By Shahid Sattar

The government’s recent contemplation of cutting off gas supply to industrial captive power plants (CPPs) while maintaining subsidized gas supply to so-called “industrial connections” is a move that defies all economic rationality.

It’s a policy decision that will not only undermine the principles of efficient resource utilisation but also threatens the competitiveness and survival of large industrial units, particularly in the textile industry.

A more prudent approach based on free-market principles and sound economic arguments is required.

At the heart of this is a fundamental misunderstanding of energy efficiency in industry.

In addition to captive power generation, natural gas is used extensively in industrial processes across various sectors in Pakistan, including for textiles, chemicals, glass, cardboard, and plastic manufacturing. These typically involve the use of gas for generating steam via boilers, heating thermal oil for dryers, directly hearting dryers, powering chillers, etc., (Table 1).

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Table 1: Gas Consumption in Industrial Processes
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Textile and Apparel Sector    Other Industries
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Hot water/steam boilers       Hot water/steam boilers (*50-60% of total gas usage)
Printing                      Injection molding machines (plastic)
Stenters                      Pharmaceutical manufacturing
                              Industrial/molding furnaces (glass)
                              Packaging machines for corrugated materials
                              Oil Heaters, Power Chillers, Printing etc.
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The gas tariff code separates industrial gas usage by process and captive, with the price of gas for the latter at Rs 2,750/MMBtu compared to only Rs. 2,150/MMBtu for the former.

Now, the government is exploring options to completely cut off gas supply to CPPs based on the argument that captive gas usage is inefficient, lowers demand for grid electricity, and that redirecting gas supplies to other uses could optimize resource allocation.

Conversely, various reports and consultations with industry experts highlight the extremely low efficiency of boilers at 45-50% as over 90% of operational boilers are low pressure and single burner based.

Furthermore, problems such as poor insulation, unaddressed leaks, outdated equipment, and improper operational settings are also prevalent.

However, no comprehensive surveys or audits have been conducted to benchmark the efficiency of gas usage in industrial processes. This lack of data and analysis hinders efforts to implement targeted improvements and achieve higher efficiency and sustainability in gas-based industrial processes.

The wastages not only drive-up operational costs but also undermine broader efforts to achieve energy efficiency and sustainability.

The government’s perspective overlooks the critical role of cogeneration units in CPPs, which are far more efficient than the available alternatives. Cogeneration units, or Combined Heat and Power (CHP) systems, operate at efficiencies exceeding 70%. These units not only generate electricity but also utilize the same gas to produce steam and hot water, essential byproducts for industrial manufacturing processes.

The dual output from a single energy source maximizes the utility derived from each unit of gas, making it the best possible use of our scarce energy resources.

Contrastingly, the alternatives are less efficient and more costly. Grid electricity tariffs are prohibitively high, currently around 15.4 cents/kWh and as high as 17.5 cents/kWh a few weeks ago and are expected to increase by another 2 cents/kWh following the tariff rebasing in July.

Moreover, the frequent outages, voltage fluctuations and overall poor reliability associated with grid electricity cause significant operational disruptions, leading to costly wastages and downtime.

Similarly, standalone industrial boilers used for steam and hot water generation typically operate at efficiencies of around 45-50%, substantially lower than cogeneration systems.

Thus, shifting away from high-efficiency CPPs to these less efficient methods would result in a greater overall energy consumption to achieve the same industrial output, undermining the very goal of resource optimization and energy efficiency.

Moreover, the distinction between gas used for industrial processes and that used for captive power generation is highly problematic. It is not only artificial but also opens the door to widespread corruption and system leakages. Many industries already use their process gas connections for both process use and power generation.

If the government decides to completely cut off gas supply for CPPs, more industries will inevitably find ways to circumvent these restrictions, leading to unauthorized use of process gas for power generation.

Overcoming this would necessitate stringent administrative measures and policing, incurring significant administrative costs and fostering corruption as industrialists seek to bribe inspectors to overlook violations. The implications of such a policy are far-reaching.

“Cutting off gas to CPPs would force industries to rely more heavily on grid electricity in the short-term while seeking cheaper sources of energy, increasing their operational costs and making them less competitive in international markets. This is particularly detrimental at a time when Pakistan’s industries are already struggling with high production costs and shrinking margins. Many of the most efficient and largest vertically integrated manufacturing units, which rely heavily on captive power for stable and cost-effective energy, would be hit the hardest. With energy prices constituting a significant portion of total production costs, any increase in energy expenses could lead to a decline in exports, loss of jobs, and further economic downturn.”

Just a few years ago, the government introduced policy measures to incentivize CPPs to transition from less efficient single cycle units to highly efficient combined cycle units. In response, several CPPs made substantial investments in CHP units and even had their efficiencies audited by NEECA.

According to SNGPL data, of the 383 CPPs on its network, 306—or 80 percent—are now CHP co-generation units. A blanket ban on captive generation would show a complete disregard for policy continuity and the commitments made by the government to private sector investors.

This move would sink the substantial investment that has been made in CHPs, further erode trust in Pakistan’s policies, increase investment uncertainty, and deter future investors from considering Pakistan as a viable investment option.

Moreover, the proposed policy overlooks the broader economic implications of inefficient energy allocation. Historically, the power sector has been the primary offtaker of imported RLNG, with its cost passed through to consumers.

However, as the power sector is transitioning to cheaper alternatives, this results in a surplus of RLNG in the system that then needs to be diverted to consumers who would otherwise be supplied with indigenous gas, at highly subsidized rates.

Cutting off gas supply to CPPs will further exacerbate the issue of surplus RLNG and diversion costs. The increased RLNG diversion to domestic and fertilizer sectors at highly subsidized rates is likely raise SNGPL’s Revenue Requirement (RR) to Rs 100 billion for 115 MMCFD. For instance, OGRA, in its Estimated RR decision dated May 20, 2024, has allowed Rs 184 billion for RLNG diversion in FY 25 at the rate of Rs 3400 ($12.19) per MMBtu, significantly lower than the Rs 298 billion requested by SNGPL for 209 MMCFD RLNG diversion, resulting in a Rs 114 billion annual shortfall for SNGPL.

In addition, the sale of indigenous gas of 59 MMCFD to public sector power plants at Rs 1,050/MMBtu instead of Rs 2,750/MMBtu for captive power plants will generate an additional Revenue Requirement of Rs 38.5 billion for SNGPL.

The cumulative increase will be a staggering Rs 138.5 billion, which will necessitate a price increase of Rs 310/MMBtu for all SNGPL consumers due to the shifting of Captive Power Plants in the SNGPL network to the Power Grid.

Reduced domestic demand during the summer could result in the diversion of cargoes at distressed prices, and SNGPL may also incur significant losses due to take-or-pay clauses and demurrages. If the take-or-pay clause is triggered after 96 hours of LNG cargo arrival, the penalty incurred will be passed through, leading to demand destruction among RLNG consumers.

This will expose SNGPL to take-or-pay contractual risks with RLNG suppliers or sovereign default, potentially causing the cascading collapse of several State-Owned Entities of the Petroleum Division, i.e., PSO, SNGPL, PLL, OGDCL, and PPL.

A more prudent approach in this regard would be to recognize the high efficiency of certified cogeneration units and classify them as industrial consumers, entitled to the same gas tariff rates as other industrial processes.

This would ensure a level playing field and encourage industries to maintain or improve their efficiency levels.

Additionally, introducing mechanisms for regular monitoring and public reporting of compliance would foster transparency and build public trust, ensuring that CPPs operate within stipulated efficiency parameters.

The government’s role should be to create an enabling environment that promotes efficiency, competitiveness, and sustainable growth.

By cutting off gas supplies to CPPs, it is doing the opposite—discouraging efficient energy use, increasing operational costs, and undermining the competitiveness of industrial sectors. It is crucial to adopt policies that align with free-market principles, where resource allocation is driven by efficiency, productivity, and economic rationality.

In conclusion, the proposal to cut off gas supply to industrial captive power plants is a regressive step that threatens to undo the progress made in industrial efficiency and competitiveness. It is a policy that fails to recognize the superior efficiency of cogeneration systems and the critical role they play in the industrial ecosystem.

Rather than penalizing these high-efficiency units, the government should support and incentivize their use, ensuring that industries can compete on a level playing field and continue to drive economic growth.

Only by embracing rational, efficiency-driven policies can we hope to secure a prosperous and sustainable future for Pakistan’s industrial sector.

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Table 2: Benefits of Combined Heat and Power (CHP) Systems over Industrial Gas
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Benefit Category for           Description
Combined Heat & Power
====================================================================================================
Primary Efficiency             CHP systems can achieve efficiencies over 70%, with some systems
                               even approaching 90%
Fuel Efficiency                CHP systems require less fuel to produce a given amount of energy
                               output, leading decreased fuel dependency
Avoid Transmission             Producing electricity on-site eliminates losses associated with
and Distribution Losses        transmitting electricity over long distances
Reduced Greenhouse Gas         CHP systems emit less CO2 SOx NOx and PM, reducing Scope 1
Emissions                      emissions aligning with the European Union's Carbon Border
                                Adjustment Mechanism (CBAM) standards
Improved Energy                CHP systems provide a stable supply of electricity and heat, ensuring
Resilience and Reliability     energy supply during power outages, interruptions, breakdowns,
                                voltage fluctuations, brownouts and blackouts.
Cost Savings and               High efficiency and reduced fuel consumption lead to lower energy
Enhanced Competitiveness       costs, lowers operational costs and improves energy efficiency with
                                additional savings from avoided steam generation, water heating and
                                T&D losses
Flexibility and Scalability    CHP systems can be tailored to various applications and utilize
Support for Renewable           different fuels, adapting to different operational contexts. It can
Energy Integration              complement renewable energy sources, providing tailor made
                                solutions to meet climate targets for exports to the West.
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By Shahid Sattar | Amna Urooj

Some institutions are referred to as ‘greats’ in the world of higher education and professional desires. Among these are the Indian Institutes of Technology (IITs), having graduates synonymous with the future innovators and captains of industry.

However, within this rosy picture, a more sobering reality has surfaced: reports have shown that 36% of recent graduates from the prestigious IIT Bombay are either unemployed or underemployed even after two years of graduating, mirroring larger problems related to India’s job market.

As the narrative unfolds within the boundaries of India, it throws a poignant reflection on the neighboring country, Pakistan, where a similar dynamic unfolds against an economic flux and an evolved landscape of employment.

Here, the struggle saga of IIT Bombay becomes not only a national issue but a story whose message resonates across the world; it enlightens shared experiences of people and poses reflection on whether higher education is really reaching its effectiveness to the requirements of the ever-flowing global economy?

 

 

Surprisingly, graduate unemployment is nearly three times higher than the unemployment rate in Pakistan (PIDE, 2023), becoming a serious challenge to the education narrative:

There are four major reasons for this trend; first, a high disparity between the education offered and the needs of the economy. Second, weak university-industry linkage translates to the fact that the graduating disciplines are not what is required by the industry or the country.

Third, the growing number of job seekers, coincides with a shrinking economy and macroeconomic imbalances, which have led to business shutdowns which hinder both expansion and new investments. According to the World Bank, Pakistan is at 63rd position out of 163 countries in the University-Industry linkages index.

Pakistan is even lagging behind India (26th rank) and Sri Lanka (53rd). It displays quite an alarming state of our graduate unemployment.

Historically, at Independence, there were only 2 universities in the country with approximately 600 students. In 1998-99, the number increased to 26. 1999-2000 is the time when the universities touched the count of 27. And from 1995 to 1999, in just four years, the Government issued charters to about 20 universities. Out of these 20, 16 were in the private sector, while 4 were public sector universities.

In sum, as of 2000, we had 59 universities. In 2022-2023, the number rose to 247 total HEIs in the country. Punjab leads with 88 HEIs, followed by Sindh with 71. Khyber Pakhtunkhwa has 43 HEIs, while the Federal area contains 25.

 

 

Balochistan hosts 11 institutions, Azad Jammu and Kashmir (AJK) has 7, and Gilgit-Baltistan has the fewest with just 2 HEIs (HEC Annual Report, 2022-2023). This distribution reflects the disproportionate allocation of educational resources across the country’s regions.

The rapid proliferation of universities since the Higher Education Commission (HEC) took over from the University Grants Commission (UGC) in 2002 represents an unfortunate shift in the higher education thinking whereby quantity is being preferred over quality.

The number of universities rose from 185 in 2016 to almost 250 last year, reflecting a deliberate policy of higher educational expansion. This surge in the establishment of Degree Awarding Institutions (DAIs) raises questions about the strategic objectives and impacts of such growth.

 

 

The question is: are the current educational strategies effectively preparing students for employment, or are they merely contributing to the swelling ranks of educated yet unemployed youth? This predicament necessitates a critical reassessment of education policies in relation to the economic realities and job market needs of Pakistan.

According to PIDE, youth employment requires more than sustained 8% growth for 30 years. The projected rise in Pakistan’s working-age population, defined as individuals aged 15 to 64, demands a significant increase in job creation for economic stability.

Annually, this population is set to grow by 4 million, necessitating at least 8% economic growth per year to match the rising number of potential workers. Higher growth rates are essential to enhance labour force participation, especially among women.

Without this growth, the job deficit will widen, exacerbating unemployment and hindering economic development. Promoting rapid economic expansion and job creation, through entrepreneurship, innovation, and enhanced vocational training, is critical for Pakistan’s future social and economic wellbeing.

 

 

Pakistan’s significant untapped resource includes its female workforce, which remains largely underutilized due to low labour force participation—a fatal flaw for the economy and women’s empowerment. Cultural norms, safety concerns, and inadequate transportation are perceived barriers that prevent women from working, despite their eagerness to contribute economically.

This situation is highlighted by the high NEET(Not in Education, Employment, or Training) rates, particularly among women, with Balochistan experiencing the highest at 77.6% and Islamabad the lowest at 44.7%. The gender disparity is stark, with female NEET rates up to 62% nationally, compared to 12.2% for males.

This underscores the critical need for interventions to close the gender gap in education, employment, and training, and fully harness the potential of Pakistan’s youthful demographics, especially for women. To effectively harness this untapped potential, strategic initiatives must be launched to modify cultural norms, enhance public safety, and improve transportation, creating a supportive environment that enables women to enter the workforce safely and conveniently.

Essential solutions include aligning TVET programmes with industry demands and promoting entrepreneurship, which equips students with marketable skills and creates new job opportunities. By adopting modern technologies and fostering innovation, Pakistan can rejuvenate its industries, drive economic growth, and create more opportunities. This integrated approach not only addresses immediate skills gaps but also prepares the workforce for future demands.

Pakistan’s Technical Vocational Education and Training (TVET) system has been a pivotal element in addressing the persistent challenges of youth unemployment and the broader underutilization of the workforce, particularly among women.

The system, comprising various educational pathways from informal industry-based apprenticeships to more structured diploma programmes, has expanded significantly over the years. As of 2018, more than 3,600 vocational and technical institutions were operational, with enrollments surpassing 400,000 students, primarily in urban areas like Punjab and Sindh.

Despite this growth, the TVET sector currently only accommodates about 13% of the nearly three million young people entering the job market annually, highlighting a gap between the availability of vocational training and market demand for skilled labor.

One significant study supporting this argument is by Dearden, Reed, and Van Reenen (2006), which found that in British industries, increasing the share of trained workers by one percentage point was associated with an increase in per worker value addition of about 0.6 percent. This empirical evidence underlines the direct impact of workforce training on labour productivity, which in turn can lead to more export-oriented and competitive firms.

The era of jobs for life has passed; recognizing this sooner rather than later is essential for adapting successfully to the rapidly changing employment landscape. The shift from traditional employment to entrepreneurial ventures is becoming essential as AI reshapes the job market. By emphasizing entrepreneurship, we can counter AI’s disruptive effects, using new technologies to foster both small and large business opportunities and stimulate economic growth.

AI’s role in driving innovation opens avenues for entrepreneurs to leverage cutting-edge technologies, enhancing productivity and creating competitive advantages in various industries. Like past technological shifts, AI may displace workers. However, supporting entrepreneurship is critical to effectively navigating the significant impacts AI is precipitating.

The government can aid this transition by providing youth with vocational training and entrepreneurial skills, enabling them to launch ventures—from AI driven projects in marketing (for example young entrepreneurs can launch AI-driven digital marketing platforms that automate and optimize marketing strategies for SMEs, tapping into advanced analytics to enhance business reach and efficiency), pottery studios to small garment factories, design studios, roadside stalls, etc., or literally anything that can help them become self-employed in this new era. These ventures can in time become the nuclei for modern companies and businesses.

Entrepreneurship, entrepreneurship and entrepreneurship: Deeply embed entrepreneurship education across all levels of TVET and higher education systems to instill a business-oriented mindset among students. Establish specialized entrepreneurship development centers that provide practical training, mentorship, and resources to facilitate business startups, especially in high-growth areas such as digital technology, green energy, e-commerce, and AI-driven sectors. These centers should emphasize the use of AI and digital technologies to innovate and streamline business processes, enhancing the entrepreneurial capacity to adapt to new market demands.

Government support for startups: Implement policies that reduce bureaucratic hurdles and provide fiscal incentives such as tax breaks and grants for young entrepreneurs. Expand access to microfinance and seed funding specifically targeted at youth and women entrepreneurs to encourage diverse business ownership and innovative start-ups in sectors like artisanal crafts, technology, and agriculture.

Skill development for modern industries: Integrate market-driven skills development programmes into the educational curriculum that align with industry needs, especially in digital literacy, coding, and technical skills that are pivotal in the modern economy. Partner with industries to ensure that the training is relevant and includes opportunities for real-world application through internships and on-the-job training.

Encourage local manufacturing and crafts: Support small-scale manufacturing units and local crafts by providing vocational training in relevant skills such as garment manufacturing, pottery, and other traditional crafts that have export potential. Enhance the marketability of these skills through branding initiatives and access to both local and international markets.

Facilitate access to markets: Create platforms such as e-commerce websites and trade fairs that help young entrepreneurs reach wider markets. Provide training on how to effectively use these platforms and access logistic support, enabling entrepreneurs to overcome barriers to market entry and expansion.

Robust mentorship networks: Develop mentorship programmes that connect experienced business leaders with young entrepreneurs to provide guidance, industry insights, and networking opportunities. This will help bridge the gap between theoretical knowledge and practical business operations.

Universal free internet access: Implement a nationwide policy providing free internet access to all citizens to ensure that every individual, especially the youth and entrepreneurs, can tap into global resources, learn new skills, and participate in the digital economy. This policy will help overcome geographical and socioeconomic barriers, create an informed and connected citizenry, and stimulate entrepreneurial initiatives and digital literacy at a broad scale.

Promote AI development to spur innovation: Encourage the development and integration of artificial intelligence technologies across all sectors of the economy.

“By supporting AI research and development through funding, incentives, and partnerships between academia and industry, Pakistan can foster significant innovation, opening new avenues for employment and economic diversification.”

By Shahid Sattar | Absar Ali

The country faces daunting economic challenges. A shrinking industrial base, a bulging workforce with no jobs to turn to, twin deficits resulting in unsustainable debt and debt servicing, and a structural imbalance between production and consumption that is the cause of repeated episodes of sharp devaluation and high inflation.

Pakistan’s industrial base has been shrinking since mid FY23, largely on account of high interest rates — a measure to bring down record-breaking inflation — and out of control energy costs.

Power tariffs for industrial consumers are around 15.4 cents/kWh at present, down slightly from a record-breaking 17.5 cents/kWh in January 2024. Cross subsidies and stranded costs embedded in the power tariffs make them over twice the average faced by regional economies like India (6 cents/kWh for textile producing regions), Bangladesh (8.6 cents/kWh) and Vietnam (7.2 cents/kWh).

 

 

Such high input cost differentials render our products uncompetitive in international markets. Resultantly, Pakistan’s textile exports—which account for over half of total exports—have been clocking in at only around dollar 1.4bn per month, which is 30 percentage below the installed capacity of dollar 2bn per month, while our competitors like Bangladesh and Vietnam have been exporting 3 to 5 times as much.

Moreover, around 60 percent of basic industry, including yarn and cloth manufacturing that are relatively energy-intensive processes, have shut down due to prohibitive energy costs. This has prompted a sharp increase in imports of the same as exporters can import duty-free inputs for exports through EFS, resulting in a decline in the domestic value addition in exports and deterioration of the trade balance.

The economy is deindustrialising at an unprecedented pace.

Yet, ironic as it is, the shortage of industrial capacity is perhaps the economy’s most pressing structural fault. Pakistan faces a permanent supply-side constraint, given that we do not produce enough to meet domestic consumption requirements. Every time the economy experiences even marginal levels of growth, there is a natural rise in aggregate demand.

However, Pakistan’s domestic production capacity is neither sufficient to meet domestic demand nor can it generate sufficient foreign exchange to meet our import requirements. The shortage of foreign exchange resulting from an increase in aggregate demand then leads to episodes of sharp devaluation and high inflation that have become seemingly permanent features of Pakistan’s economy.

The only sustainable way out of this trap is to increase the country’s productive manufacturing capacity so that it can meet domestic requirements and produce exportable surpluses to earn sufficient foreign exchange the country’s import requirements. However, competitive manufacturing requires competitively priced energy, and the energy currently available in Pakistan is anything but competitively prices.

 

As already discussed above, power tariffs for industrial consumers are over twice the regional average while gas prices have also increased by 223 percentage since January 2023, leaving no financially viable source of energy for manufacturing activities. If the economy is to revive existing manufacturing and attract investment towards more, industrial consumers cannot be made to pay for cross subsidies to non-productive sectors of the economy.

Power tariffs for industrial consumers must be reduced to 9 cents/kWh immediately. Energy consumption is highly sensitive to prices and, using actual power consumption data of APTMA (All Pakistan Textile Mills Association) members, we estimate that a 1 percent reduction in power tariffs can increase demand by 3.12 percent.

Moreover, an additional 1 percent discount on the price of grid electricity relative to the cost of alternate sources of energy further increases electricity demand by 1.85 percent. Based on this, a reduction in power tariffs to 9 cents/kWh can stimulate sufficient additional power consumption and economic activity to compensate for the revenue impact of removing the cross subsidy and generate an additional Rs 73 billion over that in government revenues from just APTMA members.

Moreover, the additional power consumption from textile and other sectors will make use of currently idle over-capacity, addressing the issue of capacity costs and reducing their burden on other consumers.

It is crucial, however, to underscore the urgency of this issue. If power tariffs are not promptly rationalized, the consequences will be irreversible. The deindustrialization could become entrenched as the cost of re-entering production—reacquiring machinery, rehiring and retraining staff—proves prohibitively expensive for most firms and business owners.

Once industrial units shutter and skilled workers disperse, reigniting the engines of production is not merely a matter of flipping a switch. The economic machinery, once dismantled, requires significant capital and effort to restore, and the window for revival is narrowing with every passing day.

In conclusion, this is a call to action to rescue Pakistan’s economy from the precipice of economic calamity.

Reducing power tariffs to 9 cents/kWh is an essential step that can catalyse a resurgence in manufacturing and exports, pivotal for economic stability and growth. So let this be remembered as the moment when Pakistan chose renewal over decline, when we fortified our industrial base rather than pushing its disintegration.

We urge policymakers to act with the resolve this crisis demands — to implement these critical reforms and secure a prosperous future for all Pakistanis. Time is of the essence, and the decisions we make today will determine the future for generations to come. Let us choose a path of growth and resilience.

By Shahid Sattar | Muhammad Mubasal

Pakistan has the one of the lowest savings rates in the world. During the past decade, Pakistan’s savings rate has averaged around 13% of GDP which by far is the lowest in the region. To put things into perspective, India and Bangladesh had an average savings rate of 32% and 37% of GDP.

The low savings rate has been the main obstacle to capital availability for economic growth. Urgent reforms must be taken to increase the savings rate which requires choosing long-term investment over short-term consumption. This shift is vital for fostering the growth of large companies that benefit Pakistan’s economy.

While addressing savings rates is crucial, it’s also critical to acknowledge the need for comprehensive reforms across all sectors such as energy, taxation, policies, infrastructure, and governance.

A higher savings rate not only reflects prudent financial behavior at the individual and institutional levels but also plays a pivotal role in driving investment, capital formation, and ultimately, economic growth. An analysis of the savings rate yields that Pakistan lags significantly behind the regional competitors. In 2022, Pakistan’s gross savings rate was a meagre 10.6% meanwhile India and Bangladesh were 30% and 34%, respectively (Figure 1). The world and South Asian average for the saving rate is 28% and 26.3%, respectively.

A key factor contributing to the low savings rate is the country’s widespread poverty and the generally low-income levels. Figure 1 illustrates a correlation: high poverty rates correspond to low savings rates, and vice versa. The World Bank reports that nearly 39% of Pakistan’s population lives in poverty, having the lowest per capita income in South Asia. Approximately 60% of the population lives on just $2 a day. This barely covers subsistence living standard, leaving no room for savings. This stark economic disparity significantly impacts the propensity to save, as individuals with higher incomes typically save more compared to those with lower incomes. Additionally, factors such as inflation and perceived macroeconomic instability further disincentivizes their purchasing power and ability to save.

Increasing the savings rate hinges on boosting income. This can only be achieved through direct government intervention or policy changes, creating a positive cycle. When income rises, the savings rate increases, leading to higher investment and ultimately fostering greater economic growth.

The prevailing culture and consumerist mindset in Pakistan also play a role in discouraging savings. Short-term spending habits are common, prioritizing immediate consumption over long-term financial security. The low savings rate is a culmination of decades of ostentatious living as a result of hyper consumerist culture.

Moreover, there is a lack of opportunities in Pakistan due to the hostile business environment and it is further compounded by the anti-export bias that the policy makers have.

For instance, Pakistan ranks 108th globally in ease of doing business, contrasting sharply with India’s 63rd ranking. This unfavorable environment discourages entrepreneurship and innovation, as entrepreneurs encounter barriers to entry, excessive red tape, corruption, and limited access to resources and support.

Consequently, fewer new businesses emerge, and existing one’s struggle, impacting job creation, income opportunities, and overall wealth generation and savings potential.

Savings, business profits, and investments through the stock exchange are fundamental sources of equity capital for investment. The declining private investment in Pakistan reflects the erosion of investor confidence in the economy. Investor sentiments are heavily influenced by perceptions, and frequent unilateral policy changes by the government disrupt industry sentiments, eroding trust in government policies and hindering the flow of equity capital essential for investment.

The lack of financial capital has direct consequences for businesses, limiting their ability to expand and thus creating fewer employment opportunities. Pakistan’s high unemployment rate in 2023, at 8.5%, stands as the highest in the region, in stark contrast to India’s 3% and Bangladesh’s 4.2%. This low savings rate contributes to low investment levels, impeding economic growth and creating a vicious cycle. In fact, Pakistan’s savings have steadily declined since peaking in 2003 at 24.5%, resulting in this low savings-investment trap.

Historically, savings in Pakistan have leaned heavily towards non-financial assets, notably real estate, and gold, which are often unproductive. In contrast, financial savings encompass a range of productive investments such as bank deposits, mutual funds, bonds, pensions, and insurance.

These financial savings, intermediated by the banking system and capital markets, are directed towards real investments like new factories and infrastructure, driving economic progress. Introducing a capital tax based on fair market value for immovable property could effectively channel investments away from unproductive assets like gold and real estate towards more productive financial savings.

Moreover, Pakistan’s stock market currently paints a bleak picture. In 2019, there were 534 listed companies with a market capitalization of $37 billion. However, as of now, the number of listed companies has dwindled to 524, with a market capitalization of $32 billion. Immediate reforms are essential to reverse this trend, increasing both the number of listed companies and the overall market capitalization.

Globally, companies often receive incentives in the form of tax benefits to enlist on stock exchanges. Unfortunately, Pakistan withdrew these tax incentives for new enlistments. As it stands, the average rate of tax in Asia is 19.8% whereas in Pakistan corporate tax rate is 29%, in addition, super tax up to 10% for tax year 2023 and onwards has also been imposed in the Finance Act 2023.

To encourage privately held companies to enlist on PSX, corporate tax rate should be permanently lowered by giving tax credit of 20% of tax payable for listed companies. Additionally, the dismal situation is further highlighted by the fact that in 2023, only one Initial Public Offering (IPO) took place on the PSX. For comparison, India saw as many as 57 IPOs in 2023.

Furthermore, listed companies face double taxation, first at the corporate tax rate of 29% and then on dividend distribution at 15%, alongside the super tax of 10%. In contrast, unincorporated businesses face varying tax rates from 0% to 35% in slabs. This inequity in taxation discourages corporatization and the documentation of the economy, as unincorporated businesses benefit from substantially lower taxes.

This advantage in tax regime to unincorporated companies must be turned on its head and tax incentives should be granted to listed companies only. Therefore, it is proposed that tax rates for listed companies should be made half of what the unincorporated companies are currently paying to promote corporatization, leading to increased revenue generation, investment opportunities, and savings.

Increasing the number of listed companies will significantly impact credit provision for businesses to operate, expand, and undertake research and development (R&D) activities. A larger and more vibrant stock market offers businesses access to capital through equity financing, allowing them to raise funds for operational expenses, expansion projects, technology upgrades, and innovative R&D initiatives.

“This access to capital fuels business growth, enhances competitiveness, and drives market development. As businesses expand and innovate, they create new job opportunities, boost productivity, and contribute to economic growth. This, in turn, leads to higher income levels for individuals, increased disposable income, and a rise in the savings rate. Individuals with higher incomes are more likely to save and invest in financial instruments, capitalizing on the economic opportunities presented by a thriving stock market and contributing to overall savings and investment activity in the economy.”

Additionally, to increase income, Pakistan needs to adopt an export-centric culture. This approach fosters trade, brings innovation, improves business management, and upskills the workforce. Shared prosperity among the trading partners raises income levels and boosts disposable income, which leads to a higher savings rate.

An analysis of trade openness yields that Pakistan lags behind its regional counterparts. In 2022, Vietnam led the region with a trade openness rate of 185%, while India and Bangladesh followed with rates of 48% and 41%, respectively. Meanwhile, Pakistan’s trade openness stood at 37%, the lowest in the region.

The need for reforms become increasingly significant especially as the country head towards negotiating another IMF program. A fundamental reform that is crucial is to foster an export-centric culture across all sectors of the economy. The government must initiate reforms that cultivate a business-friendly environment to rescue the economy from its precarious state.

Without decisive action one can picture the same problems recurring in a vicious cycle, from struggling before international donor agencies for additional loans, to struggling for the rollover of existing loans and deposits at the State Bank of Pakistan.

To achieve sovereignty and economic stability in the real sense of the word, the government must prioritize strategies that boost savings, such as incentivizing saving behavior and fostering a robust investment climate. By focusing on increasing exports, strengthening the stock market, and promoting a culture of saving, Pakistan can lay a foundation for sustainable growth.

It is high time those in power view the scenario from this perspective and reassess the broad consequences of the policies they propose. As it stands, there is no room for Pakistan’s economy to grow due its internal structural deficiencies. The choice for the future is clear: reform or perish.