Shahid Sattar and Noreen Akhtar

The World Bank Group’s Country Climate and Development Report 2022 for Pakistan presents an in-depth analysis of Pakistan’s mounting vulnerability to climate change, its rising GHG emissions, the financial implications of climate risks for Pakistan and the country’s current climate change policies and regulatory frameworks to enhance its adaptation and mitigation efforts to climate change. The report also sheds light on the major sectoral transitions Pakistan requires to pivot its economy to an inclusive, resilient and green development pathway. Finally, the macro-fiscal, financial and distributional implications of climate and development policy actions are evaluated.

APTMA has thoroughly reviewed the report and believes that, the comprehensive discussion aligns with APTMA’s analysis of the climate and development scenario in Pakistan. Therefore, Pakistan must adopt the report’s policy packages and key recommendations to ensure an inclusive and resilient socio-economic and environmental progress in all the sectors including the industry.

The report argues that Pakistan continues to face considerable macro-fiscal fragility, that could significantly hinder its ability to sustain growth and enhance equity. The investment rates and the tax to GDP ratio remains low, and there are unproductive subsidy regimes in the energy, agriculture and irrigation sectors, which indicate the lingering fiscal stress faced by the country. The high inflation rate prompted the government to implement the energy price relief plan, that ballooned the already high fiscal expenditures and fiscal space has been shrinking rapidly. These plus the country’s low investment rate and low export volume have severely hindered the country’s ability to grow sustainably and reduce poverty. Moreover, the country is experiencing a youth bulge, with 2.1 million young people entering the labour pool every year, but many are poorly skilled and inexperienced. All these issues are compounded by extremely high levels of environmental pollution due to lack of waste management infrastructure and unregulated and unmonitored pollution from the industrial processes.

Regarding climate change vulnerability, the report evaluates that Pakistan’s current GHG emissions account for less than 1% of the global GHG emissions. However, the country will experience more climatic variability and extreme events in the form of severe and more frequent droughts and floods, thus causing economic losses of billions from damage to crops and property. Agriculture will be severely impacted, that will result into significant damages to crops and food insecurity.  These climate threats from heat, floods and drought suggest a loss of up to 9% of GDP by 2050, relative to the Business as Usual (BAU). The scenarios of sectoral GDP decline indicate that industry and agriculture will experience much larger impacts. A GDP decline of 8% by 2030 and 17% by 2050 for these sectors is predicted.

Damage from water insecurity is likely to increase significantly, with climate change. Water demand is projected to increase by almost 60%, with the highest demand rates coming from the industrial and domestic sectors. Pakistan will experience inter-sectoral tradeoffs for water and about 10% of irrigation water will need to be repurposed to meet non-agricultural demands.

Pakistan has adopted several sectoral policies to support decarbonization. The legislative and policy reforms clearly indicate a new momentum to enhance climate resilience. However, with blurred lines of responsibility and weak accountability, the commitment to climate mitigation and adaptation has not shown significant results. Thus, Pakistan needs to tie the environment and climate actions closely into the green-growth agenda to ensure sustainable growth in all its sectors.

Pakistan’s development challenges and high exposure to climate change highlight the need of major sectoral transitions. Transformation of agri-food system is one of them, which requires major changes in the way crops are grown, harvested, stored and marketed. Transformation of irrigation and both surface and ground water management is the second, that highlights the need to overcome the current inefficient and wasteful use of water in major sectors and manage it sustainably.

The report also rightly elucidates the fact that fertilizer subsidies are a problematic practice which not only promote inefficient use of chemical fertilizers but also impose heavy fiscal burden on the government. In this regard, the report suggests that freed-up fiscal resources need to be utilized to remove barriers to climate-smart, on-farm investments and value chain improvements. Moreover, research and technological advancements are required to grow climate resilient crops.

Transitioning to sustainable energy sources is another critical enabler of sustainable economic development in Pakistan. The report states that power shortages in the country cause an economic loss of more than US$8 billion a year. Also, there is a significant use of imported coal, especially in the industry, and the country suffers relatively high energy intensity of GDP. These challenges are compounded by growing financial deficits due to energy prices and poor performance of electricity and gas distribution companies, that place heavy fiscal burden on the government and disincentivize private investment in the sector, as well as electricity and gas supply interruptions causing loss of productivity and heat stress. Additionally, poor planning and substantial subsidies have caused huge inefficiencies across energy sector that causes circular debt. The circular debt continued to accumulate and by the end of June 2022, it was estimated to be around US$11.3 billion in the electricity sector and US$7.5 billion in the gas sector, creating barriers to the future investments.

Pakistan, therefore, urgently needs to transition away from the fossil fuels and accelerate the commissioning of its renewable energy (RE) capacity, as the country has a huge RE potential. This will reduce the overall energy generation cost and improve energy security in the major sectors such as industry. Moreover, Pakistan must see through politically difficult supply-side efficiency improvements, including tariff and subsidy reforms, introduction of private sector participation in the DISCO (electricity distribution company) sector and start a competitive wholesale power market. Moreover, as the industrial sector is the largest consumer of the fossil fuels with only partial scope for electrification or fuel switching, the government needs to give specific attention to this sector and incentivize decarbonization and efficiency improvements through regulations, fiscal incentives and improved access to financing. Lastly, there is a need to adopt, widely, the programs such as Partnership for Cleaner Textiles, which is being implemented in partnership with the International Finance Corporation (IFC). Such programs can support the global brands and their local suppliers to achieve long-term competitiveness and the corporate sustainability targets by employing cleaner production technologies. This requires a close collaboration between the government and the industry. The industries and their associations need to get involved from the beginning in articulating energy efficiency plans and in investment financing negotiations and arrangements. The adoption of circular economy practices in the industry require such collaborative efforts through continuous stakeholder engagement.

One of the policy packages presented in the report is of carbon taxes, revenue recycling and feebates. It states that introduction of carbon taxes would provide a clear signal for the country to adopt energy efficiency measures and shift to renewable energy sources. It would also broaden tax base by bringing into the tax net the currently untaxed producers who operate in the informal economy (estimated to be 35 – 50%).

Finally, the report puts a major emphasis on the role of private sector engagement in addressing climate challenges and in transitioning to sustainable practices. It targets the SME sub sector and the informal sector with the undocumented economic activity, which not only need to be brought to the tax net, but also, to the network of compliance requirements imposed by the global community of buyers on Pakistan’s industrial sector. Lastly, the need to focus on green investment and access the international climate finance in all sectors of Pakistan is also highlighted in the report.

The report’s comprehensive discussion and analysis matches APTMA’s analysis of the current and future climate and development scenarios in Pakistan. Therefore, Pakistan must adopt the policy packages and key recommendations presented in the report, to ensure a resilient and sustainable socio-economic and environmental progress, the absence of which will retard the industrial development in the country.

Note: Full report can be retrieved from:

https://aptma.org.pk/world-bank-group-country-climate-and-development-report/

Download Report: P17671804998b80030ac4f0233dc0b995ba

by Mr. Asif Inam (Chairman All Pakistan Textile Mills Association)

Bangladesh is a large contributor to the global textile industry, with the RMG sector accounting for 84 percent of Bangladesh’s exports. This comes on the back of the sector’s rapid growth and modernization over the past decade—as well as the strides it has made in improving conditions for the country’s approximately four million garment workers. Bangladesh has surprised the market by consistently showing profits.

1257.6 miles away, Pakistan’s industrial sector is fighting to live another day. Pakistan’s export during Apr-Jun, 2022 amounted to $ 8,432.09 million showing an increase of 2.52% over Jan-Mar, 2022 and by 27.43% over Apr-Jun, 2021. The textile export data for the last five years showed that volumetric textile exports are the primary driver with a double-digit increase in value-added items. Exports during July-Jun, 2022 stood at $ 31,782.09 million. Pakistan while showing potential for increased export till June- July 2022, later took a nose dive for the worse.

The country’s exports of merchandise entered a negative growth in July

The export proceeds fell 5.17 percent to $2.21 billion in the first month of the current fiscal year from $2.34bn in the corresponding month last year according to data from the Pakistan Bureau of Statistics. On a month-on-month basis, the export proceeds tumbled by 23.95pc indicating a downward trend in the export sector and just as the increase before the current drop in exports is entirely volumetric.

The textile sector last year exported goods worth $19.3 billion and has further expanded capacity through an investment of $5 billion to increase exports to $25 billion. The expectation and goal were to increase textile exports to at least $24 billion this year however this could not materialize. Pakistan’s exports have started declining and will clock in at below $1 billion per month for the rest of the year.

The textile and clothing industry has grown to be the single largest manufacturing sector of Pakistan, employing almost over 385 of the manufacturing labor force. The textile and clothing industry is the backbone of Pakistan’s economy however the sector is confronted with numerous challenges. Worsening international economic situation primarily caused by the Ukraine crisis combined with floods in Pakistan has negatively impacted the already inefficient supply chains of the country. Flooding in dozens of districts of Pakistan has destroyed a wide swath of agricultural land. While the industry requires 14 million bales, the country could only produce 5 million bales of cotton domestically. To meet this gap cotton needs to be imported however the forex issues in the economy have curtailed imports of cotton and other essential inputs for exports. The issue of raw material clearance from the ports remains unresolved owing to unavailability of forex and therefore mills are currently unable to obtain cash against documentation and are closing down owing to the shortage of raw materials.

The cost of importing cotton has also increased by 20% due to demurrage/detention and delays while the importers face the loss and failure to book orders due to uncertain and delayed turnaround time for export orders. Manufacturers continuously find their hands tied due to liquidity constraints owing to 60 % devaluation of currency with no corresponding increase in working capital facilities. Funds bound as a consequence of 17% sales tax and devaluation on all inputs. Lags in the system committed to pay refunds and accumulation of “Deferred Sales Tax” which has not been refunded for the last 3 years have completely restricted the cash flows for new projects and expansions. As a result, the export oriented units are under immense pressure as they cannot generate funds to service debt. This may lead to massive defaults further curtailment of capacity and possibly a banking crises.

The huge differential in the rate of Gas/RLNG being supplied in different provinces in Pakistan means that Punjab based industries are no longer viable and have no option but to close down as they are no longer competitive and available orders are shifting or are in process of shifting to the cheaper alternatives internationally and within Pakistan.  To add insult to the injury new connections for RLNG/ Gas are not being extended the competitive tariffs effectively rendering the new projects /expansion uncompetitive. Electric supply to mills is erratic and sub-standard including maintenance shutdowns of 5-6 days/months reducing effective capacity by 25% of the mills running on electricity. Punjab based mills run on expensive rate of electricity as compared to Sindh or KPK. LIEDA, FIEDMC and Sundar Industrial Estates based industries are being denied the concessional power tariffs over the last 3 years despite multitudes of meetings and letters of commitments.

Over the past 2 years the textile sector has invested $5 billion in setting up new factories, some of these are now complete and others are in process however some of the machinery of new plants/ expansions is still stuck at ports, L/Cs are delayed for spare parts, and electricity and gas not being provided to these new units, instead of increasing exports by $5 billion per annum is likely to lead to massive banking defaults, complete loss of investor confidence in future  for nay investment in Pakistan with many other negative consequences.

However, all is not lost. There is still hope. The textile sector of Pakistan has already exhibited its potential for growth. Strategic collaboration between different levels of government (sub national and national) as well as the private sector which is widely considered the most significant element for policy success in order to minimize resource waste and reduce danger of fostering powerful domestic interest groups and rent seeking activities is the desperate need of the hour.

Clearing all imports of export oriented sectors which have arrived at ports whether against L/Cs or cash against documents can be the first step towards recovery. Prioritizing or exempting export oriented sectors from import controls allowing L/c for raw material, machinery, spare parts and other items to restore industry supply line would be a big help for the sector. In addition, refunding all Demurrage and Detention Charges incurred by EOU sector to maintain competitive costs of exports. Maintaining a 24 hour help desk to monitor and resolve exporters issues. Restoring SRO 1125, zero rating for the textile value chain while collecting sales tax on domestic sales at point of sale. Immediate refund of all deferred sales tax, tuff and other dues and Extension in submission date of duty drawback claims for FY21 are all steps in the right direction. A new export sector working capital lending facility may be established catering to EOU sectors at subsidized rates to tide over the current crises and LTFF be provided where L/C’s already opened and loans approved by banks.

Being an energy insecure country and keeping up with ever rising demand Pakistan’s only solution to energy crises is efficient allocation of scarce resource we have. It is necessary to accord first priority to export industry on Gas/RLNG and electricity supply and allow competitive tariffs to all new projects and expansions as well as industrial estates. To implement weighted average cost of gas while extending RCET across the country to enable new industrial units, expansions and Punjab based industry to compete. A task force with industry representatives may be made with the purpose of improving supply of grid electricity and all discos should schedule maintenance shutdowns after consultation with impacted industry.

There is a lot to learn from Bangladesh, a country with lowest minimum wages in the world with cheap gas energy. A country where power outages are almost nonexistent, allowing for consistent work and cheaper outlay. Bangladesh’s key strategy for the sector’s growth over the past decade has been to diversify customer countries and move to more complex products and value-added services. Bangladesh’s RMG sector has made progress in broadening its customer portfolio to manage risk and adapt to changing demand patterns in the global fashion market.

Pakistan also needs to diversify and upgrade its product offerings. However, the most important lesson that we can learn from Bangladesh is to learn from experiences and mistakes and make policies and mitigating strategies to overcome the challenges and flaws of the system. For instance, Bangladesh’s largest challenges were disasters, deaths, and safety issues in the textile industry. Tragedies have received worldwide coverage. Notably the Dhaka fire and collapse of Rana Plaza (2013). Bangladesh learned from its mistakes and started taking responsibility for its workers and the reforms which were once promised came into actual practice. Today, Bangladesh’s RMG sector is a frontrunner in transparency concerning factory safety and value-chain responsibility, thanks to initiatives launched in the aftermath of disasters (including the Accord on Fire and Building Safety in Bangladesh, the Alliance for Bangladesh Worker Safety, and the RMG Sustainability Council). These measures led to the closure of hundreds of unsafe, bottom-tier plants and the scaling up of remediation activities in many others.

            We need to develop an action plan not only to solve our immediate problems but also to ensure long-term solutions to such problems. Policies should be in place like a “24-hour helpline” for manufacturers who are importers and require immediate assistance in case of any supply chain disruption. We need solutions but not just temporary ones, we need solutions that are sustainable and beneficial for us in long run. With the right policy tools and support from the government, the textile sector will be once again on the right track as the sector has proved its worth time and time again.