By Shahid Sattar | Muhammad Mubasal

Pakistan’s innovation landscape presents a grim picture. Pakistan ranked 88th globally and 7th regionally in the Global Innovation Index 2023. While India ranked 40th globally and 1st in the region, this stark contrast underscores the urgent need for transformative strategies and concerted efforts to propel Pakistan’s innovation ecosystem into a new era of growth and competitiveness.

The primacy of innovation in development cannot be denied. Innovation and technological change are fundamental causes of growth. They increase productivity and efficiency, evolve products to capture new markets, and can lead to advances in sustainability by decreasing negative externalities. Technological advancement also tends to have spillover effects, as advancements in production processes, knowledge, and capital are adaptable across industries.

So, how does innovation occur?

In developing countries, innovation is predominantly driven by exports due to two major factors. Firstly, because exporters have access to larger markets which drives economies of scale. In order to fulfill the demands of both domestic and international consumers, exporting firms must increase their productivity through both increased inputs but more so through gains in efficiency. The selection pressure between firms to fulfill demand allows resources to be allocated to efficient firms as less efficient ones become uncompetitive and leave the market.

However, this does not happen in Pakistan as the inefficient, unproductive, and uncompetitive firms are subsidized and protected by the government. For instance, a plant owing to heavy protection in the form of import duties and anti-dumping duties on purified terephthalic acid (PTA) and polyester staple fiber (PSF), is purportedly still using 30-year-old outdated technology and it neither innovates nor exits the market. This situation forces exporters to purchase PTA and PSF at inflated prices, disincentivizing the production of Man-Made Fiber (MMF). Consequently, MMF-based exports struggle to expand and remain uncompetitive in international markets.

Secondly, trade creates knowledge spillovers both directly and indirectly. Direct benefits occur from the learning of new technologies and methods, while indirect benefits arise from reverse engineering advanced imports. There is also a process of ‘learning by exporting,’ which states that export behavior has a direct and positive impact on firm-level innovation and productivity. Firms engaging in trade develop minute innovations, learn the dynamics of new markets, and expand networks in the global value chain, which all lead to faster and greater knowledge spillovers.

According to trade statistics provided by the International Trade Centre, Pakistan exported goods worth $11 billion in 2003 while Vietnam and Chile had exports of $20 billion. In 2022, Vietnam exported goods worth $370 billion, Chile exported $102 billion while Pakistan exported a meagre $31 billion. In 2022, Pakistan’s exports accounted for only 10.5% of GDP, whereas the South Asian average stood at 20.5%. One of the major reasons for Pakistan’s low exports is its closed economy.

This correlation between international market exposure and innovation is particularly evident in Pakistan’s textile sector, the country’s largest exporting sector. According to Wadho & Chaudhry 2016, firms whose main market is the Middle East, has an innovation rate of 100%, followed by the USA (91%) and Europe (80%). On the other hand, firms whose main market is the local market has an innovation rate of 41%. This further highlights the structural weaknesses in the economy that impedes the growth of domestic industry which is vital for economic growth.

Furthermore, Pakistan’s Global Innovation Index 2023 rankings show room for improvement when compared to regional leaders India and Vietnam, highlighting opportunities for enhancing the innovation ecosystem to boost investments and sustainable growth (Figure 1).

In assessing innovation, various indicators are used, such as patent applications, R&D expenditure, scientific and journal article publications, and gross fixed capital formation. A comparative analysis of patent applications illustrates the gap between Pakistan and India. In 2022, for instance, Indian residents filed 26,267 patent applications, while Pakistan saw only 426. Despite Pakistan’s high rate of change in patent applications over the last decade, with a 273% increase (surpassing Vietnam’s 248% and India’s 196%), the country has yet to leverage potential effectively. This underscores the need for Pakistan to foster a more conducive environment for innovation, aligning with global standards and practices to realise its full potential.

“This need for a conducive environment is further illustrated by the decline in non-resident patent applications in Pakistan, which dropped by 42% over the past decade. In stark contrast, India, Bangladesh, and Vietnam witnessed increases of 14%, 35%, and 128%, respectively. This divergence indicates that Pakistan’s innovation landscape might be perceived less favourably by foreign investors and innovators, potentially due to inadequate regulatory and legal frameworks that impede innovation and investment.”

Regarding research and development (R&D) spending, Pakistan allocated only 0.16% of its GDP to R&D in 2021, a decrease from the 0.32% spent a decade earlier in 2011. This reduction contrasts with the broader trend in South Asia; as per the World Bank’s Enterprise Surveys, only 2.3% of firms in Pakistan invest in R&D, which is significantly lower than the South Asian average of 12.5% (Figure 3). This low investment level in R&D starkly limits the country’s innovative capabilities and growth prospects in the competitive global market.

These challenges in investment and innovation translate into credit crunch for the domestic industry. This situation is particularly complex when considering the state of Pakistani SMEs, which constitute 90% of all businesses and employ 30% of the labor force. Despite their significant presence, these SMEs face substantial growth barriers, primarily due to limited access to credit. The World Bank’s Enterprise Surveys reveal that 40.9% of firms in Pakistan are fully credit constrained, and 15.2% are partially constrained. These figures are alarmingly higher than the South Asian averages of 17.1% and 17.7%, respectively. Furthermore, only a mere 2.1% of local businesses in Pakistan had a bank loan or line of credit, compared to 23.7% in the region. The lack of financial support for Pakistani SMEs hampers their ability to innovate and expand, hindering the country’s economic development.

In conclusion, Pakistan’s potential for growth and innovation is substantial yet underutilized. Addressing the challenges of regulatory hurdles, limited investment in R&D, and the constraints faced by SMEs are crucial steps towards unleashing this potential. By focusing on strengthening domestic industries, improving the business environment, and investing in innovation, Pakistan can not only enhance its global competitiveness but also create a robust foundation for sustainable economic growth.

Moreover, removing barriers hindering the export sector is vital to remedying the current innovation dearth. This underscores the importance of adopting an export-led paradigm to drive economic growth. An export-led paradigm shift coupled with a focus on domestic industry development will not only boost exports but also enhance innovation capacity, driving sustainable economic growth in the long term.

The overarching message is clear: export-led growth is not just a solution for Pakistan’s balance of payments crisis and economic expansion but also a catalyst for amplifying innovation. To achieve this, exporters must be insulated from

distortionary interventions, unfavorable tax regimes, and other inefficiencies that impede sectoral growth and divert resources via transaction costs.

By Shahid Sattar | Amna Urooj

As Pakistan steps into critical discussions with the International Monetary Fund (IMF), it’s confronting immense financial pressures while simultaneously holding strategies that could fundamentally change its fortunes: the promise of export-led growth as well as an immense potential in much enhanced agricultural produce.

With a debt-to-GDP ratio that has breached the 70% threshold, Pakistan’s economic journey is overshadowed by the enormity of its debt—60% of it being domestic, bearing the brunt of 85% of the interest payments. This situation paints a vivid picture of the fiscal tightrope the country walks on.**

Yet, why turn to the IMF when an untapped potential lies within? Pakistan’s industrial, agriculture and tech sectors are a beacon of hope, resilience and demonstrate vast capabilities. This scenario presents a compelling case: while Pakistan seeks the IMF’s support, its flourishing textile exports, agriculture sector that can produce surplus and a growing tech sector signify an inherent strength and capacity for economic self-reliance.

This juxtaposition of external financial assistance and the potential for home-grown economic revival underscores a critical question — why rely on the IMF when there’s a path to harnessing export-driven growth towards financial independence?

While Pakistan has got other ways to bring in cash, like remittances from abroad or foreign investments, they’re not going to be the game-changer we need anytime soon. Various studies such as the study by Perez-Saiz, H., Dridi, J., Gursoy, T., & Bari, M. (2019) suggests that remittances do not automatically boost a country’s overall economy as much as we might think. While families receiving this money do end up spending more, this spending doesn’t lead to economic growth. The researchers found that whether these remittances help the economy depends a lot on how different parts of the economy are connected. This means that just getting more remittances doesn’t necessarily make the economy stronger. Moreover, the consensus in academic research is that remittances lead to inflation as they increase aggregate demand via higher household income, resulting in increased consumption.

So, we’re left facing some tough choices. From July to February, Pakistan’s exports are consistently trailing behind imports, painting a picture of a trade imbalance. In February alone, the figures are quite telling: exports stand at a modest $2.57 billion, while imports loom at a hefty $4.28 billion (Source: SBP). This substantial gap signals an urgent call to action for enhancing export capabilities to match or even overtake the towering import figures. Remittances, though stable, do not compensate for this disparity, highlighting the critical need for bolstering Pakistan’s export sector to improve the trade scenario.

But, there’s a silver lining. With the right push and a bit of creativity, exports can be our ticket to turning things around. It’s not just about selling more, but selling smarter, tapping into a world that wants what we have to offer. For example, Pakistan’s high agricultural import bill could be significantly reduced by revamping the agri-sector to produce self-sufficiency and a sizeable exportable surplus, leveraging initiatives like Special Investment Facilitation Council (SIFC) for corporate farming and agro-industry investments.

All is not lost, we’ve got a world of opportunities right at our fingertips. Pakistan needs to align its textile sector with global trends, shifting towards a 70-30% mix of man-made fibers (MMF) and cotton products. Currently, dominated by cotton exports, diversifying into MMF and high-performance apparel—where global trade is focused—could significantly enhance Pakistan’s export basket. Such a move will contribute to economic stability by meeting international market demands more effectively.

The real challenge isn’t finding new things to sell but getting better at selling what we’re already good at, for example textiles, agricultural and tech products. We’ve got to think bigger, reach further, and make sure we’re not just participants but winners in the global market.

For example, there’s been a remarkable upswing in Pakistan Apparel Exports, particularly in 2021, where we see substantial growth across all markets. The EU and the USA stand out with pronounced spikes, suggesting that efforts to broaden the export base are bearing fruit. This robust performance supports the narrative that Pakistan is moving in the right direction by diversifying its textile exports, leaning into products with higher global demand. With the right policies and continued focus on quality and market expansion, Pakistan can not only secure its position in the global market but also further the goals of economic stability and growth.

And here’s the kicker: we can do it. The agriculture sector also has immense scope for improvement through enhanced yields, corporate farming and getting areas such as the Cholistan Desert into productive use. Israel’s successful transformation of the Negev Desert into a flourishing agricultural area provides a blueprint to Pakistan to potentially replicate it in the Cholistan Desert. Adopting similar innovative farming techniques could spur agricultural development, increase food production, boost employment rate and reduce Pakistan’s reliance on foreign debt by boosting the economy through homegrown resources.

Addressing the agricultural productivity gap in Pakistan could be a significant leap toward economic self-sufficiency. The country’s current agricultural yield lags behind that of leading global producers. For instance, Pakistan’s wheat yield is significantly lower than China’s maximum yield, as is the case with rice, maize, sugarcane, and cotton. By closing this yield gap through the adoption of modern farming techniques, better irrigation systems, and superior seeds, Pakistan can substantially increase its economic output which in the ultimate analysis will allow Pakistan to maintain its potential and economic sovereignty while providing employment to its very large workforce.

Consider the wheat production: if Pakistan’s yield per hectare reaches the level of China’s, the output increase could translate to an additional $5.9675 billion. Similar increases across other major crops like rice, maize, sugarcane, and cotton could collectively add up to over $17 billion to the economy. This additional revenue could create an exportable surplus, ensuring food security, and simultaneously addressing the country’s employment issues.

The SIFC and LIMS (Land Information & Management System) are also united on the principle that by utilizing additional lands for such optimized agricultural practices, Pakistan can further boost its economy. An added benefit of $10 billion, in addition to the $17 billion enumerated above, is foreseeable by doing so, enhancing the nation’s export profile.

This kind of agricultural overhaul not only promises to fill existing productivity gaps but also to set a foundation for a more stable and prosperous Pakistan, one where dependency on external debt is greatly reduced, and local resources are fully harnessed for national growth.

Furthermore, one of the initiatives, which is the “1000 Garment Plants” initiative, also aims to double Pakistan’s textile and apparel export capacity from $25 billion to $50 billion by adding 200 garment plants each year for five years. This strategic expansion is expected to revolutionize exports, cater to global market demands, and creating over 1 million jobs, and significantly enhancing Pakistan’s economic landscape and reducing its dependency on foreign aid.

The recent downturn in Pakistan’s textile output, which has hit its lowest point in two decades, illustrates a significant challenge, with the industry experiencing a sharp 35% drop in Large-Scale Manufacturing (LSM) output two years ago.

Despite this setback, the textile sector demonstrated remarkable resilience by subsequently expanding its capacity by 33%. This recovery and unused capacity offer a glimmer of hope amidst the data, pointing to the industry’s ability to rebound.

Although there was a slight decline in textile and apparel exports in the eight months of FY24 compared to FY23, the existence of this unused capacity suggests that the industry is poised for a potential upswing. This capacity to bounce back reinforces the belief that nurturing domestic industries like textiles is crucial for Pakistan’s economic health, potentially more so than relying on unpredictable foreign aid. Harnessing this latent potential to amplify textile production, the nation could enhance its export volume, shrink its trade deficits, and stride towards an economically autonomous future, cutting down its reliance on international financial aid and loans.

One thing to note is that the escalating energy prices have had a significant knock-on effect on Pakistan’s textile industry. As costs rise, local producers find it increasingly difficult to compete on price, leading to a greater reliance on international imports to meet domestic demand. This shift has been detrimental to the foundational sectors of the textile industry such as spinning and weaving, which are struggling to stay afloat. Consequently, many of these essential back-end industries are being forced to shut down, directly impacting Pakistan’s net exports. This decrease in production capacity undermines the country’s ability to export, exacerbating the trade deficit and challenging the nation’s goal of economic self-sufficiency.

Pakistan’s textile sector is not just keeping pace—it’s moving ahead, particularly in the apparel export arena. This industry is undergoing a remarkable transformation, one that is gearing up for substantial export growth and is set to enhance its position in the international market. This positive shift was recently highlighted at a US International Trade Commission public hearing, where Pakistan’s growing competitiveness in the apparel sector was discussed.

The sector’s transformation is marked by the adoption of cutting-edge technologies and a commitment to transparency, aligning with global demands for traceable and sustainable production practices. The recent move towards the establishment of the National Compliance Center (NCC) is the right step in achieving these objectives. The ambitious Net Zero Pakistan Initiative underscores the country’s commitment to sustainability, with leading apparel companies aiming for a carbon-neutral footprint by 2050.

Gains in productivity within Pakistan’s textile sector remain largely untapped but hold significant potential for boosting the economy. Through modernization, such as upgrading technology and processes, the industry could achieve these gains, enhancing efficiency and output quality. Additionally, by shifting focus towards producing higher value-added textile products, Pakistan can elevate its export profile.

To revitalize its economy swiftly and substantially, Pakistan must focus on bolstering sectors like textile, agriculture, and technology exports. The tech sector, in particular, offers a lower-investment, high-return avenue for economic growth. However, its potential is severely hampered by the government’s frequent shutdowns of the internet and social media platforms, crucial for the IT and IT-enabled services (ITeS) industries.

Such disruptions not only hinder the productivity of software exporters and freelancers but also damage the trust of international clients, who prioritize reliability and timely delivery over cost. This mistrust discourages investment and partnership opportunities, pushing potential clients to seek services elsewhere, even at higher costs. As Pakistan houses the world’s second-largest online freelance workforce, ensuring uninterrupted internet access is paramount for not just the IT sector but for the entire economy.

The failure to provide stable connectivity undermines Pakistan’s capacity to reduce its dependency on foreign aid by leveraging its potential for self-sufficiency through IT sector exports, which are currently projected to reach USD 3.5 billion this year.

Pakistan’s history is a testament to its potential for growth, spanning diverse sectors from textiles to technology. Despite challenges such as energy costs, the nation has consistently demonstrated its capacity to rise above obstacles, fueled by its competitive edge in labour costs. The vision for economic resurgence now hinges on a cohesive, export-focused strategy that enjoys unwavering support from the highest echelons of leadership in the new government.

At this pivotal moment, with the complexities of IMF negotiations ahead and the economic landscape in flux, Pakistan’s recent strides in the textile and the recent initiatives being taken in the agriculture sector illuminate the path to sustainable development.

By capitalising on this success, expanding its economic horizons, and enacting meaningful reforms, Pakistan is charting its course towards a prosperous future. It’s a future where economic self-sufficiency is not just an aspiration but a reality, with exports serving as the cornerstone of Pakistan’s economic sovereignty.

By Shahid Sattar | Absar Ali

One of Pakistan’s most pressing economic issues is the chronic shortage of foreign exchange underscored by an import-based-consumption-driven economy with an abysmal industrial base that cannot compete on the international stage and is shrinking with every passing day.

Exports are the need of the hour; while everyone including the government and SIFC (Special Investment Facilitation Council) are cognizant of this fact, unfortunately, the policy measures that have been doled out, especially in the energy domain, reflect an opposite reality.

According to a recent report, the Bangladesh Commerce Ministry, in its draft Export Policy 2024-27, has proposed a 5 to 10 percent rebate on electricity bills for major export-oriented industries. In Pakistan, the government has abolished the preferential gas tariff for export-oriented sectors and hiked gas prices yet again—an increase of 223% since January 2023.

As a consequence, the end-use price of gas-based captive generation has skyrocketed. At the same time, grid electricity tariffs are at around 17.5 cents/kWh—over twice that faced by competing firms in regional economies like Bangladesh, India, and Vietnam.

Is it any wonder then that Bangladesh exported around $47 billion worth of just textiles and garments in FY23, while Pakistan’s total exports across all sectors of the economy stood at a meagre$28 billion during the same period? While Bangladesh and Vietnam have made significant gains in the global market for textile and apparel over the past decade, Pakistan’s share remains marginal (figure 1).

“What is important to understand for our policymakers is that neither the economy nor the industrial sectors operate in a vacuum. Whether or not we can export a product depends on our cost of production relative to that of firms in other countries. If the government continues to push its inefficiencies and social obligations on to the private sector in the form of prohibitive taxes, cross subsidies, inflation, exchange rate depreciation and high interest rates, it translates into higher cost of production that render our products uncompetitive in international markets.”

And this is the reality that the textile and apparel sector—Pakistan’s single largest and perhaps most important manufacturing sector—has been facing every day for well over a year now.

After growing by 54% in only two years and peaking around $19.3 billion in FY22, textile and apparel exports slumped to $16.5 billion in FY23 owing to the withdrawal of regionally competitive energy tariffs amid a larger macroeconomic crisis.

From a peak of $1.74 billion in April 2022, monthly exports declined to a low of $1.18 billion in February 2023 and have now become stagnant at around $1.4 billion/month—$600 million below the installed production capacity of approximately $2 billion/month (figure 2, above).

Following the most recent hike in energy prices, there is no financially viable source of energy available for industrial sectors to manufacture with and compete in international markets. Domestic production of yarn and cloth is at a 20-year (figure 3) low while a drastic increase has been observed in imports of the same (figure 4).

It is therefore safe to assume that the economy is going through premature deindustrialization and over the coming months we will observe a further decline in textile and apparel exports as most spinners and weavers are closing their doors and more and more yarn and cloth are being imported for export manufacturing, resulting in a decline in the share of domestic value-added in exports and deterioration in net exports or trade balance.

At the same time, the economy’s gross external financing requirements stand well over $25 billion per year for the next 5 years and plans for meeting these requirements are limited to squeezing more and more credit out of increasingly unwilling creditors.

To catalyze a resurgence in Pakistan’s textile and apparel sector, a multi-faceted approach targeting key barriers to export growth is imperative. This includes addressing the prohibitively high energy tariffs, persistent delays in tax refunds, high costs and shortage of financing, low product diversification, restrictive import and anti-dumping duties on raw materials, and attracting investment to upgrade and expand the limited manufacturing capacity. Addressing these challenges holistically can not only revive the sector but also position Pakistan as a competitive player on the global stage.

As discussed above, there is currently no financially viable source of energy available to industrial sectors. The cross subsidy from industrial power tariffs must be removed and they must be brought down to a regionally competitive 9 cents/kWh.

Moreover, considering that Pakistan must begin an immediate transition towards net-zero emissions in export production to maintain competitiveness under the EU’s Carbon Border Adjustment Mechanism and similar regulations in other key markets, the CTBCM must be operationalized to allow B2B power contracts with a wheeling charge of 1-1.5 cents/kWh and the cap on solar net-metering for industrial consumers must be increased from 1MW up to 5MW.

Equally vital is the expansion of the export basket beyond cotton-based products to include man-made fibers (MMF), leveraging global market trends and demand. This requires a reassessment of import and anti-dumping duties imposed on MMF raw materials like purified terephthalic acid and polyester staple fiber that afford high levels of protection to domestic manufacturers who use it to extract rents from the domestic market and hinder the development of an MMF-based apparel manufacturing culture in the country.

The limited manufacturing capacity must also be upgraded and expanded. Doing so requires attracting investment by, at the very least, matching the incentives being offered in the region. To name a few, Bangladesh is offering preferential income tax rates, duty-free import of raw material, reduced withholding tax rates, and long-term financing facilities with preferential rates for exporters, while India is setting up seven mega industrial zones for textile and apparel manufacturing with developed factory sites, plug and play facilities and rebates of up to 3% of annual turnover, whereas Vietnam is offering preferential corporate tax rates, duty exemptions and various rebated modes of financing.

By prioritizing competitive industrial and energy policies and fostering an environment conducive to export-led growth, the country can navigate its current predicament and emerge stronger. However, if the status quo is maintained, a point of no return is not very far off in the future.

The consequences will be disastrous not just for the economy but also for Pakistan’s already weak social fabric as a large and young population that otherwise provides a demographic dividend at this stage of development will be further disenfranchised with no opportunities for gainful employment and no hope for a better future.

By Shahid Sattar | Amna Urooj

Against the backdrop of unaffordable energy tariffs, the government is taking a significant step by proposing to lower the electricity tariff to 9 cents. This reduction is expected to naturally encourage people to switch to grid electricity for commercial reasons as the captive power electricity at current gas pricing costs more than 10 cents. This is crucial for Pakistan, where gas is a scarce resource.

For context, Pakistan’s energy tariffs are notably higher than those of regional counterparts, potentially undermining its industrial competitiveness. With electricity tariffs at 17.5 US cents/kWh, Pakistan exceeds Vietnam’s 7.2, Bangladesh’s 8.6, and India’s 10.3 cents/kWh. The disparity is even starker in gas tariffs, where Pakistan’s blended rate is 12.4 US dollars/MMBtu, compared to lower rates in Vietnam, India, and Bangladesh. These high energy costs, particularly for sectors like textiles and apparel, put Pakistan at a significant disadvantage, threatening the viability of its industries in the global market and calling for policy recalibration to ensure competitive parity.

Millions of jobs are at stake as Pakistan’s industrial sector confronts a looming deindustrialization crisis, driven by the dual challenges of skyrocketing energy costs and the global trend of industrial growth sustainability being severely tested by energy policy decisions. Essential for the country’s economic growth and development, the sector is navigating through turbulent waters, grappling with escalating energy costs that exacerbate the threat of deindustrialization.

The economic backdrop in Pakistan

Over the past decade, Pakistan’s economy has shown alarming signs of distress, with Pakistan’s debt per capita escalating from USD 823 in 2011 to USD 1,122 in 2023, marking a significant increase of approximately 36%. Concurrently, GDP per capita has seen a reduction from USD 1,295 to USD 1,223 during the same period, indicating a 6% decrease. This economic strain underscores the urgency for targeted reforms aimed at revitalizing the industrial sector, which could serve as a catalyst for growth and stability.

Deindustrialization: a closer look

Deindustrialization, a process characterized by a decline in the industrial sector’s contribution to the GDP and the employment it generates, poses a significant threat to economic stability and growth. In Pakistan, this trend is exacerbated by rising energy costs, which have become a critical concern for industries, especially in the textile sector. This sector, pivotal to Pakistan’s economy, faces severe challenges due to high energy tariffs, which undermine its competitiveness on the global stage.

Recent statistics from October 2022 to January 2024 highlight the striking impact of rising energy tariffs on industrial energy consumption. Notably, LESCO and MEPCO saw a substantial decrease in electricity usage, with reductions of -73% and -76%, respectively, in January. Such stark declines are indicative of broader industrial contractions and a significant move towards deindustrialization.

Furthermore, the total load of textile industries on all Discos showcased a -69% decrease, a testament to the acute challenges faced by the industrial sector due to escalating energy costs. This trend not only affects the competitiveness of Pakistani industries but also has profound implications for employment and economic growth.

On the other hand, the recent announcement from the Oil & Gas Regulatory Authority regarding the revision of natural gas sale pricing for the fiscal year 2023-24 also underscores a critical juncture for Pakistan’s industrial sector. The restructured gas tariffs aim to streamline categories and adjust costs, potentially impacting the operational expenses of industries across the board. This decision, while intended to address fiscal imbalances and ensure the equitable distribution of energy resources, places additional pressure on an already strained industrial landscape grappling with high energy costs.

The revision introduces new tariffs for general industry processes and captive usage, signaling a significant shift in the government’s approach to managing industrial energy consumption. Such changes are poised to directly affect the cost structure of various industries, from textiles to manufacturing, at a time when the sector is already facing the challenges of deindustrialization and job losses. The move reflects a broader pattern of energy policy adjustments globally, where nations are reassessing energy tariffs to balance economic growth with sustainability concerns. However, for Pakistan, the delicate balance between fostering industrial growth and managing energy costs becomes even more precarious, highlighting the urgency for strategic planning and support mechanisms to mitigate the adverse effects of these policy decisions on the industrial sector’s competitiveness and employment rates.

A path forward

In the face of deindustrialization and escalating energy costs, Pakistan stands at a critical juncture requiring a strategic and multifaceted approach to steer its industrial sector towards sustainability and growth. This approach encompasses several key initiatives aimed at creating a conducive environment for industrial development and economic stability.

Streamlining regulatory frameworks

The complexity and bureaucracy of regulatory procedures can significantly hinder business operations, discouraging both domestic and foreign investments. Simplifying these administrative processes is crucial for enhancing Pakistan’s attractiveness as an investment destination. This involves eliminating redundant regulations, digitizing administrative procedures, and establishing a one-stop shop for business registrations and clearances. By improving the ease of doing business, Pakistan can create a more dynamic and responsive industrial sector capable of adapting to global market demands.

Investing in renewable energy

Pakistan needs to steer its economy toward sustainability by promoting renewable energy, reducing reliance on imported fuels, and addressing price volatility in the international energy market. To this end, industrial units may be incentivized to develop their own renewable energy sources, with on-site projects being allowed an increased solar net-metering cap from 1MW to 5MW. The implementation of the Competitive Trading Bilateral Contracts Market (CTBCM) may facilitate off-site renewable setups, enabling industries to secure green energy at competitive rates through special arrangements like reduced wheeling charges, without the burden of cross subsidies.

The urgency of this transition is amplified by the impending EU’s Carbon Border Adjustment Mechanism (C-BAM), set to be introduced in 2026, which will tax exports based on carbon emissions. Pakistan’s move towards green energy will not be just a response to C-BAM but a strategic imperative to keep its exports competitive alongside regional players like India and Bangladesh, who are rapidly advancing in reducing energy emissions. This shift is vital for Pakistan’s industrial sector to remain viable in the face of stringent global environmental regulations and to participate actively in the international market.

Enhancing export competitiveness

The textile industry, among others with high export potential, is a cornerstone of Pakistan’s economy. Strengthening this sector requires targeted policies that provide incentives for quality enhancement, innovation, and access to new markets. Establishing special economic zones, offering tax breaks for high-value-added products, and facilitating trade agreements can enhance export competitiveness. Additionally, investing in technology and skills development can ensure that Pakistani industries meet international standards and capitalize on global market opportunities.

Learning from global best practices

Numerous countries have successfully navigated the challenges of deindustrialization and high energy costs through innovative policies and strategic investments. Studying these success stories can offer valuable lessons for Pakistan. For instance, Germany’s transition to renewable energy and its focus on high-tech manufacturing, or Bangladesh’s remarkable growth in the textile sector through policy support and market access, provide models that Pakistan can adapt to its context.

Toward a Sustainable Industrial Future

Pakistan’s industrial landscape stands at a crossroads, with deindustrialization looming on one side and the potential for a brighter, more sustainable future on the other. The government’s proposal to lower electricity tariffs to 9 cents is a positive step, but it is only a part of a much-needed broader reform. To truly revitalize the industrial sector and protect it from the global shift toward sustainable development, a multifaceted approach is imperative. This includes simplifying regulatory frameworks, incentivizing the adoption of renewable energy, enhancing export competitiveness, and learning from global best practices. Such reforms are not just about survival; they are about positioning Pakistan one step ahead in industrial innovation and sustainability.

“As the world braces for the impact of measures like the EU’s Carbon Border Adjustment Mechanism, Pakistan must act swiftly to transform its industrial sector into a resilient force capable of thriving in an environmentally-conscious global economy. The time for a decisive action is now; the path Pakistan chooses will determine its place in the global industrial narrative and its economic destiny for generations to come.”