Dr. Gohar Ejaz

Pakistan is spiraling into abject poverty and is slipping further into the abyss. The World Bank (WB) reports that over the last three years, real incomes have declined at a rate of 10.9%, while the wealth of Pakistani citizens has contracted by more than a half. Our current state of turmoil is a consequence of years of poor management and inefficient governance, the difficulties are made worse by a lack of long-term planning and failure to develop a manufacturing-cum-export culture. Political disunity undermines our society, while basic amenities are still missing, unemployment and lack of opportunity cause a significant brain drain.

Stagflation, aptly describes Pakistan’s current economic situation. There is a significant decrease in per capita income in dollars despite a 27.1% growth in rupee terms of GDP in FY2023, this is primarily due to currency depreciation, lower GDP growth, and a growing population. The impact of stagflation extends beyond the economic realm and poses risks to political stability, as rising prices and stagnant growth fuels discontent and erodes trust in government. The moment has come for busting myths, and establishing a firm commitment to reforming agricultural productivity, industrial performance, and consequently economic outlook.

Myth: 50% of Pakistan’s economy is informal/black.

Truth belies this assertion as estimates of the size of the informal economy provide a range between 20%-35%. Pakistan’s informal sector is no larger than its Asian counterparts, and has been declining for the last 30 years and now stands firmly within global values for developing economies. In light of this, efforts to integrate it into the formal economy or broaden the tax base with 80% of the population living at subsistence, will yield diminishing and marginal returns. Analysis of the money supply (M2) implies an informal sector that is roughly 25% of GDP. By most estimates, 75%-80% of the money supply is used in the formal economy. Further analysis of the bank deposits of 24.4 trillion and NSC 3.1 trillion, a total of 27.5 trillion which are all declared in the documented system with ID cards and are DNFB compliant, with tax on income deducted. Thus only 5 trillion cash or less than 20 percent of M2 money supply is not documented in system. The people of Pakistan are now 80 percent compliant and documented paying their due taxes, although all might not be filing returns but income is taxed as withholding tax regime on income is in place. Even if return of 80 percent of owners of this wealth is filed there will be no increase in tax revenue.

The informal sector cannot decrease below 15% of the economy, and that is at par with advanced nations. Pakistan needs to balance its fiscal deficit through promoting efficiency in public spending by slashing its government footprint rather than bloating its fiscal income through unsustainable taxes and loans.

Myth: Pakistan can progress without aggressive family planning.

Low-income families in Pakistan are finding it difficult to survive. This is manifested through nearly half of children under the age of five are suffering from stunted growth, while 30% experience wasting, leading to estimated annual losses of approximately $3 billion, accounting for around 1.33% of Pakistan’s GDP. The problem is Pakistan’s high population and fertility rate, which is the highest in South Asia and the surrounding region, at 3.56 births per woman. Such a large rate of growth, raises inequality, places greater pressure on government services, and drives more people into poverty. Family planning is often challenged as being antithetical to Islam, this is also a myth. Many of the world’s Muslim societies such as Iran have had comprehensive family planning initiatives which brought their fertility rate down to 1.71 births per woman.

Change in Fertility Rates, 1960-2022

	2000	2022
Pakistan	5.26 births per woman	3.56 births per woman
Bangladesh	3.22 births per woman	1.95 births per woman
Iran	2.02 births per woman	1.71 births per woman

Source: World Bank

Myth: Remittances and foreign currency loans lead to sustainable GDP growth.

Although, Pakistan’s remittances contribute to its Balance of Payments their impact on sustainable economic growth is negligible. Instead, remittances have been shown to decrease labour force participation, increase the import bill, and negatively impact investment. Loan conditions from the IMF add fuel to the fire, as the country’s inflation is expected to increase further due to tax hikes and rising fuel prices and self-generated economic recession.

Myth: Devaluation will increase exports.

Devaluation has little or no impact on exports, as various studies have concluded that a 10% devaluation yields a 1% increase in exports with a time lag of two years. Furthermore, the soaring exchange rate has spurred a dearth of working capital as whatever is available is now totally inadequate to finance the export momentum achieved in the prior years. Export-led-growth is the only sustainable solution to address our structural economic issues. For this to happen, Pakistan needs to develop an export culture which can only be done via reforms and ensuring their implementation.

Myth: The export sector is demanding a subsidy on energy tariffs.

This is summarily not the case, as the cost-of-service based tariffs are below the Regionally Competitive Energy Tariff (RCET). Exporters are expected to cross-subsidize other sectors and underperforming DISCOS at the cost of their own competitive pricing for exports. This is leading to a permanent loss of market share, resulting in factory closures, investment losses, deindustrialization, unemployment, and poverty. The export sector cannot be expected to maintain or increase exports and employment under the unnecessarily high-cost cross-subsidy burden placed upon it.

Myth: Pakistan’s economy can survive without reducing government expenditure and massively curtailing borrowing.

The FY 2023-24 bugdet framework has an estimated outlay of Rs. 14.46 trillion, with half allocated to debt servicing. We’re now trapped in a ‘witch cycle’ whereby nearly 100% of our tax revenue is diverted towards debt servicing.

There is evidently a lack of focus on rationalizing government expenditure, and a heavy reliance on increasing debt in budget framework 2023-24. The formal sector is squeezed with additional taxes, hindering investment and job creation. The available options to increase the national kitty is through industrialization and expanding exports. However, the export sector is facing great difficulties on its own ranging from energy availability and pricing issues to absence of working capital and the unacceptable level of interest rate leading to an unserviceable cost of doing business.

Myth: Pakistan has cheap labour.

This is not the case as Pakistan’s labour productivity renders the actual cost of that labour far above its competitors. Regrettably, when comparing the region, Pakistan exhibits the lowest level of work ethics and labor productivity across all the sectors of the economy. According to the International Labor Organization (ILO), India’s per capita output has increased by 177 percent, Bangladesh’s by 109 percent, and Pakistan’s by only 32 percent in between 2009-2019. From 2015 to 2020, Pakistan experienced an annual growth rate of 1.6 percent in productivity, significantly lower in the region.

Furthermore, around 445,000 students graduate from Pakistani universities, and approximately 31% of those with professional degrees remain unemployed. In 2022 alone, more than 765,000 young qualified professionals left the country in search of employment overseas. The loss of talent is a serious threat to productivity.

Myth: Higher interest rates will control inflation in Pakistan.

In Pakistan’s case, it is paradoxical that high interest rates have not been effective in controlling consumer spending and inflation. This is because approximately 80% of borrowing in Pakistan goes towards fulfilling government budget deficits. High interest rates typically work well in countries with a substantial proportion of commercial borrowings, which is not the case in Pakistan’s economic structure. Instead of increasing national savings, the hike has led to an upsurge in public debt and repayment burdens. Inflation is outpacing the interest rate hike, reaching levels around 35-40%. In 2021, Pakistan’s domestic credit to the private sector was 15.4% of GDP while 84.6% was borrowed by the government.

Pakistan certainly has the chance to climb out of the growing crisis, but it cannot do so without serious reforms and severely curtailing the size of government. According to experts, Pakistan’s problems are small in the grand scheme of things. What is required is to add a mere $10 per capita to exports. This can be achieved through enhanced agricultural productivity, increased industrialization, and developing a serious export culture.

Shahid Sattar and Amna Urooj

Pakistan’s policy makers have been consistently formulating excellent policies to address challenges in the industrial sector of the country, but these have been fruitless due to non-continuity and lack of implementation (Khan 2016). While some policies may yield short-term benefits, but to gain traction, they often lack sustainability in the long term. To navigate the complex and rapidly changing landscape, the textile industry can be viewed through the 5F’s framework. This framework enables companies to analyze the entire value chain, from Farm to Fiber to Factory to Fashion to Foreign stages, and identify areas of strength and weakness to stay competitive. It is particularly relevant in a market where consumer preferences, technology advancements, and sustainability considerations are paramount. We will examine this article through the lens of the 5F’s framework to identify issues and problems within the sector and enable the formulation of policies for mitigating the issues so identified.

Farm:

Lack of fiber (Cotton and PSF) have reduced or closed operations of many factories as both these fibers were to be imported in large quantity in an environment where L/C’s were not being opened or honored. This brought to focus the extremely urgent need for establishing a reliable local supply of cotton and PSF in order to avoid such situations in the future.

Pakistan’s cotton farming, which is crucial to the textile industry, is facing daunting challenges due to climate change, rising temperatures, unpredictable rainfall, water scarcity are resulting in lower crop yields and diminished quality. As a consequence, cotton production and productivity has reached a 40-year low. This situation not only jeopardizes the livelihoods of farmers but also threatens the sustainability and profitability of the entire textile industry. Source: APTMA
Pakistan’s low cotton yield and production costs the country approximately $4.0 billion annually, along with a much higher impact on GDP. Imports of cotton worth $5.0 billion in the past three years highlight the need for increased domestic production to reduce reliance on imports and lower the cost of edible oil imports as an important byproduct of cotton is oilseed.

Despite challenges, some progressive cotton farmers achieve a yield of 1500 kg/hectares, emphasizing the potential for improvement in productivity. This highlights the potential gains that can be achieved through better seed and crop management. Support for edible oil crops and addressing productivity issues are crucial for the cotton industry.

To ensure the long-term sustainability of the textile industry, Pakistan must prioritize the adoption of suitable seed varieties for the sector. By doing so, the country can secure the future of its textile industry and mitigate the adverse impact of climate change on cotton farming.

Fiber:

Ensuring the availability of adequate raw materials/fiber for Pakistan’s textile production is crucial for sustained growth, requiring measures such as promoting domestic cultivation, exploring alternative sources, and fostering international collaborations. Textile mills in Pakistan are instrumental in the cotton-to-fiber transformation, supporting high-quality textile production. To sustain growth and expand market opportunities, the industry needs to tap into the global synthetic textiles market by aggressively entering the industry and accessing raw materials at competitive prices. However, challenges such as high protection rates and tariff structures hinder Pakistan’s progress in the synthetic textiles sector. The government may implement trade facilitation measures by abolishing import duties on PSF, enabling the industry to diversify and thrive in international markets.

In terms of sustainability, some textile mills in Pakistan are taking proactive steps to promote eco-friendly practices. They are introducing innovative fabric ranges, such as Radianza fiber, which employs environmentally friendly dyeing processes to reduce water consumption and pollution. Additionally, larger companies are championing recycling and reuse by offering recycled textile products like “Premium,” “Indigo,” and “Blue,” which are made from post-industrial, preconsumer, and post-consumer waste, respectively. By reducing the carbon footprint through these recycled products and developing biodegradable polyester, the textile industry in Pakistan is contributing to a more sustainable and environmentally conscious future. However, an increased R&D in this area is required which definitely requires an increased budget.

Unconventional materials such as Hemp and Banana leaves are increasingly being used in textiles due to their sustainability and eco-friendliness. These natural materials offer durability, breathability, and biodegradability, making them attractive alternatives to traditional textiles. Pakistan should also invest in such innovative yet sustainable fibers.

Factory:

Investing in human capital is vital for the industry’s sustainability. Ongoing training and education for textile workers and engineers are essential to stay updated on technology and production advancements. The industry also offers vocational training to attract young individuals into the field.

Efforts to modernize textile factories and enhance working conditions in Pakistan should be the top most priority. The government needs to focus on policies for energy efficiency and cost reduction, while private investors may invest in advanced machinery and technology to improve production efficiency and quality.

Enforcement of labor laws, strengthening of labor inspections, and protection of workers’ rights is a prerequisite for an exporting industry. Effective implementation of the 27 labor and human rights conventions is crucial as Pakistan’s current GSP plus status will be reviewed in December 2023. Factory owners should commit to reform and implement the requisite conventions. Revisions to labor laws, impartial investigations, and increased resources for inspections are needed. Transparency, collective initiatives, and grievance redress procedures should be implemented by companies to improve the situation.

The infusion of approximately $5 billion in the textile sector served the objective of enhancing textile exports to reach $25 billion by 2025 through the establishment of 100 new textile units, accompanied by significant upgrades in value addition to meet market demands. Regrettably, so far, the investment has failed to achieve its potential due to various factors. These factors include difficulties in opening letters of credit (L/Cs), challenges related to the supply and pricing of energy (both gas and electricity), the high policy rate (currently standing at 21%), liquidity crises, complications regarding cotton imports and the release of shipments, obstacles concerning the refund of sales tax, and issues associated with the markup rates of the Long-term Financing Facility (LTFF).To ensure the success of such policies and investments, it is crucial to adopt a comprehensive approach that encompasses the enhancement of capacity in all relevant areas, enabling the policy to yield fruitful results.

Fashion:

Pakistan’s rich culture is rooted in the traditions and history of its people, showcasing a unique way of life, ideas, and ethics. The clothing in Pakistan, influenced by its diverse regions like Punjab, Sindh, Balochistan, Khyber Pakhtunkhwa, Kashmir, and Gilgit Baltistan reflects the cultural heritage of these areas. The clothing culture and fashion is a significant aspect that distinguishes each regional culture, incorporating elements of climate, lifestyle, and distinctive styles that contribute to their distinct identity. Despite this beautiful diversity, Pakistan’s fashion industry has not exploited its true potential as of yet. The fashion products and apparel industry are expected to exhibit dynamism and diversity. Despite challenges, the country’s textile industry holds significant potential to become a global fashion player. Abundant raw materials and a skilled workforce position Pakistan as a major producer and exporter of highquality fashion products.

Investment in design and marketing is crucial to enhance the visibility and appeal of Pakistani fashion products. To address the perception of mediocre quality associated with products from Pakistan, manufacturers and designers should concentrate on creating innovative designs that appeal to a specific niche. This niche refers to a targeted segment of consumers who are willing to pay a higher price for textile products from Pakistan when they perceive added value, such as superior craftsmanship, unique aesthetics, or exclusive materials. By catering to this discerning niche market abroad, the textile industry in Pakistan can achieve higher profitability and overcome negative perceptions. Effective marketing campaigns and initiatives are necessary to promote Pakistani products successfully and maximize their market reach and impact. Pakistan’s textile industry has the potential to establish a strong foothold in the Western fashion sector. To capitalize on this opportunity, immediate implementation of effective marketing campaigns is essential.

Foreign:

With strategic investments and initiatives and sustained policy implementation, the industry can thrive. Trade barriers, such as tariffs, hinder Pakistan’s textile exports. In order to align our exports with global requirements, the government must undertake a thorough policy review. This should involve negotiating free trade agreements and expanding market access to ensure that our products can effectively compete on the global stage. By doing so, we can enhance our export potential and effectively meet the demands of the international market. It is also necessary to establish Pakistan as a reliable and quality supplier. Research and development investments are crucial to meet market trends and standards.

The global market for textile fibers has witnessed a shift from cotton to synthetic fibers, particularly polyester, with Pakistan’s textile industry lagging behind in this transition. The country’s garment exports still predominantly rely on cotton, and the use of man-made fibers remains limited. China, India, and Southeast Asian countries dominate the production and export of synthetic textiles. While a fully integrated chemical industry is crucial for synthetic fiber production, countries like Vietnam, Bangladesh, and Cambodia import materials to excel in the global market. Unfortunately, domestic import policies and market conditions have hindered Pakistan’s progress in the synthetic textiles sector, despite the potential. Removing import duties on PSF (Polyester Staple Fiber) is essential to compete globally as bulk of PSF based textile manufacturers do not have access to duty free schemes for import and export. To stay competitive, the industry must prioritize enhancing productivity, efficiency, and quality.

Investing in sustainable and ethical practices across the 5F’s framework is vital for Pakistan’s textile industry to compete globally. This involves adopting organic and recycled fibers, conserving water and energy in factories, ensuring fair labor practices, and minimizing waste in the supply chain. Not embracing sustainable and ethical practices in Pakistan’s textile industry carries severe consequences. Failing to meet evolving consumer demands may result in business loss, while exploiting workers and causing environmental harm can lead to legal and reputational repercussions for the industry.

Value addition in Pakistani textile businesses, through the shift to higher value-added products, such as finished garments and designer textiles, will enhance global market share, lead to increased revenue and establish Pakistan as a reputable hub for quality textile manufacturing. Pakistan’s textile sector must embrace change, harness innovation, and establish itself as a trusted source of textile products. By taking collective action and implementing proactive measures, the industry can secure its rightful place and unlock its true potential.

Way Forward:

In order to strengthen exports and empower the economy, several crucial measures need to be undertaken:

1. Strengthening the Farm stage:

a) Promote research and development leading to usage of genetically modified seed varieties which are resistant to pests, water scarcity, have high heat tolerance etc.
b) Implement sustainable practices in cotton farming to mitigate climate change impacts.
c) Adopt innovative technologies like precision agriculture to improve crop yields and quality.

2. Enhancing the Fiber stage:

a) Prioritizing enhanced R&D for identification of better quality and different raw materials.
b) Duty exemptions and duty drawbacks with more streamlined mechanisms are needed to support the industry and enable growth in the global synthetic textiles market.

3. Upgrading the Factory stage:

a) To prevent the futility of isolated policies, it is necessary to formulate all-encompassing policies for the textile sector that integrate with related sectors like gas and electricity, while ensuring effective implementation for true success.
b) Improve energy efficiency in textile factories.
c) Invest in modern machinery and technology for textile mills.
d) Stricter enforcement of labor laws, ensure compliance with international quality and safety standards.
e) Implement transparency, collective initiatives, and grievance redress procedures.
f) Focus on skill development and education for textile workers and engineers.

4. Promoting the Fashion stage:
a) Invest in design and marketing to enhance the visibility and appeal of Pakistani fashion products.
b) Focus on innovative designs and products to attract a different but profitable niche.
c) Conduct effective marketing campaigns and initiatives to showcase high value of Pakistani products, breaking away from the perception that Pakistan is merely a supplier of mediocre goods.

5. Expanding in the Foreign market:

a) Negotiate free trade agreements and expand market access.
b) Invest in research and development to meet market trends and standards.
c) Work towards establishing Pakistan as a reliable and quality supplier.
d) Enhance productivity, efficiency, and quality to stay competitive.

6. Embrace sustainable and ethical practices across the 5F’s framework:

a) Adopt organic and recycled fibers.
b) Minimize waste in the supply chain.

7. Shift towards value-added products:

a) Focus on producing finished garments and designer textiles.
b) APTMA’s commitment to establishing 1000 garment plants with a substantial investment of $7 billion has the potential to bring significant value addition to Pakistan’s textile sector and the overall economy. The boost in exports, job creation, technological advancement, value chain integration, infrastructure development, and sustainable growth are some of the key benefits that can be realized through this initiative. However, sustained policy support is essential to maintain this momentum and overcome any past challenges, ensuring the long-term success of the textile industry in Pakistan.

8. Continuously innovate and upgrade:

a) Harness innovation to meet evolving consumer demands.
b) Participate in international fairs and exhibitions to showcase capabilities.
c) Take collective action and implement proactive measures for industry-wide growth.
d) Create a strong linkage between academia and the textile industry which will foster continuous innovation and upgrades, driving advancements and ensure a dynamic and progressive sector.

Pakistan’s textile sector, with less than 2% global market share, has great potential for expansion, however; Pakistan must focus on a visible shift to more MMF based products as 70% of the world trade now focuses on MMF based fabrics. To revive the economy, sustainable practices across the 5F’s framework are crucial. Uplifting MMF import duties, enhancing the PSF sector, simplifying import-export schemes, promoting sustainable sourcing, eco-friendly production, innovation in design, and exploring new export markets is mandatory. Pakistan can become a prominent textile player, creating jobs, boosting foreign exchange, and driving economic development.