Shahid Sattar and Absar Ali

Before Pakistan can embark on the long and tedious journey of structural reforms, fiscal discipline must be embraced wholeheartedly.

Fiscal discipline refers to the practice of governments maintaining sound financial policies related to government revenue, expenditures, and debt. In the context of Pakistan, fiscal mismanagement by successive governments has resulted in a chronic crisis characterized by low government revenue, high and structurally rigid expenditures, large and persistent fiscal deficits, and mounting public debt that has constrained welfare and development-related spending required for economic growth.

Pakistan has one of the lowest government revenue to GDP ratios in the world (see figure below). The fiscal sector exhibits a high reliance on indirect taxes, which account for between 40 to 50 percent of annual general government revenue since FY15, while more efficient and equitable direct taxes, and non-tax revenue account for 25 to 30 percent each. For comparison, direct taxes account for between 50 to 60 percent of government revenue in India.

Moreover, tax regimes are overly complicated, and rates are high with frequent ad hoc changes, while tax administration and compliance are weak. Over time, these factors have created a culture of tax evasion and broadening the tax net has become a major challenge because of strong incentives for tax avoidance and generally low per capita income levels.

At the same time, government expenditures are at par with other developing and emerging market economies, and high in the context of Pakistan’s overall fiscal position. Several components of current expenditures exhibit structural rigidities that make them difficult to meaningfully curtail.

For instance, given the geopolitical situation and security risks—particularly on the eastern front with India—the government allocates a significant portion of its budget to defense, which accounts for 12 to 14 percent of annual general government expenditures, and 2 to 3 percent of GDP since FY15. In the energy sector, deep-rooted inefficiencies and misaligned policies have built up a circular debt of over Rs. 4 trillion, where different entities owe money to each other, leading to a vicious cycle of growing debt that is increasingly difficult to break.

Discretionary and politically motivated fiscal policies are a major reason for the dire state of the fiscal sector. Pakistan’s fiscal deficit exhibits a strong correlation with the political business cycle (see figure 2). In the lead up to election years, governments — incentivized by electoral gains—increase spending on popular and often short-sighted initiatives and decrease revenue by providing tax breaks to politically favored segments. Low revenue collection and rigid current expenditures mean increased spending must be financed through borrowing. This causes the fiscal deficit to widen and increases debt servicing costs for future governments.

When new governments come in, they are faced with a difficult fiscal situation that requires them to curtail the deficit. Coupled with a vulnerable external sector and frequent external balance shocks, this often requires the help of international financial institutions like the IMF and other bilateral partners. The situation is brought under control through unpopular and ad hoc austerity measures that provide short-term relief but create longer term distortions. Austerity measures are abandoned shortly thereafter, in the same ad hoc manner in which they were first introduced, as the next elections appear on the horizon. And the cycle repeats itself.

Frequent political turmoil and interruptions in the tenures of elected governments also hamper long-term fiscal planning and create an uncertain policy environment that deters foreign investment. These trends have culminated in a situation wherethe government sector is now consuming around 70 percent of domestic banking credit, with annual debt servicing costs for FY24 budgeted at Rs 7.3 trillion — almost 40 percent of budgeted government revenue.

With a significant portion of its population living in poverty, Pakistan needs to spend on social welfare and development programmes to achieve sustainable economic growth. However, fiscal constraints due to low revenue collection, high debt servicing costs and rigid current expenditures have limited the scope of spending on growth-oriented initiatives, which in turn has negative implications for future fiscal sector outlooks.

Moving forward, fiscal discipline must be embraced immediately to create room for growth-oriented spending. This requires setting time-bound targets to rein in fiscal deficits and public debt, and creating fiscal rules that place ceilings on fiscal deficits and public debt and rationalize government revenues and expenditures to ensure long-term and intergenerational debt sustainability.

Fiscal rules must be accompanied by a multipronged overhaul of the tax regime towards a growth-friendly structure, and a shift from reliance on indirect taxes and non-tax revenue towards direct taxes by reducing tax rates and expanding the tax base. Structural reforms in other sectors, such as civil service must be simultaneously pursued to address the structural rigidity of current expenditures.

This will help achieve fiscal sector stabilization, an imperative for long-term economic stability and prosperity, by stimulating economic growth rather than at the expense of an already highly burdened tax base, as is the status quo.

 

Dr. Gohar Ejaz

In FY23, textile exports plunged by $2.8 billion (15% decline) compared to FY22, derailing positive developments achieved over the last two years. This decline, along with a provisional 13% decrease in June-23 compared to June-22, requires a closer examination of causes like energy costs, liquidity crises, tax refund issues, import restrictions, non-implementation of policies, market dynamics, competition, and supply chain disruptions. Recognizing and addressing these factors is crucial to reverse the decline. However, a misinformed narrative has distorted Pakistan’s textile sector’s image, making it difficult to comprehend associated challenges and formulate well-informed policies.

 

Pakistan’s textile exports decreased by $2.8 billion (15%) in FY23 compared to FY22.

Source: Research Department – APTMA

Devaluation Does Not Increase Exports

Constructive developments in Pakistan’s export sector are being hindered by a number of obstructions, including problems with the devaluation strategy that is intended to increase exports. Pakistan is sensitive to currency changes because of its heavy reliance on dollar-linked inputs and foreign markets, which drives up the cost of imported inputs and reduces the profitability of exporters. To meet production demands and reduce currency impact, the industry needs a two-fold increase in working capital. However, there is a lack of readily available capital and interest rates of 22% prohibit borrowing and export growth, making it challenging to maintain export levels in dollars. The non-payment on time of FBR refunds (explained later) further restricts the recycling of funds, limiting liquidity for investment and growth.

Policy Stability

Unreliable information and non-implementation of approved policies undermine confidence, deterring investments and stifling the growth of exports. The industry has not witnessed implementation of textile policies from the first one in 2014-2019 to the current 2020-2025 policy. If these policies had been fully implemented, it is estimated that textile exports could have increased by 25 to 40 percent annually.

TERF: A Catalyst for Industrial Growth in Pakistan

Pakistan’s exportable surplus is currently only in textile, the bulk of which is largely directed towards exports. However, to increase the exports, there is a need to increase the capacity for creating the exportable surplus. To increase that exportable surplus, investments in the form of modern machinery is required for which TERF was introduced.

A hundred new textile units were set up as a consequence of TERF. Approximately 50% of them are currently operational. Once all the units start working, additional exportable surplus of between 8-10 billion dollars is expected. These units, set up under TERF, are mostly downstream and rely on the already installed capacity of spinning and weaving for intermediate products. The machinery which has been added through TERF is state-of-the-art, aimed at increasing the efficiency of the sector Hence, the country stands to gain through higher value addition.

For this capacity to operate, energy inputs at competitive rates are required, without which all these projects will not be viable anymore. New projects, upgradation, and capacity enhancement are stranded because of non-provision of electricity/gas connections to start production. More than $5 billion installed capacity, most of which has not been energized. This affects long-term productivity and global competitiveness of the industry and carries a risk of banks defaulting as the industry cannot service debt.

The funds provided through TERF were not gratis. A concessional fixed interest rate was applied for a period of 10 years, allowing for the approval of Rs. 425 billion for investment in local and imported plant and machinery. Land and building investments were not covered. The total investment generated by TERF is projected to surpass Rs. 800 billion. Commercial banks diligently evaluated each project before issuing L/C’s for the machinery portion only.

Regrettably, certain elements are attempting to cast aspersions on this scheme, aiming to portray it as a criminal endeavor. Such actions pose a significant threat to the policy continuity, investment climate, and trust in the government. If this trend persists, it will hamper progress and perpetuate the current negative economic outlook of Pakistan.

Debunking the Subsidy Myth

High energy costs increase operating costs to an extent that it makes it difficult for manufacturers to maintain competitiveness. The discontinuation of the Competitive Electricity Tariff (RCET) has had a devastating impact on the export industry, which has a negative impact on the Balance of Payments and the economic outlook. Export-oriented businesses suffer from cross-subsidies and stranded costs in the power tariff system, depriving them of the support essential for competitive success. Energy sources that are reliable and affordable are vital for keeping the textile industry competitive. The textile sector operates on a high volume, low-margin business. Even a small difference of 5% in costs can significantly impact profitability, as witnessed by the discontinuation of the RCET. The high energy costs have consumed the sector’s profitability, stressing the sensitivity of the industry to apparently small changes in margins.

Source: NEPRA/CPPA 2022

 

One critical reform required is the formation of a separate tariff category for exports without cross subsidies/stranded costs. By establishing such a category, it would promote fair competition and encourage sustainable export growth within the guidelines set by the IMF.

Disparity in Gas/RLNG Pricing

Punjab-based industries in Pakistan, which account for over 50% of installed capacity, have substantial operational issues as a result of differences in gas accessibility and pricing between Punjab and Sindh. While Sindh-based Export-Oriented Units (EOUs) benefit from subsidized gas supply, their operations are hindered by high gas prices, a lack of supply, and erratic electricity supply. These inequalities have a negative impact on operating capacity, shutdowns, unemployment, and circular debt. A uniform gas price of $8/MMBtu for the export industry and a reassessment of distribution based on value-added contributions to the GDP are two urgent actions that must be taken.

A competitive electricity tariff applicable across the country would to some extent overcome the gas price differential.

Domestic Sales and Under Collection of Sales Tax

By tackling tax evasion and underreporting, the implementation of retail-level taxing measures in Pakistan’s textile industry can increase revenue collection. To find these glitches and execute targeted solutions, comparisons of domestic sales to under-invoiced imports need to be analyzed. Because of the current system of sales tax collection and refunds, new projects and export growth are hindered by growing inventory and capital expenditures. These problems can be solved by only charging sales tax at the point of sale for all domestically sold goods which would capture sale of all smuggled item. It is critical to balance the GST rate to decrease the danger of smuggling while assuring optimal revenue collection. Other vital initiatives include addressing the problems with used clothing imports and bringing unregistered dealers into the tax net.

Working Capital Requirements/ Zero Rating

The withdrawal of Zero-Rating (SRO 1125) and the imposition of an 18% General Sales Tax (GST) on export-oriented sectors have had a substantial negative impact on the industry in Pakistan especially now that the FASTER system is not working and refunds are held up. The higher cost of doing business, unsustainable working capital levels, higher interest rates, and currency depreciation have formed obstacles for new projects and export expansion. Accumulated “Deferred Sales Tax” without timely refunds and the complex refund process have further burdened the industry. To promote export growth, restoring SRO 1125, reintroducing zero rating for the textile value chain, collecting sales tax at the point of sale for domestic sales, and expediting the refund process are essential.

Focusing on Retailers and Collaborating with the Industry

To improve the taxation system in Pakistan’s textile industry, the focus should shift from taxing compliant businesses to targeting potential tax evasion practices among industries and retailers. Questioning the Federal Board of Revenue’s (FBR) emphasis on taxing compliant businesses does not ensure a fair and equitable tax system. Redirecting attention towards retailers helps identify instances of tax evasion, promoting a level playing field.

APTMA has been instrumental in fostering collaboration and conducting research in the textile industry. Their cooperative efforts with government bodies and industry experts provide valuable insights for policymakers. APTMA’s advocacy for technological advancements, investment attraction, and innovation has enhanced efficiency, stimulated growth, and created employment opportunities. Recognizing APTMA’s contributions underscores the need for ongoing collaboration to ensure sustainable development in the textile sector.

Way Forward:

• Policy Stability and Trust: Policy stability, honoring contractual agreements, and maintaining consistency in policies are paramount for the government. Transparent communication and commitment to refund commitments build trust among stakeholders, encouraging long-term investments, industry growth, and export potential.
• Energy Sector Reforms: Ensuring affordable and accessible energy is crucial for the competitiveness of the textile industry. The government should prioritize energy cost reduction through reforms, enhance efficiency, and eliminate corruption. It is essential to create a separate tariff category for exports, guaranteeing it is designed without cross subsidies or stranded costs. This would foster equitable competition and support the sustainable expansion of exports, aligning with the guidelines established by the IMF.
• Gas Pricing Disparities: Establishing a uniform gas price for the export industry and prioritizing gas supply to export-oriented sectors will address disparities in pricing and availability. Reviewing the gas allocation mechanism based on value-added contributions to the GDP ensures fair distribution, while pricing reforms foster a transparent and efficient gas market. A competitive electricity tariff applicable across the country would to some extent overcome the gas price difference. For this to happen, judicious use of system charge and third-party access rules need to be fair and transparent.
• Domestic Sales and Tax Collection: To enhance revenue collection in Pakistan’s textile industry, implementing taxing mechanisms at the retail stage is necessary. This involves identifying tax evasion and under-reporting by comparing domestic sales with under-invoiced imports, while accurate estimation of domestic sales tax requires analyzing market size, production volumes, and tax rates. Balancing revenue generation and smuggling risks is crucial, necessitating measures such as border control initiatives and enhanced monitoring systems. Addressing challenges from used clothing imports involves promoting local production, enforcing anti-dumping laws, and conducting inspections. Deducting sales tax at the Point of Sale ensures proper taxation, while a comprehensive and balanced approach is needed to avoid negative impacts on production costs, competitiveness, exports, employment, and investment.
• Working Capital Requirements and Zero Rating: Restoring Zero-Rating (SRO 1125) and expediting the refund process for deferred sales tax and outstanding dues will supply the textile industry with crucial working capital. Reintroducing zero rating for the textile value chain, collecting sales tax at the point of sale for domestic transactions, and streamlining the refund process will alleviate the burden on businesses, foster compliance, and stimulate export growth.
• Ensure Implementation of Policies: The government should prioritize the development and implementation of supportive policies tailored to the textile sector, encompassing reliable energy supply, improved infrastructure, accessible financing, and export-friendly regulations. By promoting innovation, attracting investment, and ensuring a level playing field, the industry can overcome challenges and contribute to a sustainable Balance of Payments.
• Continuous Monitoring and Evaluation of Implementation: Regular monitoring and evaluation of policies in the textile sector, along with engagement with industry stakeholders, are crucial for ensuring their effectiveness. Periodic reviews and necessary adjustments by the government will facilitate timely interventions and promote the sustainable development of Pakistan’s textile industry.
• Financing Facility for Exports Expansion: To achieve its goal of reaching $50 billion in the next five years, APTMA plans to establish 1,000 garment units with 500,000 stitching machines, requiring a $7 billion investment. This expansion aims to increase exports by $20 billion annually, create employment opportunities for 700,000 workers, and contribute to the country’s economy. To facilitate this growth, exporters should be provided with low-interest loan financing facilities to overcome the current challenge of high interest rates and create the exportable surplus. This is especially attractive as it is not energy intensive but will require all the back-end industry already installed to operate on competitive rates.

Addressing misconceptions and providing accurate information is crucial for Pakistan’s textile industry to make informed policy decisions and ensure progress. Creating an export-culture is sine qua non. Selective allocation of funds to prioritize the export sector and focus on economic challenges will drive sustainable job creation, foreign investment, and economic growth. Prompt action, consensus building, and critical reforms are needed to address energy tariffs, taxation, and promote export facilitation, propelling the economy forward. Policymakers must consider the long-term implications of their decisions to enhance the industry’s competitiveness, generate employment, and increase exports for sustainable economic development.

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.

Shahid Sattar and Amna Urooj

Industrial economic size refers to the scale or size of industrial activities within an economy, typically measured by the total output, employment, or capital investment of the industrial sector. It is a key indicator of the level of economic development and competitiveness of a country or region. The size of the industrial sector can vary greatly between countries, depending on factors such as natural resources, labor force, technological advancements, infrastructure, and government policies.

A larger industrial economic size can provide several benefits, such as higher productivity, employment opportunities, and economic growth. However, it also requires significant investment in infrastructure and technology, as well as skilled labor force to sustain its operations.

Some of the features of the economic size of Pakistan’s textile industry include:

1. Limited Scope: Efficiency, Innovation and Sustainability are the key elements that indicate the scope of an industry. An efficient industry can produce high-quality textiles at a lower cost, allowing it to offer competitive prices in the international market. In contrast, an inefficient industry may struggle to compete, leading to lower revenues and reduced growth potential. Innovation is also critical for the textile industry’s long-term success.

Limited access to capital in the industrial sector of Pakistan, coupled with unprofessional managers, results in low productivity for several reasons. Firstly, without adequate access to capital, industrial units are unable to invest in modern technologies, equipment, and infrastructure that can boost productivity. Secondly, unprofessional managers may lack the necessary skills and experience to manage operations effectively, resulting in inefficiencies and waste. In addition, limited access to capital often leads to a reliance on informal financing sources, such as family and friends, which may be insufficient to support the growth and expansion of industrial units. This results in a lack of competitiveness and innovation in the market.

Firms in Pakistan have not achieved the same level of growth and competitiveness as those in India or other regional players, due to various factors such as political instability, regulatory unpredictability, limited access to finance, and lower levels of human capital development.

The “Seth Culture” has hampered the country’s productivity and competitiveness. It has contributed to a lack of competition and innovation in the Pakistani economy, as businesses are often owned and operated by a small group of individuals who prioritize their own interests over those of the broader economy. This has led to a concentration of wealth and power among a few elites, which has limited economic opportunities for others and stifled entrepreneurialism contributing to a low level of productivity, with the country’s workers producing far less output per hour than workers in other countries. This, in turn, has limited the country’s ability to compete in the global market and attract foreign investment.

Pakistan has a high prevalence of zombie firms, a decline in private investments, and a limited presence of large firms, which suggests inefficiencies in resource allocation. The low presence of high-growth firms (HGFs) and a small number of superstars (top exporters) impede growth and diversification of exports. Furthermore, the crowding-out of private sector credit by government borrowing has reduced incentives for innovation.

The differences in productivity explain variation in standards of living among countries, with productivity limiting distortions being high in Pakistan. Some of these distortions include size-dependent policies, high import duties, and entry-level distortions. These distortions create barriers to entry, reduce the number of firms in the market, limit innovation, and stimulate informality. Removing these distortions could potentially increase aggregate productivity by 40%. Pakistan faces productivity challenges, with publicly listed firms experiencing a decline in aggregate total factor productivity over the period 2012-2020. Poor managerial practices and limited technology adoption are some of the reasons for this decline. Innovation and productivity are strongly linked, and patent applications and investment in R&D have declined in Pakistan in the past decade. Growth in international trade and global value chains have significant effects on development.

In Pakistan’s case, its per capita GDP growth has been inconsistent and generally low for the past two decades, with occasional periods of rapid growth interrupted by external vulnerabilities and Balance of Payments crises. The country’s growth model is centered on consumption and government expenditure rather than investment and exports, leading to a lack of investment, savings, and export culture. With limited foreign direct investment and low exports, financing the current account imbalance has become a challenge, resulting in foreign exchange shortages and a depreciation of the Pakistani rupee. As a result, Pakistan is facing challenges in liquidity, debt sustainability and therefore a limited scope.

In Pakistan, small industrial unit sizes have been identified as a major factor that hamper productivity and innovation in the industrial sector. Small industrial unit sizes in Pakistan limit access to resources and economies of scale, hindering investment in research and development, technology, and expansion. Initiatives to promote the growth of small and medium-sized enterprises aim to increase productivity and competitiveness.

2. Variations in Industry Structure: The structure of Pakistan’s textile industry refers to the various stages involved in textile production, such as fiber production, spinning, weaving, knitting, dyeing, printing, and finishing. The structure of the textile industry can vary from country to country, depending on factors such as access to raw materials, labor costs, and technological advancements.

For instance, Pakistan’s textile industry has a significant focus on the production of cotton yarn and fabric, with the country being one of the largest cotton producers globally. This structure reflects the abundance of cotton as a raw material in Pakistan, making it an attractive location for textile manufacturing. In contrast, some other countries may have a more diversified structure, with a focus on producing finished garments or value-added products, such as high-end fabrics or technical textiles.

Comparing the economic sizes of textile industries across different countries can be challenging due to these structural differences. However, since different countries have different industry structures, this measure may not accurately reflect the relative competitiveness of their textile industries. For example, if a country produces a high volume of raw cotton, it may have a larger economic size than a country that specializes in producing high-end fabrics, even if the latter’s textile industry is more advanced and technologically sophisticated.

When comparing the economic size of Pakistan’s textile industry to other countries, it is essential to consider the specific structure of each industry to make a fair comparison. This means looking at metrics beyond just the value of goods produced, such as employment levels, export volumes, or technological advancements. By doing so, we can gain a more nuanced understanding of the textile industry’s performance in different countries and identify areas for improvement.

3. Different Economic Environments: The economic environment in which the Pakistan textile industry operates refers to the various factors that impact the industry’s performance, such as trade policies, labor laws, and infrastructure. These factors can vary significantly between countries, creating different economic environments that can influence the industry’s economic size and overall competitiveness.

Trade policies, for example, impact the Pakistan textile industry’s ability to compete in the global market. Tariffs, subsidies, and quotas can affect the cost of imported and exported goods, making it more or less attractive for businesses to operate in Pakistan. Changes in trade policies can lead to fluctuations in demand for Pakistani textile products, affecting the industry’s economic size and growth potential. The recent discontinuation of the ZRI Package, for example, has created an economic catastrophe for the industry, closing 20% of the industry due to higher electricity tariff.

Labor laws are also an essential factor in the economic environment that can impact the Pakistan textile industry’s performance. The cost of labor, labor regulations, and the availability of skilled workers can all affect the industry’s competitiveness. In some countries, labor laws may be more restrictive, leading to higher costs and potentially reducing the industry’s economic size.

Infrastructure is another critical factor in the economic environment that can influence the Pakistan textile industry’s performance. The availability and quality of transport networks, power supply, and communication systems can impact the industry’s efficiency and productivity. A lack of infrastructure can lead to delays in production, increased costs, and reduced competitiveness.

Different economic environments can create different challenges and opportunities for the industry, impacting its economic size and overall competitiveness. To address these challenges, policymakers and industry stakeholders need to work together to create an enabling environment that supports the industry’s growth and development. This may involve reforms to trade policies, labor laws, and infrastructure development initiatives to support the industry’s economic size and competitiveness. Restoration of the ZRI Package in this scenario is necessary.

4. Changing Global Market Conditions: The global textile market is subject to constant change, driven by factors such as evolving consumer preferences, technological advancements, and changes in international trade policies. These changes can have a significant impact on the performance of Pakistan’s textile industry, both positively and negatively.

Consumer preferences are a major driver of change in the global textile market. As consumers become more aware of sustainability and ethical issues, they may demand eco-friendly and socially responsible products. This can create opportunities for Pakistan’s textile industry, which has been working towards sustainability and ethical production practices. On the other hand, changes in consumer preferences towards new materials, designs, and styles can also pose challenges to the industry, requiring businesses to invest in research and development to stay competitive.

Technological advancements are another major factor that can impact the Pakistan textile industry’s performance. Innovations in production processes, such as automation and digitalization, can increase efficiency, reduce costs, and improve product quality. However, these advancements also require significant investments in technology and skilled labor, which can be challenging for smaller businesses in the industry.

For Pakistan to attain higher economic growth, it must enhance its textile sector by incorporating value addition, specifically in the highly productive cotton-focused industry. The Pakistani textile millers need to concentrate on specialized yarn to cater to the burgeoning market for athleisure and sportswear. Nevertheless, the country’s fixation on short staple fiber raw cotton and the existing MMF tariff regime impedes its ability to keep pace with the rest of the world, causing it to disregard the rapidly expanding MMF market that dominates more than 70% of the global textile trade.

International trade policies are also an important factor that can influence the global textile market and, consequently, the Pakistan textile industry’s performance. Changes in trade policies, such as tariffs, subsidies, and trade agreements, can affect the cost of imports and exports, creating opportunities or challenges for businesses in Pakistan. For example, the recent trade tensions between the US and China have created opportunities for Pakistan’s textile industry to increase exports to the US market.

Therefore, it is crucial for Pakistan’s textile industry to stay informed and adaptable to changing global market conditions. By monitoring trends in consumer preferences, investing in new technologies, and keeping up-to-date with changes in international trade policies, the industry can remain competitive and adapt to changing market conditions, maintaining its economic size and growth potential.

In conclusion, Pakistan’s growth model, which relied on state intervention and protectionist policies, has hindered its industrial sector’s growth, leading to a narrow export base and limited diversification. The country requires policy reforms to promote competition and innovation, such as improving access to finance for small and medium-sized businesses, reforming regulations, and investing in education and skills development. The textile industry is vital to Pakistan’s economy, but it faces challenges such as limited scope, low productivity, and declining investment and exports. To address these, the country must remove entry barriers, promote innovation, productivity, and sustainability, and prioritize transparency and accountability in business operations. By implementing these policies, Pakistan can promote growth in its industrial sector and continue to make a positive impact on the economy.

Shahid Sattar and Sarim Karim

Women hold up half the sky, but whether they are compensated for this effort in Pakistan remains questionable. As of last year, Pakistan stood only above Afghanistan as the second-most unequal country along gender lines in the world (WEF, 2022). Women face disproportionately higher risks of poverty, financial and economic exclusion, and unemployment (PPAF, 2013). However, exports and economic growth offer a glimmer of hope in an otherwise bleak scenario. All evidence points to export-led growth, especially within textile and apparels, majorly aiding women’s development too. Analysis of both historical trends and contemporary data reveals a nexus between gender, export growth, and economic development. After all, women comprise half of the population, and therefore failure to emancipate them leaves half of a nation’s human capital and labour underutilized. Including women in development creates new opportunities for innovation and intellectual development, once their unique experiences are incorporated into workplaces and industry. All successful developed countries have valued women and their significant contributions. The argument that follows posits that it is necessary to include women in economic growth and export-led development is the most effective means to do so.

First, an illustration of women’s economic situation in Pakistan will help to contextualize the need for development. Among numerous indices of gender inequality, such as the aforementioned Gender Gap Report from the World Economic Forum, Pakistan performs poorly. 33.6% of girls are out-of-school, and 46.5% of women are illiterate. Women make up 75% of the absolute poor in Pakistan, according to the Pakistan Poverty Alleviation Fund (PPAF). Despite this, they remain essential components of the nation’s economy. In agriculture especially, where 76% of Pakistani women find employment, and female labour makes up a higher proportion of the workforce than male labour. Additionally, 30% of industrial workers in textiles are women, with almost half of Faisalabad’s 1.3 million workers being female labour (Ansari, 2023). A major driver of gender inequality has been Pakistan’ protectionist structures. A World Bank study of 54 countries found that tariff protections depress the real incomes of women, and disproportionately hurt their consumption (Artuc et. al, 2021). This is because the majority of female-oriented and marketed products in Pakistan are imported, as well as because women spend more of their budget on agricultural products. Men also earn more income from agricultural labour as compared to women, even though women make up the majority of the labour force in agriculture. The study concluded that tariffs hurt women disproportionately more than men, and that lifting tariffs would raise real incomes for women by 2.5%.

Gender parity as a development goal is essential for four key reasons. Firstly, there is an undeniable moral component. Women comprise half the population and are equally deserving of inclusion in growth. One’s capacity to innovate, be productive, and contribute to the economy has no correlation with one’s gender. Secondly, gender gaps in the labour market (e.g wage differentials, discrimination in advancement, exclusion from specific sectors) and low female labour force participation rate result in total income losses as high as 27% of GDP (Cubenes and Teignier, 2012). Thirdly, the case studies of many countries have shown a strong link between a rise in female employment leading to a decrease in fertility rates. Pakistan is currently struggling with overpopulation, and women often find their capacity for work and education minimized once they have a child. Expansion of employment and education opportunities for women reduce these phenomena. Fourthly, a 20 year study in Bangladesh found that female employment caused by export expansion generated a larger rise in educational enrollment than the Bangladeshi government’s biggest education subsidy (Heath and Mobarak, 2012). Therefore, there is strong evidence to suggest that gender equity is a valuable goal, and exports are a means to achieving it.

Openness to trade has been particularly beneficial for women. Trade liberalization is responsible for increasing female employment to 20% since 1991 (World Bank, 2020). Export growth has also aided female entrepreneurship, as approximately 50% of Pakistan’s women-owned or women-managed companies are in the textile exporting sector (Lopez-Acevedo and Robertson, 2016). Women have been responsible for the introduction of several value-added textile products since 2015 which have benefited both the domestic and export market (Zahid and Kamarudin, 2019). Export-led growth has also created opportunities for advancement amongst women. For example, universities across Pakistan like NCA, Punjab University, and the Millenium Colleges have established departments specifically focused on textiles in response to the growth of that industry. These departments build various skills from design to management. A survey of these institutes found that 88% of textile design students are female, with some universities like Gujarat University having enrollment as high as 94% female students (Zahid and Kamarudin, 2019). These results show that women pursue skill acquisition given the conditions to do so, and textiles are an inclusive sector for their advancement. Within the industry, women have found success in positions as designers with 75.5% of designers in textiles being women (Zahid and Kamarudin, 2019). Out of the 15 surveyed producers in East Punjab, 11 producers had over 60% of their design and practitioner staff comprising women. These uptakes in female enrollment and employment coincided with the growth of the textile industry and exports post-2000. Pakistan’s admission into the EU’s General System of Preferences Plus (GSP+) also bodes well for gender parity, as ratifying conventions on equality is a requirement for membership.

Historical precedence explains the link between gender parity and export growth. In fact, despite the successes listed above, Pakistan is still an outlier compared to its South Asian competitors like Bangladesh, India, and Sri Lanka who have all seen greater gains for women coinciding with greater export growth (Lopez-Acevedo and Robertson, 2016). Pakistan has failed to fully harness its export potential and therefore has stunted its women’s potential too. A study in 2022 explored the experience of Bangladeshi women employed in the textile export sector, using interviews and statistical data on income growth and financial asset growth. It found that women attained financial independence, empowerment, and social mobility due to paid employment (Mamun and Hoque, 2022). The proportion of bank accounts opened in a woman’s name rather than joint accounts opened under a husband’s name also grew in Bangladesh as exports expanded. This implies a growing level of financial literacy, allowing many women to buy plots of land, and begin schooling for themselves or their children. Furthermore, their contribution to household budgets gave women the leverage to negotiate greater respect and autonomy amongst their communities (Mamun and Hoque, 2023). In Pakistan, only 13% of women have bank accounts, which aggravates poverty and maintains cycles of dependency between women and men (Joles, 2023). Empirical research into labour market trends among South Asian exports also explains why textile exports are specifically good for women. Firstly, textile and apparel exporters have more elasticity with regards to exports than other sectors. This implies that textile and apparel have a larger potential for generating employment in response to a rise in exports than other sectors. Much of this is due to the labour-intensive nature of this industry, paired with low-skill requirements for labour to find employment in it (Lopez-Acevedo and Robertson, 2016). Meaning that women without education or only agricultural work experience are still able to find work in textiles. Second, the export elasticity for labour demand across South Asia was higher for female workers compared to their male counterparts. Thus implying that female workers are more likely to benefit from the employment generated by textile export growth (Lopez-Acevedo and Robertson, 2016). With an abundance of historical, theoretical, and empirical evidence to support the pursuit of exports as a means to gender parity, Pakistan must orient itself towards export-led growth.

Unfortunately, the nation’s export industry is witnessing a reversal of gains. Surveys show that the number of female employees in the exporting sector has been falling due to a contraction of the industry and its export potential (Zahid and Kamarudin, 2019). Similar problems are faced by women workers in Faisalabad’s textile industry. The ‘Manchester of Pakistan’ provides jobs for hundreds of thousands of women, many of whom travel from rural areas because they lack other sources of income (Ansari, 2023). The reversal of the Regionally Competitive Export Tariff (RCET) paired with withdrawn exemptions on gas and electricity bills, has placed a massive cost burden on exporters, who must make difficult decisions between layoffs, shutdowns, or decreasing capacity in order to sustain themselves. Women workers suffer in this scenario, as factory closures cause unemployment and threaten to return them to poverty.

To harness the potential of both growth and gender parity, Pakistan must prioritize exports and address the challenges faced by its textile sector. Evidence shows that export-led development offers a solution to Pakistan’s numerous crises, from its imbalanced Balance of Payments, to unemployment, and gender inequality. The current supply-side initiatives are not enough to address these concerns, and measures like increased tariffs and taxes are actually driving women further into poverty rather than helping them. It is therefore imperative for Pakistan to motivate export growth and use it as a tool for addressing its internal issues rather than wasting its potential and sacrificing the livelihoods of its people.

Shahid Sattar and Sarim Karim

Pakistan’s development history has been in a state of crisis for decades. One major factor underlying this struggle is an imbalance in the Balance of Payments which can only be corrected through enhanced foreign exchange earnings via exports. The economy is currently instead reliant on unsustainable sources, such as remittances, foreign loans, and tariffs, alongside indirect taxes, to service a heavily import-based economy. Pakistan is among the seven most trade-averse countries in the world with the highest average tariff amongst 70 countries, and there is a strong undercurrent of import substitution within its economic policies. The automobile industry, fertilizers, capital inputs, all constitute protected industries with tariffs as high as 500% on imports. Pakistan’s policy sphere remains loyal to an anachronistic development model where industries are offered protection until the state deems them competitive. However this protectionist tendency has yielded no solutions to the myriad macroeconomic crises, such as an untenable debt burden, high inflation, and rising poverty.

Export-led industrialization is a development strategy which aims to expand trade of goods for which the nation has a comparative advantage. This model involves developing export surpluses in sectors with comparative advantage. An orientation towards exports has proven successful across the world, from Singapore to Rwanda. Exports provide revenue, which stabilize an economy, balance budgets, and fund structural transition towards industrialization. Secondly, exports facilitate a ‘learning by doing’ approach whereby producers and policy-makers gain expertise through competition with the international market. These externalities form the backbone of export-led development. Pakistan stands to gain immensely from prioritizing its export sector, whose expansion guarantees higher economic growth rates, greater employment, fiscal stability, and a plethora of positive externalities explained in the following.

1. Rising exports have a positive impact on economic growth, as evidenced by the global average of GDP growth rates increasing by 1-2% after the trade liberalization waves following the establishment of the WTO.

• In the case of Pakistan, the country observed its highest growth rates during periods of rising exports, with exports playing a significant role in determining growth.
• The World Bank identified exports as a significant factor behind Pakistan’s recovery after the contraction of the economy in 2019 due to the pandemic.

2. As a result of export growth, average incomes and wages experienced a substantial increase ranging from 10% to 20%.

• Since 1990, export growth has played a crucial role in raising average incomes by 24%.
• For the poorest 40% of the global population, trade has had an even more significant impact, leading to a 50% increase in their incomes.

3. Exports and trade openness have an effect on reducing prices.

• When countries engage in trade, resources are allocated more efficiently, avoiding the wastage of producing goods that require scarce factor inputs.
• Exposure to more competition also drives prices down.
• According to a 2020 study by the World Bank, 45 out of 54 countries examined experienced a decrease in consumer prices as a result of trade, indicating the positive impact of trade on prices.
• This effect is particularly strong on food and agricultural products.

4. Export-led development plays an instrumental role in alleviating poverty. Over the past three decades, there has been a significant increase of 15% in the share of developing countries in global trade since 1990.

• This increase has coincided with a remarkable reduction of global extreme poverty by half. The correlation between the expansion of trade opportunities for developing countries and the substantial reduction in poverty levels highlights the effect of trade in poverty alleviation efforts.

5. There is a strong connection between employment and export-led growth, as they are cointegrated.

• Increasing exports have the capacity to create jobs across all segments of the market.
• Pakistan’s major exporting industry, that of textiles and garment production, is also its largest employer.
• Notably, an OECD study conducted in 2012 revealed that openness to trade is associated with improved working conditions when compared to protectionist measures.
• This suggests that trade openness promotes better employment opportunities and fosters favorable working conditions, emphasizing the positive relationship between trade and labor markets.

6. Competition stimulated by exports leads to the expansion of competitiveness and productivity among local producers. When domestic producers are exposed to international competition, they are encouraged to innovate, improve efficiency, and enhance the quality of their products.

• The presence of foreign competitors in the market drives local producers to adopt more advanced technologies and practices, which ultimately boosts their competitiveness.
• As a result, increased competitiveness leads to higher productivity levels among local producers, benefiting both the domestic economy and consumers who receive better quality, lower prices, and greater variety.

7. Commitment to export-led growth and subsequent liberalization of barriers to trade generates an increase in foreign direct investment (FDI) and other forms of investment.

• This is primarily because trade liberalization removes barriers such as tariffs and controls that hinder capital flows. When these barriers are eliminated, countries become more attractive for investments, as investors are encouraged by the ease of doing business and the potential for market access.
• Furthermore, supply chain integration plays a significant role in motivating technology transfers and investment. As countries integrate into global supply chains, they gain access to advanced technologies and expertise from their trading partners.
• This exchange of knowledge and technology fosters innovation and promotes investment in industries that can take advantage of the integrated supply chains.

8. Exports lead to diversification, which enhances economic resilience in the face of exogenous shocks.

• Through trade, countries can expand their markets and reduce dependence on a single market for revenue. This diversification helps mitigate the risk of volatility and demand fluctuations by spreading economic activities across multiple markets.
• Moreover, diversification also extends to product diversification, where countries are no longer reliant on a narrow range of products to generate revenue. By diversifying their product offerings, countries become more resilient against supply shocks and are better equipped to handle disruptions in specific sectors.
• This diversification also promotes the expansion of production capabilities and increases the overall competitiveness of the nation.

9. Exports play a significant role in fostering fiscal stability for countries.

• Export earnings generated through trade can be utilized to service foreign debt obligations and cover the costs of importing goods and services.
• By promoting exports, countries can generate a surplus in their balance of trade, which helps balance the current account deficit.
• In the case of Pakistan, increasing exports can help address the current account deficit challenging the country.
• By expanding its export base and improving trade performance, Pakistan can earn foreign exchange that can be utilized to address the deficit, reduce dependency on external borrowing, and enhance fiscal stability.

10. Exports facilitate various aspects related to technology and knowledge transfers, skill sharing, adoption of new technology, and incentives for innovation.Through trade, countries have the opportunity to exchange technologies and knowledge with their trading partners

• This transfer of technology can occur through direct investment, licensing agreements, or collaborative research and development initiatives. By engaging in trade, countries can learn from each other, acquire new skills and knowledge, and apply them to their own industries.
• Trade also serves as a platform for skill sharing, as it creates opportunities for workers to gain exposure to different work practices, technologies, and management techniques. The interaction between workers from different countries and companies fosters the exchange of skills and expertise, leading to the development of a more knowledgeable and skilled workforce.
• Additionally, trade encourages the adoption of new technologies by exposing domestic industries to foreign products and processes. As countries import goods and services that incorporate advanced technologies, they are prompted to upgrade their own technologies to remain competitive. This adoption of new technology enhances productivity and efficiency in domestic industries.
• Furthermore, trade provides incentives for innovation. When companies compete in global markets, they are motivated to innovate and develop new products, processes, and services to meet the evolving demands of customers worldwide. The pressure to stay competitive drives companies to invest in research and development, leading to technological advancements and innovation.

11. Trade has enabled the global dissemination of technologies important for ecological sustainability

• It connects countries, facilitates knowledge sharing, and encourages innovation in the renewable energy sector.
• Technology that was prohibitively expensive or advanced has become available due to trade.
• Trade promotes quality improvement and environmentally friendly practices among local producers by enforcing international sustainability standards.

12. Export growth fosters increased female labor force participation through the creation of new job opportunities

• The ratio of employed women to the total population rose to over 20% since 1991, as a result of trade liberalization, according to the World Bank.
• Additionally, trade has enabled more women to transition from informal and domestic labor into the formal sector, providing them with better working conditions and greater economic empowerment.

It should be clear that export-led growth offers a sustainable and equitable model for Pakistan’s economic development. However, without implementation none of the reforms, policies, or plans will generate results. For example, the GoP introduced the Regionally Competitive Energy Tariff (RCET) in 2018 and quickly reneged on it merely four years later. The textile sector’s investments into increased capacity, expansion, and over $5 billion in R&D were suddenly rendered moot. The four years of export growth could not be translated into development due to inconsistent implementation of policy. Similarly, Pakistan has thrice attempted to reform its railways since 2018, and failed to follow through on any of its proposed acts. The issue of half-hearted implementation reduces investor confidence, and prevents exports from being able to actualize their growth potential.

The nation must orient towards export-led growth. Trade benefits all members of society through employment, income, and reduced prices. It fosters structural transition via enhancing innovation, knowledge capital, and easing access to green technology. Exports are also responsible for fiscal stability, balancing current account deficits, and improving foreign exchange. These benefits can no longer be ignored as Pakistan attempts to navigate its contemporary economic turmoil. Only by embracing an export culture and actively pursuing export growth can the nation achieve the outcomes it desperately needs.

Shahid Sattar and Sarim Karim

Pakistan is currently in difficult circumstances, grappling with deindustrialization and widespread unemployment. The country’s inflation rate at 36.4% has forced millions of families into subsistence conditions. Shockingly, 22% of the population now lives below the national poverty line, with 16.7% lacking access to education, electricity, sanitation, and water. The solution to these crises has historically been export-led development, which is pivotal for poverty alleviation, employment generation, and balancing the fiscal deficit.

However exports have not been given priority in Pakistan due to an unfounded fear of income inequality associated with trade liberalization. Protectionist policies wreak havoc on Pakistan’s export sector, generating cost burdens and inefficiencies which have led to an artificial loss of competitiveness and closures. This fear of income inequality disregards the fact that income equality alone cannot address the ongoing macroeconomic crisis. Pakistan cannot hope to achieve equitable growth or stable macroeconomic conditions unless priority is given to export-led growth.

When measuring inequality, institutions use the Gini index. The index ranges from 0 which implies perfect equality, and 1 which implies perfect inequality. Pakistan has a Gini index of 29.6, meaning that the wealthiest 10% of Pakistani households are responsible for 29.6% of relative consumption. At first glance, Pakistan appears relatively equal compared to its Asian peers. Bangladesh’s Gini coefficient stands at 32.4, India’s is at 35.7, and the South Asian average is 33.6. However if deindustrialization continues, this Gini Index score will become further unsustainable, as Pakistan’s shared prosperity has been decreasing since 2005, indicating that the poorest 40% are receiving fewer gains from economic growth.

To discuss the role of inequality in the context of development, Kuznets’ Curves help to outline long term trends. These suggest that inequality initially grows as a nation industrializes, due to the influx of cheap labour via rural to urban migration and capital investment. However, as labour becomes more organized, human capital expands, and incomes rise, inequality begins to decrease. Therefore, much of the fear-mongering centred around trade exacerbating inequality fails to account for two facts. First, deindustrialization would have worse outcomes for the working class. Pakistan’s current trajectory places it on the path of degrowth, employment loss, and a current accounts crisis that will hurt the entirety of its population but especially its rural and urban poor. Secondly, an unequal distribution of gains from trade can be mitigated using redistribution policies, expanding social safety nets, and increasing skill development. However these policy outcomes are harder to achieve without the revenue and current account balancing that exports provide.

Many of Pakistan’s protectionist policies are implicitly a consequence of this fear of inequality. World Bank data shows that customs duties on final and intermediate goods hinder capital intensity in production. Upstream duties have consistently increased since 2012 indicating a desire to maintain wages in labour intensive downstream sectors. The simultaneous imposition of duties on raw materials, which represent a cumulative 19% including a 7% customs duty on polyester staple fibre and a 12% anti-dumping duty, drive up production costs and render exporters uncompetitive. The first half of the decade witnessed some customs duties decrease, which led to growth in both the textile and apparel industries. The growth in these sectors outpaced other industries in the same period, but these gains were quickly stymied by a rise in regulatory duties post-2014. Currently, Pakistan fails to harness the potential of a growing export sector.

An investigation in 2016 on trade and inequality in Pakistan sheds light on the significant role of textiles. The study highlights that increased textile trade particularly benefits lower-income households. There are several reasons for this. Firstly, because textiles employ a substantial portion of non-farm, low skill labour, accounting for 28% of the workforce. Secondly, the textile value chain encompasses both rural non-farm and urban low-skill labour, thereby compensating for reduced agricultural earnings resulting from price reductions due to liberalization (Khan et al., 2016). Thirdly, this characteristic of the industry also ensures that restrictions on mobility do not impede equitable distribution of gains from increased textile exports. Lastly, textiles exhibit greater  labour intensity than other manufactures like processed food, resulting in a more balanced distribution of earnings in favour of labour over capital (Khan et al., 2016). Therefore, it is evident that textiles hold the most potential for equitable growth as it provides employment in urban areas as well as income to cotton pickers (a largely female labour force) in the rural areas of Pakistan.

A general assessment of trade liberalization highlights three channels for equitable growth:

1. Trade facilitates technology transfers and innovation, leading to increased productivity. This in turn fosters skill development and higher wages for labour as it adapts to innovative processes.
2. Exports produce foreign exchange earnings that can finance imports and service foreign debt. This frees up fiscal capacity and lowers consumption costs.
3.  Increased employment and economic diversification enhance an economy’s resilience to exogenous shocks.

In summary, trade provides valuable tools to an economy to address its challenges.

Empirical research on the short-term link between trade openness and inequality is inconclusive especially among countries reliant on import tariffs for revenue. A 2020 investigation by the World Bank found that in 45 out of 54 countries, households benefited from trade, particularly due to lower food prices. Since food is the major source of expenditure for poor households, this is pertinent to Pakistan’s current cost of living crisis. Nine countries were identified as losing from trade, but this was due to overreliance on tariff revenue that was lost upon liberalization. In the short-run for 37 countries, the richest households (the top 20% income earners) gained more from liberalization than the poorest households (the bottom 20%). Kuznet’s curves explain this observation in inequality as a short-term impact for countries which are reliant on import tariffs. However, even these results exhibited strong heterogeneity. In the case of Pakistan for instance, the study found its lower-income population to be one of the largest beneficiaries of agricultural tariff liberalization. These gains occur because of two main factors: lower food prices and the role of agricultural goods as inputs for other industries. The reduction in food prices benefits households, as mentioned earlier. Additionally, since agricultural goods are used as inputs in various industries, the decrease in input prices for those industries has a multiplier effect. This multiplier effect leads to significant gains to the economy and particularly urban labour and labour involved in cotton picking.

Finally, it would help to also challenge the mainstream arguments that support the idea that trade openness leads to income inequality. The United Nations Conference on Trade and Development (UNCTAD) in 2019 summarized two channels through which trade contributes to inequality: the ‘race to the bottom’ and geographical clustering. The first argument suggests that countries compete by offering cheap goods, achieved through reducing wages, weakening labor rights, and relaxing regulations. However, the extent of the ‘race to the bottom’ depends on a nation’s ability to use foreign investment and trade-driven growth to improve workforce skills. Successful export-led developers like South Korea have transformed from impoverished societies to mass-consumption societies with dedicated poverty alleviation strategies. The second argument highlights that trade can lead to uneven geographical development, favoring specific sectors and creating clusters of industries. This means that certain segments of the population, typically rural communities, may not have access to higher incomes associated with employment in export industries. However, this issue can be addressed by improving infrastructure to better connect rural areas with industrial centers. Additionally, investment in small-scale handicraft enterprises, which employ significant rural non-farm labor, can enable them to contribute to exports as well.

Analysis of Pakistan’s peculiar economic circumstances suggests that protectionism actually leads to increased inequality. Pakistan is currently grappling with a cost of living crisis stemming from currency devaluation, rising import prices, and disrupted supply chains. Import tariffs incentivize rent-seeking behavior among inefficient firms that lack competition. These firms can maintain artificially high prices since consumers bear the burden of their inefficiencies. Another frequently overlooked aspect is the gender bias associated with protectionism. A 2019 study conducted by the World Bank, which analyzed data from 54 countries including Pakistan, revealed that protectionist policies disproportionately disadvantage women. Women tend to spend a higher share of their budget on agricultural products compared to men. Female labour also tends to derive a smaller share of income from agriculture compared to men. Therefore protectionism increases both the cost gap and wage gap between men and women. This further exacerbates inequality between female-headed and male-headed households, as men benefit more from income gains associated with protectionist measures. Additionally, there is a gender bias in the cost of living, commonly referred to as the ‘pink tax,’ where products marketed towards women are often priced higher than those targeted at men. When tariffs raise prices and diminish incomes, women bear a disproportionate burden during the cost of living crisis.

Income inequality is a complex and multifaceted phenomenon with many determinants that are difficult to isolate. An empirical investigation by the University of Karachi in 2015 also shared these conclusions. However, they did report a significant relationship between social spending and inequality. As social spending increased, Pakistan saw a decrease in income inequality. Export-led development can provide the fiscal revenue, current account balance, and macroeconomic stability necessary to embark on such projects. Without priority given to exports, Pakistan’s most vulnerable will remain subject to the dire conditions of the present stalemate of premature deindustrialization, failure to gain from export-led growth, and declining standard of living.

In conclusion, Pakistan stands at a critical juncture grappling with deindustrialization, unemployment, and a balance of payments crisis. The unfounded fear of inequality associated with trade liberalization persists, and it is the working class who suffer because of it. Trade openness offers opportunities for poverty alleviation, employment generation, and fiscal stability. To address income inequality effectively, Pakistan must realign its resources to empower export-led growth. By doing so, Pakistan can overcome its economic crisis, create inclusive growth, and improve the living standards of its most vulnerable populations. Failure to prioritize exports will perpetuate inequality, impeding progress toward a more equitable and prosperous future for the nation. It is crucial for Pakistan to embrace trade as a tool for achieving sustainable and inclusive development and end its reliance on protectionism.

Dr. Gohar Ejaz

Textile exports for April,23 clocked in at $1.24 billion, a staggering $500 million less than the previous year’s exports for April,22 and a colossal $1 billion per month short of the capability due to enhanced capacity. It is disheartening to see that over the same time period, our competing countries such as Bangladesh, Sri Lanka and Vietnam posted impressive growth ranging from 10-30% in textile exports over the last year, while we struggle to keep up with our previous years’ exports. Exogenous factors i.e., demand and external market forces, cannot be blamed for our downfall as the decline is entirely the consequence of our shortsighted decisions and failure to follow through on the proven policies such as of providing a level playing field on energy tariffs.

The impressive surge in Pakistan’s textile exports, a remarkable 56%, $19.5 billion in 2022 from $12.5 billion in 2020 is largely attributed to the strong policy support through regionally competitive energy tariffs (RCET). The industry’s enhanced competitiveness empowered it to invest a further $5 billion in expansion and new projects, effectively boosting export capacity by $5-6 billion per annum. These milestones placed Pakistan firmly on track to achieving its target of $25 billion in textile exports in 2023. However, the import restrictions and unfortunate withdrawal of RCET has left the industry reeling. The momentum is lost and investments are at risk of going to waste. The ramifications of such a decision are far-reaching and disastrous, with severe economic costs, loss of confidence, and social unrest stemming from the surge in unemployment.

Figure 1 Textile Exports for FY 22 and FY 23.     *Provisional

In accordance with our nation’s historical metaphor of the timeless game of snakes and ladders, it appears that the predicted event outlined in the article THE SNAKE BITES ONCE AGAIN – ENERGY, has indeed come true. The government has rescinded their prior commitment to provide competitive energy tariff to our country’s export sectors, which were to extricate us from the grip of twin deficits through export-driven expansion. This decision is distressing as it may suggest that the government has relinquished their resolve to pursue the sole viable strategy for managing our Balance of Payment (BoP). This has sent shockwaves throughout the economy, leaving essential export sectors precariously vulnerable and driving the country towards rapid deindustrialization.

Pakistan’s economic growth was on the rise and was climbing the ladder with the implementation of the Regional Competitive Energy Tariff (RCET). The promising tariff structure offered the country’s vital export sectors competitive energy rates, serving as a beacon of hope for a brighter future. The initial tariff rates of 7 cents/kWh for electricity and $6/MMBtu for gas were highly competitive and proved to be instrumental in driving the country’s export-led growth. As the tariff climbed to Rs.19.99/kWh and $9/MMBtu for electricity and RLNG/gas, respectively, it still remained marginally competitive. However, the sudden complete withdrawal of RCET has dealt a fatal blow to Pakistan’s economy, leaving its export industry in shambles with the recent hike in electricity and RLNG/gas prices, from Rs.19.99/kWh to over Rs.40/kWh and $9/MMBtu to over $13/MMBtu, respectively. This has made the industry uncompetitive in both local and international markets. Punjab industry in particular, with energy costs four times that of Sindh, seems to have been sacrificed at the altar of short sightedness and expediency. As a result, the available orders are now being shifted to cheaper alternatives, both domestically and internationally.

The withdrawal of this tariff will undoubtedly lead to further economic deterioration, including unemployment, lower exports, and bankruptcy. Due to closure or partial operation of the total installed capacity which has already resulted in significant unemployment of more than 10 million. The rise in unemployment has had a profound impact on the nation’s youth, who account for 65% of the overall population. They have become the ultimate collateral damage, with their aspirations and dreams dashed by the dismal wasteland of high joblessness and uncertain prospects.

Pakistan’s dependence on exports for foreign exchange has always been a challenging task, and with the withdrawal of RCET, this reliance has become even more tenuous. The current situation implies that replacing exports with mere remittances and loans is an impossible feat, which could permanently damage the Pakistani economy. The government must realize that growth-led export policies such as RCET can lead to increased exports and higher revenues for the industry against foreign loans with high-interest rates of 7% – 8%. It’s worth noting that the total cost of regionally competitive energy tariff (RCET), if the differential is treated as the subsidy/cost is 2.67%, making it the most efficient and sustainable way of funding foreign exchange requirements.

The issue of Pakistan’s economy teetering on the brink of a severe financial crisis is not new. The question at hand is how to execute policies effectively to ameliorate long-standing disadvantages and secure the future of the nation. The reintroduction of RCET will undoubtedly be a game-changer, providing an immediate boost to the struggling economy by lowering energy tariffs and keeping foreign investors engaged. However, a sustainable long-term solution is also required to secure the future of the country.

In order to find a sustainable, long-term solution, the structural issues and inefficiencies within Pakistan’s energy sector must be addressed. These issues and inefficiencies greatly impact affordability, and it is crucial that the state relinquish control of business operations to private investors and innovators. CTBCM, is one step in the right direction, however, it is being hampered by bureaucratic interference and unnecessary restrictions. Government has to loosen its grip on business, instead, what the nation needs are B2B deals that are free from government intervention and meddling. This will aid in restoring competitiveness, benefiting both the industry and the state in breaking the vicious cycle of circular debt, which currently stands at Rs. 4 trillion for electricity, as per the Power Division’s statement to the standing committee of national assembly and Rs. 2 trillion for gas/RLNG. It is imperative for the state to acknowledge that running businesses, particularly in the energy sector, is beyond its realm of expertise. Therefore, it is high time that the state relinquishes control and grant the private sector the opportunity to take the reins for a long-term and sustainable solution. Only then can we hope to see the innovative and efficient practices of the private sector take hold and bring about the financial stability and affordability in the sector.

The crux of the matter does not solely lie in policy formulation, but rather in the effective execution of policies. The Textile Policy 2025 serves as an example of this, as it was developed after rigorous deliberation and consultations but has yet to be implemented. The non-implementation of the Textile Policy 2025 implies that the business environment in Pakistan is not conducive to the growth of both existing and new investors. Emphasizing the implementation of policies can have a tangible impact on driving sustainable development and spurring economic growth, leading to significant improvements in Pakistan’s textile sector and exports within the next four years.

It is an undeniable fact that Pakistan has consistently fallen behind when competing countries have experienced economic take-offs. The reasons for this disparity are numerous, including a lack of long-term vision and implementation of policies, compounded by erratic energy prices and availability. Additionally, policies have been abruptly withdrawn time and again, causing the industry to veer off its path of export-led growth. To achieve sustained progress, it is imperative that Pakistan focuses on augmenting export earnings by implementing long-term policies while simultaneously reducing state intervention in the business arena. This approach represents the most sustainable and pragmatic means of overcoming Pakistan’s current account deficit and economic stagnation.

We hope that the decision makers take heed and reverse the decline through decisive measures in support of creating a focused export culture in the country.

Shahid Sattar and Noreen Akhtar

UNDERSTANDING TRACEABILITY

The United Nations Global Compact defines traceability as ‘the ability to identify and trace the history, distribution, location, and application of products, parts, and materials to ensure the reliability of sustainability claims, in the areas of human rights, labor (including health and safety), the environment and anti-corruption’ (Sourcetrace n.d.).

Traceability is a major exercise to ensure transparency in the supply chain, that requires efficient supply chain mapping to track down various modes in the chain. If the products’ or materials’ journey along the supply chain is traceable, this helps understand aspects of both social and environmental sustainability (i.e. human rights, labor practices, and environmental footprint) associated with these products. This then assists in providing a basis to establish credible sustainability by providing reliability to the green claims by the companies (Cottonup n.d.).

Companies use different traceability models to trace their supply chain. Each model has its own advantages and limitations. The Identity Preservation model, for instance, provides traceability back to a single point of origin, from a farm to the final users, and treats certified products separately throughout the supply chain. The model, however, is expensive and resource- extensive. Moreover, in the certificate trading model, certificates/credits are issued at the beginning of the supply chain. These are tradeable certificates that indicate responsible production. However, this model lacks effective monitoring of data against traceability through the supply chain (Cottonup n.d.).

THE NEED FOR TRACEABILITY

The demand for traceability is rising from both brands and the consumer side. While brands want to know the origin of the products, the conditions where they are manufactured, and their environmental footprint, the consumers are also prioritizing mindful purchasing, where they are expecting the products to not just meet style requirements but also social and environmental sustainability principles. Further, responsible and ethical production – the key pillar of a transparent supply chain, is a significant requirement from global buyers. For instance, the EU’s traceability and information requirements on products’ circularity and key environmental aspects have clearly received momentum in the recent EU Strategy for Sustainable and Circular Textile. These regulations will gradually become non-optional for the major textile exporters such as Pakistan and the survival of their export market will largely depend on how effective traceability requirements are fulfilled compared to other regional competitors.

Improvement in traceability is a competitive factor that can bring several benefits to companies. For instance, brands validate green claims of products and practices through traceability data and communicate them to the end consumers, which increases the level of trust and sales and makes the supply chain more secure. Traceability also improves supply chain management for firms. It confirms sustainable sourcing practices and fulfillment of due diligence requirements; the responsible business conducts all businesses are expected to follow to avoid human rights violations and environmental degradation.

TEXTILE SECTOR FROM TRACEABILITY PERSPECTIVE

Traceability and disclosure of mandatory information is an integral part of sustainability in the textile industry. The textile industry is long criticized for unsustainable practices including child labor, the use of fake organic cotton, and the discharge of hazardous chemical waste. This is caused due to the complex nature of the textile supply chain that involves numerous stakeholders at diverse levels. Therefore, a strong movement, traceability, is now in the limelight to not only promote eco-friendly practices but also avoid greenwashing.

The textile sector contributes directly and indirectly to the socioeconomic development of Pakistan. It employs around 45% of the country’s total labor force, contributes 8.5% to the GDP, and more than 60% to the country’s exports. Therefore, the sector’s functioning has gained the highest attention from both brands and consumers regarding whether or not its manufacturing is within the domains of social and environmental sustainability. To ensure this, traceability, as an integrated tool has been introduced and will be gradually imposed to digitally communicate and understand the holistic sustainability information.

Traceability will be a fundamental tool for Pakistan’s textile industry to achieve a competitive advantage and credibility, as it harmoniously supports all sustainability pillars: Ecological pillar, societal pillar, and economic pillar, as described by Kumar et al. (2017). The ecological aspect of a textile product indicates that three categories, namely, the manufacturing phase, use phase, and post-use phase are associated with the ecological pillar of textile sustainability. Each phase is linked with complex processes that result in crucial environmental damage and their communication becomes even more challenging. Thus, traceability communicates this information in a holistic manner, that can also be traced back to the original source. This changes the perception of the consumers who prefer green products in a positive manner, which acts as a catalyst to promote sustainable growth of the textile business.

The societal aspect of textiles includes social transparency in the supply chain. This aspect usually remains hidden from the brands and consumers, who prefer getting more information about how safe textile products are for consumer use as well as whether or not the product manufacturing fulfills human and labor rights. Therefore, experts suggest traceability as a well-established tool, that provides all information including that regarding cotton cultivation and farming practices, labor practices, and consumer safety (Kumar et al. 2017). This successfully promotes corporate social responsibility (CSR), which benefits all stakeholders in the supply chain. For instance, as farmers’ data can be traced via traceability tools, they can easily secure contracts and get better access to markets and services such as education (Cottonup n.d.).

The third pillar of sustainability, which is the economic pillar, includes a balance between efficient resource use for economic growth and environmental safeguard for people and species. Traceability contributes majorly to the economic sustainability of the textile supply chain. Traceability information reduces production-lead time as products can be efficiently located and traced, enhances the visibility of the supply chain to the end-consumers, and improves stakeholder responsiveness that reduces long-term costs associated with unsustainable practices (Kumar et al. 2017).

COTTON SUPPLY CHAIN TRACEABILITY

Traceability in the cotton supply chain has become a mandatory tool to assess the due diligence and sustainability efforts of the textile stakeholders in Pakistan. While some of the leading firms are concentrating their efforts to include traceability in their supply chain, many are lagging behind in adopting this newly-emerged sustainability tool. For instance, Interloop’s newest technology Looptrace aims to provide end-to-end traceability for cotton-derived products (from the farm level throughout the production process). It is designed to support the stakeholders to trace and access raw material information that is transparent, thus helping them meet SDGs. Interloop’s vision for transparent sustainable cotton farming via its Looptrace project aims to maximize water efficiency, and soil health, reduce chemical use and improve labor working conditions. The project involves around 8000 farmers who are in continuous engagement through training (Interloop n.d.; Sourcing Journal 2022). Other companies such as Sapphire and Artistic Apparels have partnered with FibreTrace VERIFIED and climate-positive Good Earth Cotton to make each step of their supply chain traceable and credible (Apparel Resources 2022).

APTMA, Pakistan’s top textile association, has pledged to make Better Cotton the mainstream commodity. It is playing a crucial role in providing training and promoting research on traceability and Yarn Ethically and Sustainably Sourced (YESS) standards in collaboration with WWF, BCI, and NTU (Better Cotton Initiative n.d.). Moreover, the export and use of high-quality cotton will become a necessary part of the industry’s supply chain traceability in the future. Therefore, APTMA has proposed to the government to support the establishment of the DNA Testing Lab by the APTMA Cotton Foundation (ACF). This lab will play a crucial role in determining the cotton origin at any stage of the supply chain and help the industry avoid false content claims in the finished products and the associated risks to boost the export-led business.

THE WAY FORWARD

The current traceability progress in Pakistan’s textile sector portrays a blurred picture. While firms are developing their own traceability systems, integrated mandatory provisions for textile supply chain traceability must be adopted, that aim to mandate all textile firms to progress harmoniously towards achieving international standards of traceability. It is required that the Government of Pakistan makes APTMA Cotton Foundation (ACF – A non-profit organization established by APTMA) the sole agency responsible to effectively trace and record accurate supply chain information. Successful traceability can only be established if it is made mandatory and adopted by law.

A traceability system can only properly function under a central agency from farmers to ginners to spinning mills, manufacturers, retailers and brands acquiring data and tracking with appropriate level of confidentiality to protect the commercial interests of individual exporters.

REFERENCES

https://textclothsustain.springeropen.com/articles/10.1186/s40689-017-0027-8

https://bettercotton.org/bci-sign-agreement-pakistans-largest-textile-trade-association/

https://tracextech.com/traceability-of-the-cotton-supply-chain/

https://sourcingjournal.com/denim/denim-innovations/interloop-looptrace-responsible-manufacturing-denim-traceability-organic-cotton-pakistan-361764/

https://www.interloop-pk.com/2022/07/18/traceability-through-digitization-looptrace-project/

https://www.fibre2fashion.com/news/textile-news/europe-s-better-cotton-working-on-developing-traceability-capability-284718-newsdetails.htm

https://circulareconomy.europa.eu/platform/en/toolkits-guidelines/traceability-and-transparency-sustainable-and-circular-garment-and-footwear-value-chains

https://www.interloop-pk.com/wp-content/uploads/2022/12/Sustainability-Report-2022.pdf

https://www.sourcetrace.com/blog/cotton-traceability-challenges-importance-digitization/

https://australiancotton.com.au/traceability

https://bettercotton.org/developing-a-traceability-solution-for-better-cotton/

https://bettercotton.org/wp-content/uploads/2022/06/Better-Cotton-2021-Annual-Report.pdf

https://cottonupguide.org/sourcing-options/understanding-traceability/#1520083495454-6960a6f5-3f1e

https://cottonleads.org/sustainable-production/traceability-united-states/#:~:text=Traceability%20means%20a%20company%20has,starting%20at%20the%20cotton%20gin.

https://apparelresources.com/business-news/sustainability/pakistans-textile-manufacturers-adopt-traceability-solution-fibretrace/