, ginning, stitching, designing, innovating or strategic planning. The expansion and development of exporting industries thereby reduces unemployment in addition to being essential for a healthy Balance of Payments.

In the longer term, policy that prioritizes an export culture in Pakistan, specifically supporting industrial growth and productivity, can help to substantially boost the economy. Supporting the growth of large scale manufacturing industries, especially textiles, where there is evidence of a comparative advantage for Pakistan, would therefore be critical moving forward. Value addition, competitive inputs and trade competitiveness can effectively result in sustainable economic growth; as unlike aid, these measures are free of any liability. Earnings through enhanced exports can pull Pakistan out of its current account deficit and economic stagnation. The government needs to work in tandem with major exporters to incentivize diversification, while removing institutional roadblocks and barriers to growth that have held the exporting sectors back from realizing maximum potential. Policy continuity is crucial for any economy, and in this connection, the recent government decision to continue the provision of regionally competitive energy tariffs (RCET) is welcomed and appreciated.

Dr. Gohar Ejaz

Strong policy support in the form of regionally competitive energy tariffs (RCET) enabled textile exports to increase by 56% to reach $19.5 billion in 2022, and they are projected to reach at least $24 billion by the end of FY23. This growth trajectory is indicative of the tremendous impact created by applying the right policy of viable input pricing, thereby allowing exporters to price their products competitively. The impact is particularly significant when compared with other kinds of incentives, which are subject to delays and tend to have little or no effect on export volume or competitiveness as they are not priced in the exporters’ bids.

While RCET provides an excellent base for export-led economic growth, policy discontinuity restricts Pakistan’s ability to maintain or increase its market share in the fast-expanding global textile sector. As previously emphasized in our 2019 articles “Ladder and the Snake” (https://fp.brecorder.com/2019/05/20190522477836/) and “The Snake Has Truly Bitten” ( https://fp.brecorder.com/2019/07/20190702493518/), exports have often reached and then hovered between the $20 billion and $23 billion marks. Each time an economic takeoff has been anticipated in the past, and achieved by competing countries, Pakistan gets left behind due to a combination of factors, chief among which are the lack of a long term vision, an unfavorable environment for investment and industry, and energy unavailability/inconsistency. Policies have been abruptly withdrawn time and again, thereby diverting the industry away from its path of export-led growth. Policy continuity is crucial for any economy, and in this connection, the recent government decision to continue the provision of regionally competitive energy tariffs (RCET) is welcomed and appreciated.

A robust export base serves as the foundation for a strong economy without the requirement for external forces such as foreign aid. In Pakistan’s context, the textile sector provides a sustainable path to offset the debt acquired from repeated loans and so-called relief packages. Earnings from increased exports are a key inflow to the economy that can help Pakistan overcome its current account deficit and economic stagnation. In this regard, RCET is the most efficient way of funding foreign exchange as is evidence by the fact that it is only 2.67% of total export value.

However, the structural issues in Pakistan’s energy sector have yet to be resolved, as they have a great bearing on affordability. Cross subsidies, high capacity costs and an inefficient generation mix result in a structurally weak energy environment. One of the best long-term solutions to this conundrum is to dedicate a full power plant, similar to the Haveli Bahadur Shah combined cycle gas power plant, to the Punjab export industry. The total output of the plant should be delivered directly to the exporting industry. The inclusion of wheeling charges in tariffs should be rational, and not include cross subsidy and standard asset costs. If this plant is supplied with domestic gas, calculations show that it will generate electricity at a rate of Rs 13.205 per kwh. If this plant operated on RLNG, the total delivered power cost to the export industry would be Rs 21.37/kwh. This is the optimal solution for affordable power supply to the textile industry.

One of the largest emerging sectors in small scale manufacturing is the garment industry, which has substantial local and global demand. Improvements in equipment and e-manufacturing can boost our exports and enable us to access the high-performance apparel and MMF markets. This will also help the sector to achieve its needs in terms of value addition and export bundle diversification. According to the World Bank, a 1% increase in garment manufacturing is connected with an increase in employment of 0.3% to 0.4% for both men and women.

According to trade data, there has been a significant growth in the quantity of higher value items (bedsheet, knitwear, and woven garment) exported from Pakistan, while lower value and intermediate products such as yarn and greige fabric are gradually being turned into higher value products – a very positive sign that the economy is poised to grow. 70% of textile exports were of items that underwent extensive processing to make value-added products. Keeping up with this trend will largely rely on a continuous & uninterrupted supply of gas and electricity to the entire value chain at regionally competitive energy tariffs.

Pakistan remains underrepresented in the high-end garment and apparel sectors. Current yarn and greige fabric output that is not transformed into higher value items might contribute $12 billion per year if turned into apparel. The industry has set up a detailed plan to use surplus yarn and greige fabric exported to turn it into garments for export through the establishment of 1000 garment facilities, each with 500 stitching machines and a $7 million investment. Each plant would be able to create garments for $20 million in exports while employing 700 workers. The overall investment would be $7 billion, generating $20 billion in yearly incremental exports and employing 700,000 people.

These efforts remain contingent upon strong and consistent policy support. If this initiative is supported by the government in letter and spirit, the industry is confident in its ability to achieve its target of $50 billion textile exports in the next 4 years provided consistent and affordable energy supply, additional working capital, new entrepreneurs, and new finance facilities. The new plants that have been installed or are being installed are not energy intensive, but are fully dependent on the total textile chain operating at affordable and competitive energy rates so that intermediate products can be supplied to these plants at reasonable prices.

Pakistan’s youth, which accounts for 65% of the overall population, signifies a very large window to capitalize on in terms of opportunities to develop the economy and evolve society. Pakistan’s population is estimated to be around 230 million (235,877,803) as of July 1, 2022, according to the latest United Nations data. Job creation is a critical measure for growth in any economy, and even more so when there is a youth bulge to cater for, as yearly spikes in unemployment must be managed. Job creation is only possible if the industry expands, and the industry will only expand if investments are made in the labor-intensive market.

The issue has not been a lack of policy formulation, but rather the reliable execution of policies to ameliorate long-standing disadvantages. With a stronger emphasis on policy implementation, there can be a tangible impact in terms of sustainable development and economic growth, significantly improving the position of Pakistan’s textile sector and exports over the next four years. The expansion and growth of the textile sector over the years has been enabled by consistent provision of RCET policy, and the facts and figures given in this article further cement this statement. The continuation of this policy alongside other means of supporting exporters are therefore essential to remain competitive and achieve sectoral expansion targets. Earnings through enhanced exports remain the most sustainable mechanism to pull Pakistan out of its current account deficit and economic stagnation.

Dr. Gohar Ejaz

The World Bank’s latest Pakistan Development Update released in October 2022 highlights the rapid rise in inflation in Pakistan over the past year, and aptly identifies its key drivers:

• External factors, including rising global food and energy prices
• Domestic economic conditions and policy settings, including a weaker Rupee and an overheating economy

More recently, the floods with agricultural losses and disruptions of supply chain

Source: World Bank, Tabadlab

This unprecedented inflation has disproportionately affected the poor, given their declining real incomes and their inability to meet even basic household expenditures. Energy and food have become unaffordable, and acknowledgement of the human element is essential to recognize how immediate and dire the need for economic revival has become.

Source: World Bank, Tabadlab

Pakistan has historically sought loans to achieve economic stability. These loans come with conditions that tend to restrict growth and affect the poor disproportionately. Meanwhile the export-oriented industry is neglected, despite having the potential to steer sustainable economic growth as long as it is provided with basic policy support. The high priced energy for industry is a particular case in point. The country has historically suffered from some of the highest energy tariffs in South Asia. These tariffs have not only served as a means to transfer the costs of inefficiency to consumers and industries without considering affordability, but have also given way to premature deindustrialization. Meanwhile, the current stock of circular debt hovers around Rs. 2.5 trillion ($11.4 billion) while in the gas sector an additional Rs. 1 trillion ($4.6 billion) has accumulated – an alarming figure which has gradually built up as a result of the poor planning that has characterized Pakistan’s energy sector over the years.

The situation is exacerbated by the misinformed and regressive policy of maintaining a high interest rate to counter inflation. Exporters’ working capital requirements have increased immensely and the requisite finance is not available, and when available it is extremely costly given the unreasonably high interest rates which no industry can afford. Without the operation of textile exporters, there will be no means of meeting the country’s forex requirements or balancing the current account.

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 serve as a valuable inflow to the economy, and can pull Pakistan out of its current account deficit and economic stagnation. The expansion and development of exporting industries not only reduces unemployment in the long term but is the only sustainable way out of Pakistan’s debt trap.

For sustainable business activity, there is a need for upgraded infrastructure, a strong workforce, legal and governance support. The supply of regionally competitive energy has been emphasized time and again but the lack of policy continuity in the country results in an unstable environment for businesses to thrive. This brings us to a notable difference between rapidly developing economies and those where growth is stagnant: those which prioritize growth set aside sums of public money and ensure policy continuity to support industries, particularly LSM and exporters. Pakistan has consistently failed in this regard.

Meanwhile, imports have been allowed to run amok. Non-essential goods imports must be discontinued, especially where substitutes are made in Pakistan. Pakistan is a strong producer of both wheat and raw cotton so their imports should be cut down drastically while strengthening domestic production.

In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated from consecutive loans. The most effective mechanisms to sustain export-led growth include product and market diversification, improvements in quality, and integration into global value chains. Government support is naturally an essential component in ensuring these policies are implemented and institutionalized, leading to a successful economic future for Pakistan.

Rising food and energy prices decrease the real purchasing power of households, disproportionally affecting poor and vulnerable households that spend a larger share of their budget on these items. Meanwhile, excess government borrowing from the financial sector crowds out the supply of credit to the private sector and deepens the sovereign-bank nexus.

Resolving these constraints in the medium to long term requires concerted efforts by the government, regulators, and other stakeholders, and the most sustainable way to counteract them is by building Pakistan’s export-culture. Export enhancement has proven time and again to be the only effective economic solution, as exhibited by the ability of the textile sector to achieve record numbers despite the constraints and lack of an export culture in Pakistan.

Job creation is another crucial metric for an economy in the growth stage, as yearly increases in unemployment must be catered to. The private sector provides us with a viable means to achieve this, as export-oriented sectors are highly labour intensive. The textile sector creates jobs in every tier of the economy, as different skills are required at each stage, be it cotton picking, ginning, stitching, designing, innovating or strategic planning. The expansion and development of exporting industries thereby reduces unemployment in addition to being essential for a healthy Balance of Payments.

In the longer term, policy that prioritizes an export culture in Pakistan, specifically supporting industrial growth and productivity, can help to substantially boost the economy. Supporting the growth of large scale manufacturing industries, especially textiles, where there is evidence of a comparative advantage for Pakistan, would therefore be critical moving forward. Value addition, competitive inputs and trade competitiveness can effectively result in sustainable economic growth; as unlike aid, these measures are free of any liability. Earnings through enhanced exports can pull Pakistan out of its current account deficit and economic stagnation. The government needs to work in tandem with major exporters to incentivize diversification, while removing institutional roadblocks and barriers to growth that have held the exporting sectors back from realizing maximum potential. Policy continuity is crucial for any economy, and in this connection, the recent government decision to continue the provision of regionally competitive energy tariffs (RCET) is welcomed and appreciated.