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November 16, 2022

by Shahid Sattar and Eman Ahmed

The textile sector is the central pillar of our industry, contributing nearly a quarter of Pakistan’s manufacturing value-addition and providing employment to about 40 percent of the country’s industrial labor force. Textiles comprise over 60 percent of national exports.

To increase exports, the GoP announced its Textile and Apparel Policy, 2020-25, under which adequate energy (electricity and RLNG) is to be provided to export-oriented textiles and apparel industrial units at ‘regionally competitive energy tariffs’ (RCET).  The Textile sector contributed $ 19.4 as export proceeds last FY. The sector has added further production capacity through new projects and enhancements vide TERF, and now has the potential to generate more than $24 billion exports in FY23, provided energy supply – especially gas/rlng – is adequate. The industry in Punjab is already being supplied only 70 MMcfd of gas against a requirement of approximately 200 MMcfd. This is severely curtailing its production and it is feared that gas/RLNG supply will be further reduced during the coming winter months.  The export sector’s total requirement for gas/RLNG is 350 MMcfd which is approximately 9% of total supply of approximately 3800 MMcfd expected this winter. The restriction of gas supply to domestic or power sector to prioritize the export sectors needs to be planned in order to prevent further deterioration in the country’s trade balance.

Gas/RLNG allocation follows a merit order basis which places domestic and power generation use at a higher priority than the export sector. Given the extremely sensitive and urgent forex requirements of Pakistan export sector’s gas allocation priority must be revised to No 1, ahead of the domestic sector. Pakistan can survive without hot water or space heating but will be in severe difficulty if exports decline.

The argument that electricity supply can provide the energy needed is patently wrong as grid supply cannot substitute for the steam and hot water use of the industry apart from the quality issues which are already reducing the industry output by about 25%. Power load enhancements and new connections are delayed and at present over 126 applications are pending with the Discos. The power division is fully briefed on this but little if any progress is visible on new enhancement of loads, new connections, or quality of supply.

Another aspect that requires serious attention is that gas/RLNG curtailment has been consistently applied on the units located in Punjab. This has placed them at a severe disadvantage both in terms of pricing and availability as supplies to Sindh based plants have not been curtailed in the past. A fair and just system would ensure that gas supply to Punjab based exporters is also not curtailed and adjustments made in the supply of other sectors to accommodate. Gas/RLNG being supplied to Punjab is priced at $9 for less than 50% of the average consumption of mills last year. This formula irrationally excludes the new plants / expansion that have been made during the last 2 years. The Gas/RLNG being supplied to mills in Punjab is less than 1/3 of the required quantity of 200 MMCFD. At present gas supply to Sindh export industry is supplied at $ 3.75/ MMBTU (Rs 840) and at a quantity meeting 80% plus requirements. This is contrary to the commitment that differential in gas / RLNG pricing within the country will be less than $2 to keep Punjab industry competitive. This huge differential means that Punjab based industry is paying for gas at $9 and electricity at 9 cents/kwh while bulk of Sindh industry is generating their own electricity at 4 cents / kWh.

Given this differential Punjab based industries are no longer viable and have no option but to close as they are no longer competitive and available orders are shifting or in process of shifting to the cheaper alternatives internationally and within Pakistan.

A further issue is that due to a misinterpretation of the gas priorities, supply to non-export processing units such as glass, ceramics and steel continues unabated despite this being completely unjustifiable from an economic viewpoint. Decision was taken by Federal Cabinet on Gas Supply Priority Order, notified on December 16, 2021, wherein fertiliser and power sectors were given upward revision till March, 2022 to facilitate augmented production of urea and generation of electricity. On expiry of this SRO Zero rated industry is now at the second priority at par with power generation.

Amidst increasing domestic demand and dwindling supply of gas – including imports of RLNG – circular debt is continuing to mount. It is a fact that the power sector bureaucracy is deeply entrenched in existing systems that have been beneficial for their vested interests. Pakistan’s energy crisis has persisted for decades, and power shortages are estimated to have cost the equivalent of at least 3-4% of GDP each year since 2008, in direct output losses alone. In addition, the impact on jobs has been severe, especially in the industrial sector. Furthermore, we must remain cognizant of the fact that electricity is perceived as a fundamental “right” and consumers are not willing to pay for it (Burgess et al., 2020). This notion coupled with our unreliable supply, poor service, and weak infrastructure translates into Pakistan’s energy sector being stuck in a “bad equilibrium.”

Amid elevated levels of inflation, the war in Ukraine, and rising interest rates, global economic growth is expected to be weak in 2022 and 2023. The war has resulted in elevated prices of food and energy, and the situation is increasingly dire. Being an oil importing country, Pakistan heavily relies on hard currency to finance imports, and is thus faced with mounting food and energy prices and deteriorating external balances. Moreover, industries in Pakistan are energy intensive and will therefore see rising input costs of energy, other commodities and borrowing. With interest rates being synchronized with the US Fed policy interest rates, borrowing and servicing debt costs are expected to rise. Furthermore, the strengthening value of the US dollar has been constricting the textile industry’s liquidity and eroding competitiveness.

An export-led economic growth model is central to strengthening developing economies like Pakistan’s, but this also requires a more diversified product basket and diversified markets. The major exports of textiles need to be supported for value addition while simultaneously tapping into other products and services. This is more sustainable than acquiring more foreign aid.

Higher value addition through technology, IT investment and renewable energy generation are the most impactful and symbiotic means to improve the economy while simultaneously enhancing worker capabilities and enabling integration into Global Value Chains. Enhancing internal capacity in these industries will allow is to reduce imports. Pakistan’s import bill has historically been weighed down the most by petroleum imports; therefore, drives for domestic exploration of renewable energy sources must be introduced, and the transition to solar and wind capacity must be pursued aggressively, which will have positive impacts on job creation and skill enhancement for the population.

If we target the doubling of Pakistan’s trade value by 2030, there is a need for aggressive export facilitation by the government by incentivizing exports and reducing tariffs for the most productive and high potential exporting industries, and by reviewing non-tariff barriers to trade and ensuring international standard compliance. The country should engage professional consultants to lobby for GSP+ status for Pakistan. With our competitive advantage in textiles, Pakistan should be able to target 10-15 leading brands and retail chains in the USA and Europe for sourcing Textile & Clothing from Pakistan.

It is often argued that giving priority and subsidies to exporters will lead to neglect of other industries and businesses such as local startups. However, this is the most effective geo-economic strategy for a country like Pakistan that struggles to in forex through other sustainable means, so these measures are critical for the long-term stability of the economy. Another strategic implication to bear in mind is that reducing oil imports may result in energy shortages if domestic production is not able to keep pace. Since exports are to be supported on a priority basis, this may lead to power cuts for domestic consumers and industries that are less productive, resulting in energy insecurity in the short term. However, the strategy of prioritizing domestic energy is not geo-economically prudent and is more often applied for political gain over the economic prosperity of the country. If Pakistan’s economy is to survive this winter of discontent, it is crucial to prioritize gas supply to the export sector – thereby preventing Pakistan’s premature deindustrialization.

 


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November 12, 2022

by Shahid Sattar and Noreen Akhtar

INTRODUCTION

Pakistan’s export performance data and progress by the World Bank indicates that the country’s exports have reached around $35 billion, showing a 24% increase compared to that of 2020 (Macrotrends 2022). Pakistan’s Free Trade Agreements (FTAs) have, over time, reduced barriers to the export-led growth. For instance, China allows Pakistan a tariff-free access to its market. Also, EU’s GSP+ (Generalized System of Preferences) status allows duty and quota free market access to maximum exports from Pakistan. EU has remained the top export destination for Pakistan’s textile industry. In 2020, 75% of total exports made to EU were from Pakistan’s textile and clothing industry (European Commission 2022a). Pakistan’s exports growth to the EU has increased from around 26% in 2007-2013 to 47% in 2014-2021. However, considering a period of 9 years, the growth rate shows a comparatively slower pace (Javaid 2022).

Pakistan’s export market is heavily reliant on its textiles while the stability of textile industry’s exports is majorly reliant upon free access to the global market such as that of EU. Thus, Pakistan needs to enhance its eligibility under the EU’s GSP+ preferential status and utilize it effectively to make its export-led growth steady as well as to stay in line with other regional competitors including Bangladesh. GSP+ status is crucial for Pakistan to achieve a stable economic growth as in the absence of this status, “country would have to face an MFN Tariff of a maximum of 12% for most traded commodities under GSP+ and would also be paying an anti-dumping duty of 13% to the EU on cotton bed linen” (Javaid 2022). The status has also supported Pakistan to enhance its capabilities to grow in a sustainable manner, diversify its economy and create employment opportunities. It also accelerated Pakistan’s efforts in improving compliance to major human and labor rights and environment and good governance related international conventions.

EU awarded Pakistan the GSP+ status in 2014 and Pakistan, fortunately, became the largest beneficiary of GSP+ among all other awardee countries (European Commission 2022b). This status will end in December 2023 and its continuation is highly reliant upon a strong implementation of the 27 mandatory international conventions related to environmental and social compliance along with the treaties to be newly added. Therefore, Pakistan needs to accelerate its current efforts to fulfil the requirements of these conventions in all its sectors including the textile industry.

Pakistan has ratified all the compulsory international agreements required for the GSP+ renewal. These treaties fall under four categories: Human rights, labor rights, environment and climate change and good governance.

COMPLIANCE TO THE HUMAN RIGHTS CONVENTIONS

Pakistan has shown significant progress towards compliance to the human rights conventions. The country’s constitution prohibits torture and other cruel, inhuman or degrading treatment. The penal code prohibits criminal use of force and assault. The constitution orders free and compulsory education for all children aged 5 to 16, regardless of their nationality. Also, government authorities support NGOs/INGOs work to ensure safety of IDPs. Pakistan has also shown progress to human rights by proposing Protection of Journalists Bill 2021 and became the first country in South Asia to launch National Action Plan on Business and Human Rights. The Government also launched Ehsaas Program in 2019 supported by the World Bank, that aimed to develop a resilient social protection system via emergency cash initiative.

WOMEN

Women’s rights have gained considerate attention over past years. Rape is considered criminal offense. The following major initiatives took place to safeguard women’s rights in the country: Implementation of Women’s Protection Act, Punjab Protection of Women Against Violence Act, designation of special courts countrywide to have an exclusive focus on gender-based violence, KPK Domestic Violence Against Women Act 2021, introduction of cellphone apps to enable women to contact police, increase in research initiatives by the foundations on gender-based violence, operation of Crisis Center for Women in Distress by the government, Enforcement of Women’s Property Rights (Amendment) Bill 2021, Punjab government funding women’s career centers and crisis centers that provide legal and psychological services to women and emergency shelters for women and children, initiation of economic empowerment programs such as Kisan Ki Beti Project to enhance skill development of rural women, financially empowering women via initiatives such as Ehsaas Kafaalat Program, appointment of first female chief justice in the High Court (US Department of State 2021) and increasing awareness via peace marches such as Aurat March.

Moreover, regarding night shift hours for women employees, the Factories Act 1934 now known as Factories (Amendment) Act 2012, states that “no woman shall be allowed to work in a factory except between 6 am and 7 pm. With the exception, the Provincial Government by notification in the official Gazette, vary the limits laid down above to any span of ten and a half hours, or where the factory is a seasonal one, of eleven and a half hours, between 5 am and 7.30 pm.” Recently, however, Pakistan has supported women’s empowerment and allowed work in nights shifts. Sindh Assembly in this regards passed Sindh Factories (Amendment) Bill, 2021 and Sindh Shops and Commercial Establishment (Amendment) Bill 2021 to allow women work during night shifts under better work conditions. Both bills made the employers accountable to provide safe workplaces with better facilities including transportation for women working beyond 7pm (Tunio 2021).

MINORITIES, OTHER RACES AND ETHNICITIES

Racial and ethnic violence and discrimination is prohibited in all the sectors. According to Pakistan’s constitution, all citizens are entitled to equal protection before law and minorities shall be given freedom to practice their religions and cultures. The constitution also discourages racial, sectarian or tribal discrimination. Moreover, some of the initiatives at the country level that have ensured minority rights include the 2017 Hindu Marriage Law and KPK Rehabilitation of Minorities Endowment Fund Act 2020 (US Department of State 2021).

CHILDREN

Regarding children’s rights, the constitutional mandates have made education compulsory and free for the children aged 5 to 16, regardless of any nationality. Moreover, government has taken multiple initiatives to protect children. For instance, both boys and girls have access to the government medical care facilities. Sindh provincial assembly has passed Child Protection Authority Amendment Act 2021 to take strict action against child abusers. Child protection courts were inaugurated by the Peshawar High Court in KPK. Various laws aim to protect children from sexual abuse and cruelty and KPK government built hundreds of schools to educate internally displaced children deprived of education. The legislative progress includes launch of National Action Plan on Child Abuse and launch of National Child Labor Survey. Lastly, agencies were established to track child abuse and in response to the Zainab abuse case, Zainab Alert, Response and Recovery Bill 2019 was approved (US Department of State 2021).

PERSONS WITH DISABILITIES

The law supports equal rights for persons with disabilities and the responsibility of protecting their rights is given to the provincial special education and social welfare offices. There are departments or offices legally responsible to address educational needs of disable persons in each province in Pakistan. Pakistan also supports employment quotas at federal and provincial levels in public and private organizations to reserve 2% of jobs for persons with disabilities. Moreover, the National Council for the Rehabilitation of the Disabled had job and loan facilities for the disable.

OTHER SEXUALLY ORIENTED AND GENDER IDENTITIES

Pakistan has taken certain positive measures under UN Human Rights Conventions, to ensure rights of other gender identifies. Regarding transgender rights, Transgender Persons (Protection of Rights) Act 2018 was incorporated and government of Sindh, in 2019, announced to provide 0.5% of office jobs in Sindh police force to the transgender community. KPK province has also shown effective improvement regarding transgender rights. For instance, transgender prisoners are held separately to improve prison situation. There are dedicated intake desks for transgender persons in KPK police stations and transgender rights education is added to police training courses. Transgender sensitization trainings are also held for police officers in Punjab and Islamabad. Lastly, Supreme Court ruling allows transgender community to obtain national ID cards listing third gender to participate in elections as both candidates and voters (US Department of State 2021).

COMPLIANCE TO THE LABOR RIGHTS CONVENTIONS

After 18th amendment, most of the labor force in Pakistan is under authority of provincial labor laws. In Pakistan, the government collaborates with the labor NGOs to assist workers regarding capacity building, support establishment of labor unions to organize workers, advocate for the wellbeing of workers and to support workers get access to citizenship benefits. Moreover, the ministries in KPK, Punjab and Sindh worked to register brick kiln workers to enhance their access to labor courts and other services as well as to regulate the industry efficiently. Also, the government of Punjab supported Elimination of Child Labor and Bonded Labor Project to overcome child and bonded labor in brick kilns. Under this project, the workers were supported to obtain national IDs and interest-free loans as well as schools were established at brick kiln sites (US Department of State 2021). Government of Pakistan has also signed an MOU with ILO and launched Better Work Program to achieve decent work standards, especially in the export-oriented Textiles and Apparel sector, supporting the sector in improving labor conditions and enabling greater freedom of association.

Regarding prohibition of child labor and forced labor, in 2020, Pakistan’s federal government amended Child Protection Act 1991 and prohibited child domestic and other hazardous labor. Pakistan’s constitution prohibits employing children younger than 15 in any factory, mine or other hazardous sites. Moreover, some of the provinces such as KPK have set minimum age for hazardous work to be 18 which meets the international standards of minimum age for employment. Moving on, Baluchistan passed Baluchistan Forced and Bonded Labor System (Abolition) Bill in 2021 to prohibit forced and bonded labor as well as Baluchistan Employment of Children Prohibition and Regulation Act to protect children from hazardous working conditions. The legislative progress also includes launch of National Action Plan on Child Abuse, launch of National Child Labor Survey and Punjab’s Restriction on Employment of Children Act.

Compliance to the rights to acceptable working conditions has also received strong attention. KPK raised minimum wage standards and mandated women and transgender workers to receive equal remuneration. According to the law, maximum workweek hours are 48 with rest periods and paid annual leaves. Overtime pay, sick leaves, health care, social security and education for worker’s children are other basic facilities required to be ensured. In 2019, rights of women working in farming, livestock and fisheries were recognized via Sindh Women Agriculture Workers Act, ensuring their minimum wages, sick and maternity leaves, accurate working hours and right to collective bargaining and social security.

 COMPLIANCE TO THE CONVENTIONS RELATED TO ENVIRONMENT AND CLIMATE CHANGE

Environment and climate change have received extensive devotion in Pakistan. One of the biggest accomplishments was an effective control on wildlife trafficking and raise awareness among communities regarding illegal wildlife trafficking and sustainable trophy hunting. The main stakeholders include Pakistan Customs as well as other bodies such as Ministry of Climate Change who supported relevant organizations through capacity building. Also, a system of

permits was established to transport rare animal species abroad and regular monitoring takes place at the airport. Lastly, law enforcement agencies were trained by WWF regarding illegal wildlife trade (Javaid 2022).

Pakistan has endorsed hazardous waste and chemicals related UN conventions such as Basel and Stockholm Convention. The Ministry of Climate Change has recently published National Hazardous Waste Management Policy and EPAs are responsible to monitor national environmental quality standards and regulate effluent release and pollution-oriented manufacturing in the industries.

Pakistan has ratified all conventions related to climate change and ozone depleting substances (ODSs). The global GHG emissions data indicates that Pakistan contributes to around 1% to these emissions (UNEP 2021). Energy and agriculture are the main sectors responsible for most of the emissions as 46% emissions come from the energy sector and 41% from agriculture (USAID 2016). The entire industry sector contributes 5% to the country GHG emissions. Although, Pakistan’s contribution to the global emissions is comparatively low, its GHG emissions are increasing at an alarming rate and so is its vulnerability to the climate change. To overcome these, the country has shown significant progress via substantial initiatives.

For instance, the Government of Pakistan (GoP) developed National Climate Change Policy (NCCP) as a major guideline to ensure climate change mitigation and adaptation in the country. NCCP was revised and updated in 2021 to ensure sustained economic growth by integrating climate change at policy level and fulfilling SDG implementation in every sector (Ministry of Climate Change 2021). Pakistan’s continuous efforts in overcoming GHG emissions also include updation of the Nationally Determined Contributions (NDCs) in 2021. Despite Pakistan’s financial needs remaining high, the updated NDCs aim to decarbonize its economy and enhance its climate resilience by cutting 50% emissions, shifting to 60% renewable energy and targeting 30% electric vehicles by 2030 (UNFCCC 2021).

Other legislative and policy actions to achieve greener Pakistan in future include Billion Tree Tsunami Program, Protected Areas Initiatives, Recharge Pakistan Project to reduce flood risks and enhance water recharge and National Action Plan on Sustainable Consumption and Production in collaboration with the EU.

COMPLIANCE TO THE CONVENTIONS ON GOOD GOVERNANCE

Pakistan has improved on part of the UN Convention on Corruption. Javaid (2022) states that “According to Financial Action Task Force (FATF), Pakistan has substantially completed its two action plans, covering 34 items and warrants an on-site visit to verify the reforms implementation.” Recently, this visit by the FATF’s technical team took place and the global money laundering and financing watchdog removed Pakistan from FATF’s grey list (Hussain 2022).

REMAINING CHALLENGES

Under the status of GSP+, Pakistan has shown a strong commitment towards ensuring social and environmental sustainability in the country. However, the progress needs to be enhanced and amplified to all the sectors.

The progress regarding human rights states that the right to free speech and press is subjected to restrictions. Blasphemy law restricts rights to free speech concerning matters of religion. Also, journalists and media platforms reporting on sensitive topics are subjected to harassment and violence. Also, national legislations regarding protection of refugees including access to basic services and employment opportunities are not endorsed (US Department of State 2021). Further, corruption is persistently observed in the politics and government.

Regarding women’s rights, spousal rape is not explicitly criminalized, rape survivors face procedural barriers to have access to courts and there is no centralized law enforcement data collection system in the country. Moreover, women become victims of honor killing and forced marriages and face legal and economic discrimination. Forced religious conversions, unlawful kidnapping and detentions, target killing and religious discrimination are other remaining concerns associated to human rights.

Pakistan also needs to advance its efforts in ensuring rights and safety of children. The major focus needs to be diverted towards monitoring and effectively implementing regulations regarding child abuse and sexual exploitation, forced early marriages and displaced children (US Department of State 2021).

Furthermore, rights of persons with disabilities require strong recognition in all sectors of Pakistan. The initiatives must focus on measures including education of children with disabilities, increasing employment quotas and improving access to public transport and health-care facilities. Lastly, marginalization of transgender women, violence against other sexually oriented persons, unlawful attacks on the families and residences of transgender community, mob killing and discrimination in employment, housing, education and other services require an effective consideration (US Department of State 2021).

The current progress regarding compliance to the labor rights conventions indicates that the provincial laws regarding collective bargaining excluded banking and financial sector, forestry and hospital workers and self-employed farmers. Relevant regulations are not enforced effectively to penalize those denying labor rights. Illegal strikes are strictly monitored and large scale strikes are often interrupted by the police. Moreover, forced and child labor still exists in Pakistan. The sectors are presented in figure 1 (Bureau of International Labor Affairs 2022). Children still work on hazardous sites, domestic workers are hired informally with no limits to working hours and inspection of child labor and minimum age requirements is a failure in the country (US Department of State 2021).

Occupational health and safety is another crucial area that requires maximum attention of the authorities. Workers are usually not trained regarding health and safety measures. Also, dangerous working sites such as mines lacking ventilation still exist and contract workers or the invisible workforce not in records usually fall victim of accidents (US Department of State 2021).

Initiatives regarding environmental safety and climate change have shown promising results. However, the relevant sectors are still facing prevalent challenges. For instance, due to inefficient monitoring, capacity building and financial instability, manufacturing industries including SMEs still use hazardous chemicals such as POPs and import unverified contaminants. This not only causes aquatic and land ecotoxicity but also creates hazardous working conditions for the workers. Moreover, the GHG emissions are increasing at an alarming rate and so is the country’s vulnerability to the climate change. Overall, there is a lot of scope for Pakistan to enhance its climate change adaptation and mitigation via proper utilization of funds, hunting international climate change grants as well as by ensuring an interdisciplinary approach to this change.

Figure 1. List of goods produced by child labor and forced labor (Bureau of International Labor Affairs 2022).

SUSTAINABILITY PROGRESS OF PAKISTAN’S TEXTILE INDUSTRY

SOCIAL SUSTAINABILITY AND COMPLIANCE

Pakistan’s textile industry can play a vital role in fulfilling human rights conventions in the country. As Pakistan’s major share of exports relies on textiles, the industry has a vital responsibility to act for the renewal of GSP+.

The industry, fortunately, is giving utmost attention to social compliance in all sectors. For instance, figure 2 presents the human rights principles targeted by US Apparel and Textiles to be addressed in 2022. Sarena Textiles has also added employee welfare in its major goals. Other initiatives by the textile industry to ensure human rights include Pheonix Project by Artistic Milliners that aims to fight gender-based violence by employing victims of acid attack, Enriching Lives Program by Gul Ahmed to provide training and employment to differently-abled people and Sapphire’s Deaf Reach Program providing trainings and employment to the deaf.

Figure 2. Targeted principles related to human rights, labor rights, environment and anti-corruption to be addressed (US Apparel and Textiles 2021).

The focus, however, needs to be enhanced by ensuring protection of all workers including those from the minority groups, transgender communities and disabled from unlawful conflicts. Moreover, effective monitoring against official corruption must be ensure to improve transparency in the sector. Effective regulations to ensure women’s safety need to be enforced. Moreover, the textile industry must treat every worker with different cultural, religious, ethnic and tribal background equally in terms of freedom of expression as well as social and financial security.

Further, Bureau of International Labor Affairs has marked Pakistan’s textiles as goods produced using child labor. Thus, the protection of rights of children needs to be a highest priority area for the industry. Child abuse must be monitored and regulated and child labor must be reduced to the minimum.

Compliance to the UN labor rights conventions is the matter most associated to Pakistan’s textile industry as it employs 40% of the total labor force (SDPI 2022). In order to make relations between business and human rights favorable, labor rights must be fulfilled.

Pakistan’s textile industry has added fulfilment of labor rights in its main agenda. This is successfully followed by an increase in trainings related to labor rights, provision of fair remuneration and allocation of fair working hours as well as elimination of child labor. For instance, figure 3 presents the 2022 sustainability challenge map of one of the textile companies which is US Apparel and Textiles. It clearly highlights the assurance of labor rights and prohibition of forced and child labor in the industry (US Apparel and Textiles 2021). Moreover, Interloop is another major textile company that, as a result of its initiatives to ensure human and labor rights, achieved the following people impacts in 2021:

  • 25,000+ people provided with decent work and employment opportunities
  • 4000 children provided with quality education at 29 TCF schools
  • 8000+ empowered through lean tool and trainings
  • 500 young women and men equipped with higher education
  • 2028 women working at interloop
  • 25,000 patients provided with free healthcare facilities
  • 6000 local talent promoted through sports events

The efforts, however, need to be enhanced. To achieve this, the industry needs to ensure freedom of association and encourage collective bargaining by providing workers relevant labor rights related trainings and education. Moreover, strong inspection of labor rights implementation needs to be ensured by the social compliance departments. This includes monitoring of forced and compulsory labor, extra working hours without wages, hazardous working conditions, freedom of speech, gender discrimination as well as child labor. Also, special departments must be associated to inspect the child labor element.

Figure 3. Sustainability challenge 2022 mapping (US Apparel and Textiles 2021).

ENVIRONMENTAL SUSTAINABILITY AND COMPLIANCE

Pakistan’s textile industry has incorporated the long-ignored principles of environmental consciousness in its agenda. One of the examples is presented in figures 2 and 3, which indicate the major environment and climate change related principles and sustainability mapping set to be addressed by the US Apparel and Textiles. Interloop is another great example which has, as a result of its green initiatives, shown the following environmental impacts in 2021:

  • 7,390,289 KWH energy saved which is equivalent to energy used by homes for one year 631
  • 21,295 Tons of GHG emissions avoided which are equivalent to tree seedlings grown for 10 years 352,117
  • 81,864 M3 water saved which is equivalent to daily water consumption (based on 6-member family) 68,220 families

(Interloop 2021)

Sarena Textiles encompasses a range of environmental matters of global importance including responsible sourcing, water stewardship, energy conservation, carbon footprint reduction and certifications and transparency. Crescent Bahuman Textiles has achieved crucial certifications including OCS, GRS, Higg index, ZDHC, ISO 14001, Cradle to Cradle, Oeko-Tex, GOTS, and WRAP. Its major environmental initiatives include enhancing carbon sink, shift to renewable energy sources and rainwater harvesting. The Crescent Textile Mills Limited (Crestex) has prepared its sustainability roadmap to present its vision 2050. It has aligned its development and all activities to achieve this roadmap. This roadmap indicates that Crestex has envisioned to reduce its carbon footprint and achieve net zero by 100%, reduce unsustainable water consumption, shift its development to the renewable energy sources as well as reduce landfill waste and comply with the ZDHC requirements (figure 4).

Other initiatives taken by Pakistan’s textile industry to achieve environmental sustainability by reducing carbon footprint and increasing water conservation include revolutionary zero waste dying technology by AGI Denim, initiation on rainwater reservoirs of 6 million gallons by KMLG, GHG reduction via Heat Exchanger Rehabilitation Project by Al Rahim Textile Industries and sustainable textile bleaching by Interloop.

However, the industry is still facing major environmental issues. For instance, land and marine ecotoxicities are major environmental concerns associated to Pakistan’s textile industry (UNCTAD 2021). Thus, the industry needs to significantly enhance its efforts to make its manufacturing less pollution oriented. This can be done by banning import and use of hazardous chemicals, updation of effluent treatment plants (ETPs) and improving safety standards to use and store hazardous chemicals. The industry needs to regularly update its members regarding lists of chemicals of concern and most hazardous chemicals which are frequently updated by the international bodies and top export destinations such as EU, UK and US.

Figure 4. Crestex’s vision 2050 (Crestex 2022).

Furthermore, the textile industry contributes around 9.5% to the country level industrial GHG emissions and 0.095% to the global GHG emissions. The emissions from the industry, however, are showing an increasing pattern (USAID 2016). Therefore, industrial emissions need to be monitored and efficient technology needs to be installed to filter hazardous air pollutants. Also, textile industry needs to shift its focus towards renewable energy sources to combat climate change.

EU is one of the major export destinations of Pakistan and EU’s GSP+ status allows tariff-free access to Pakistan’s exports to the EU. Pakistan is the largest beneficiary of GSP+. This status has not only supported Pakistan grow its exports, the country also has enhanced its capabilities to grow in a sustainable manner and diversify its economy and create employment opportunities. It also accelerated Pakistan’s efforts in improving compliance to major human and labor rights as well as international conventions on environment and good governance.

GSP+ ends in December 2023 and its extension is crucial for the country to boost its export-based GDP but also, to shape its development sustainably. The country, in this regard, must fulfill the requirements by all the mandatory international conventions on human rights, labor rights, environment and climate change and good governance. The current efforts are crucial and require global appreciation; however, they need to be enhanced in all the sectors. Pakistan’s textile industry also needs to enhance its current efforts, especially regarding labor rights and environment and climate change.

The current practices and efforts indicate that Pakistan has not utilized the GSP+ status to the maximum and therefore, it must reshape its development in all the sectors and align it with the international requirements to achieve sustainable development. This will not only help Pakistan enhance its trade capacity; the country will also increase its job market, stay in line with its export competitors such as Bangladesh and implement SDGs in every sector by socially and environmentally complying to them.


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October 31, 2022

Dr. Gohar Ejaz

Exports remained largely stagnant from 2012 to 2018, while regional competitors witnessed commendable export growth rates that strengthened their economies considerably. Our inward-oriented trade policies served as a substantial roadblock to the economy’s ability to keep pace in global trade, despite the great potential of our business sector. Then in 2019 as a result of regionally competitive energy tariffs and TERF, considerable progress was made thereby increasing exports by 60% over the following 3 years. However, this progress led to a situation where exporters’ working capital and ease of doing business needs became more acute.

Textile Exports

With the withdrawal of Zero-Rating (SRO 1125) and the implementation of a 17 percent General Sales Tax (GST) on export-oriented sectors, the cost of doing business has increased to unsustainable levels, as a consequence of the liquidity crunch from the non-payment and delay in refund of GST collected.

Sales tax is consumption based, which inflates inventory and capital costs, serving as an impediment to new projects as capital cost increases by 20 percent and refund can only happen after commercial operations. According to a report by the IMF, the cascading effect of GST has harmed Pakistani exporters’ competitiveness as there is currently no systemic method to ensure that all tax paid on inputs may be charged against a final sale is fully refunded. In this huge cycle of sales tax collection, exporters suffer in the form of delayed pending and deferred refunds. The cost of collecting and refunding sales tax outweighs the revenue collected by a significant margin. The administrative cost of collecting and refunding sales tax is estimated at Rs 10 billion. The imposition of sales tax has resulted in billions (over Rs. 250bn) of rupees in liquidity transferring from the industry to the FBR. Despite the commitment to pay refunds within 72 hours under the FASTER system.

Rather than encouraging import substitution, these regressive policies are doing the exact opposite by dis-incentivizing local production and promoting cheap imports. For instance, when a company holding a DTRE, Bond or EOU license needs to buy raw materials like cotton, yarn or greige fabric, if it imports them through these schemes, it does not have to pay sales tax or duties, whereas, if they buy the same material from domestic industry, it is required to pay 17% GST and wait for its ultimate refund after exports which entails a minimum wait of nine months.

The counterproductive GST system has distorted the level playing field for local manufacturers and now heavily favors sales tax free imports. It appears that the government policies do not take into account the need to develop and support domestic industry and are actively substituting local production with imports. Consequently, the economy has been undergoing premature de-industrialization and capital is rapidly draining from the country.

Requiring businesses to first pay taxes and then later struggle to obtain refunds is an irrational policy measure for several reasons. Firstly, the government already owes refunds worth over Rs 250 billion to exporters and has no fiscal space for making that payment. Secondly, there is no reason for exporters to believe that they will get their sales tax refunded in due time while their prior refunds still remain unpaid, thereby depriving them of liquidity and of their own resources which could very well have gone towards modernization and expansion. Eliminating the sales tax waiver for a fragmented industry with a long and complex value chain has increased the production cost for exporters.

In a rational policy environment, to keep businesses liquid this sales tax should have been imposed in a step-wise progressive manner. It is still in vital interests of the exports and economy that the government should consult stakeholders for initially imposing a rational percentage of sales tax to ensure adequate cash flow and hence timely fulfillment of export commitments. In all countries, Value Added Tax (VAT) begins at extremely low rates and gradually rises. When it is performing well, the tax would be gradually increased.

On one hand, the government advocates promotion of exports and ease of doing business, but on the other hand problems have been created for industries. The government should commit to the oft-quoted economic direction of export-led growth so that the country may move forward on the path of economic development by promotion of business and industrial activities.

The zero-rated regime for the whole textile supply chain was first introduced by the Finance Act 2005 to stimulate export-oriented sectors in Pakistan and minimize flying invoices, which was resulting in more refunds than tax collection. Zero rating was then withdrawn in 2013 without providing the expeditious refund system that was committed, thereby creating liquidity a crunch for exporters. Then zero rating was restored in 2016 but subsequently rescinded for the export-based industry in the June 2019 budget announcement. This decision was based on a misrepresentation of facts and pretext by Federal Board of Revenue (FBR). FBR claimed that the domestic sales constitute more than 50 percent of all sales from the textile sector and somehow the industry was evading approximately $12 billion worth sales tax on domestic sales. However, domestic sales of the sector do not exceed 20% of industrial output, as later conceded by FBR. Back in 2019, the government assured industrialists that they will examine the issue in 6 to 8 months, but no such review has been taken even after the passing of 3 years.

In July 2019, FBR issued bonds in lieu of sales tax refunds pending, but these bonds were not of any value as no bank was willing to discount them. Following the failure of the bond system, the FBR implemented the FASTER system, which guaranteed reimbursements within 72 hours. FBR claimed that they had implemented a robust and sustainable sales tax claim refund system to ensure that exporters do not face a liquidity crisis as a result of the withdrawal of sales tax exemption for them. Despite making a commitment to pay refunds within 72 hours, the FBR has not honored this commitment It must be noted that a significant amount has accrued as “Deferred Sales Tax.” As a matter of routine, a portion of the claims through Sales Tax returns are routinely deferred or rejected by FBR. A large proportion of the amount vanishes into thin air being neither paid nor rejected or deferred. The FASTER system usually raises typical objections and errors in the data, which can be resolved by refund processing officers. Yet the system is unresponsive and unable to cater for the complexity of the textile sector, and is therefore in need of serious review and modifications.

Because of the high rate of sales tax, trade volumes outside the Sales Tax System have expanded, resulting in smuggling, outright fraud, and the import of used clothing into the country. Pakistan is among the top importers of used clothing. Meanwhile India, which has a much larger population and higher poverty rates, has at least half the import value of Pakistan. This indicates that Pakistan is importing fresh textile and apparel under the guise of used clothing in order to avoid taxes and tariffs. This happens to be rejected new apparel and clothing from all over the world that is dumped on our market at extremely low prices under the guise of worn clothing. This creates a cheap alternative that is impossible to compete with. Pakistan imported used clothing in FY21 at a cost of about $1.4 per capita per year, while India usually imports at a cost of $0.8 per capita per year. Pakistan imports about 43 percent more used garments than India.

In the last five years, Pakistan’s imports of worn clothing increased by 153 percent in quantitative terms and nearly 200 percent in value terms.

Since our import of used clothing is unsustainably high, we suggest that the government must;

  • Incentivize local production and sales to prevent smuggled and imported apparel, which impacts the balance of trade
  • Implement effective anti-dumping and under-invoicing laws
  • Impose 20% regulatory duty on used clothing imports in order to prevent the misuse of regulation. Duty-free imports should be available exclusively to registered charities importing used clothing.
  • At the point of entry, the Customs Enforcement Directorate shall conduct a routine check on all containers labelled as used clothing.

When collecting sales tax on domestic sales, it should be deducted at the Point of Sale. This will subject any product sold domestically from any source to a 17 percent sales tax, including smuggled goods. As a result, the domestic market will remain regulated and classified as “Made in Pakistan”.

Textile exports are expected to increase from $19.35 billion (FY 22) to $ 25 billion this fiscal year and $50 billion over the next four years. Considering that our currency has depreciated by 60-70% in the last year, exports have climbed to over Rs. 3 trillion, but working capital has not increased. To bridge the gap, industry requires double the amount of working capital that is currently available – and this is further exacerbated by the situation where in order to impose sales tax on domestic sales of textiles, the whole sector gets roped in. Under these circumstances, the restoration of zero-rating is imperative to improve exporters’ liquidity position, improve competitiveness and act as a deterrent to cheating and smuggling, and as a result, the market will remain documented and largely made in Pakistan.

The pace of competitiveness and modernization in the global textile market is progressing exponentially. In order to effectively compete, we must lower our cost of doing business and make it comparable to our regional competitors such as India, Bangladesh, and Vietnam. To achieve the targeted exports, business-friendly policies should be ensured for the industry to grow and further achieve increased targets on a yearly basis. There is immense potential in the textile industry to engineer an economic turnaround and achieve targets not only in exports but in economic growth, through consistent policy support.

 


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October 28, 2022

Shahid Sattar and Amna Urooj

One of the most important industrial sectors, the textiles industry contributes significantly to national economies, job creation, and exports in developing nations such as Pakistan. The size of the global textile market, estimated at USD 993.6 billion in 2021, is expected to increase at a 4.0% compound annual growth rate (CAGR) according to a report by Mordor Intelligence. In 2021, Asia Pacific held the highest share in the textile market. China leads the global textile exports, meanwhile Pakistan has a share of 2% in global textile exports. All of the world’s major textile economies, including Pakistan, have grown in the first nine months of 2022. Due to the ongoing global recession, there are concerns about a decline in the most recent quarter, however, unusual growth occurred in the first three quarters of 2022. China, Bangladesh, Indonesia, Vietnam, Italy, Turkey, Germany, and Pakistan all saw strong increases in textile exports. Pakistan’s textile exports scaled by 5% in the first quarter of FY23 compared to September’21.

However, export numbers are not the only benchmark of performance for textile industries in twenty first century. If textile firms follow Sustainable Business Practices, and show a satisfactory status of Sustainable Business Practices, only then they’re able to compete in the modern world. Simply stating, making a profit while also having a positive impact on society (the people), the environment (the planet) is only possible with sustainable business practices – the three Ps. In today’s corporate world, sustainability is a critical component of social and environmental responsibility and is a fundamental first step in protecting the earth for future generations. These practices not only save money, cut down on waste, and save natural resources, but they also aid in protecting the environment and the inhabitants of it.

Few examples of Sustainable Business Practices include using renewable energy, manufacturing environmentally friendly products, recycling and reduction of waste, sustainable packaging, composting, ethical sourcing, sustainable supply chain management, employee welfare, fulfilling corporate environmental and social responsibility and finally sustainability reporting.

Even though the textile sector of Pakistan is seen as one of the most significant sectors from an economic perspective, the supply chain for this sector is plagued by serious environmental and social issues. The primary environmental issue connected to the textile industry is the pollution of water bodies brought on by the discharge of untreated effluents. The sector also contributes to air pollution as dust, cotton lint, and other pollutants are produced during spinning and weaving, which worsens the working environment. Environmental protection was once the textile industry’s most neglected sector, but as people’s awareness of the issue has grown in response to the depletion of nonrenewable resources, the effects of climate change, and ecological destruction, it is now widely acknowledged that a more responsible approach to the environment is required.

Pakistani textile firms are continuously striving hard to adopt Sustainable Business Practices. One of the examples is that of Net Zero Pakistan. It is a national partnership involving cutting-edge businesses, government organizations, and sectoral specialists to achieve Pakistan’s objective of net zero carbon by 2050. The alliance is on its way of setting out the plan and structure by which Pakistan’s private sector may hasten its transition to sustainability and accomplish this net zero objective. Out of the 23 signatories of this partnership, 22 belong to the textile and apparel sector such as Gohar Textiles, Crescent Bahuman and many others. The signatories have committed and set net zero targets, affirmed to measure and disclose transparently the levels and sources of GHG emissions, vowed to decarbonize value chains and lastly have shown interest in advocating for climate action.

The textile sector is also actively engaging in international conventions and platforms such as ‘Better Work Programme’, ‘Decent Work Country Programme-IV (2023-27)’, ‘The Accord on Fire and Building Safety’, to name a few. Moreover, in lieu of its Corporate Social Responsibility (CSR) initiatives, All Pakistan Textile Mills Association (APTMA) has recently signed an MOU with National Emergency Operations Centre for Polio Eradication Initiative, a national coordination body of the Government of Pakistan to create an enabling environment to achieve a shared objective of attaining a healthy future by eradicating polio from Pakistan.

According to numerous analyses of empirical studies, the textile firm’s efforts to manage the environment are positively impacted by regulatory pressure (Jeswani et al. 2008; Babiak and Trendafilov 2011; Ervin et al. 2013). As an illustration, earlier studies shown that firms are more receptive to regulatory factors and in taking part in voluntary environmental programmes (Delmas and Toffel 2004; Jeswani et al. 2008). The reasons for going sustainable are industry agreements, regional environmental regulations, and national environmental regulations regarding water, waste, and energy efficiency. The reasons for going sustainable are also regional environmental regulations regarding water, waste, and energy efficiency (Sharma & Narula, 2020). Pakistani textile firms are, for example, under the regulatory pressure by European Union’s (EU’s) Scheme of Generalized Scheme of Preferences Plus (GSP+) to avail duty free export to EU. They are actively displaying a responsible attitude in the quest for a better position against such regulatory pressures.

The government’s environmental rules and regulations strengthen the management of Pakistani textile companies’ desire to put these methods into effect and aid in the improvement of their environmental performance. Despite the financial constraints they face, the impact of regulatory body pressure demonstrates that businesses are willing to invest resources to stop environmental deterioration given proper backing from government programmes. Instead of viewing regulatory pressure as a danger, they view it as an opportunity to become more environmentally friendly.

Competitive pressures are known to drive businesses to differentiate their products, boost production, and ultimately persuade them to embrace environmental management techniques. According to empirical research, market forces such as competition and demand are crucial in driving businesses to embrace sustainable practices. According to several empirical studies (Chkanikova and Mont 2015; Jeswani et al. 2008; Sgaard Jrgensen et al. 2010; Wu- et al. 2012), companies that were under more intense competitive pressure were more likely to adopt their competitors’ business models in order to maintain or even increase their competitive advantage. Pakistan accounts for a sizeable portion of worldwide textile exports, and in order to compete in the market, textile producers must satisfy customers’ environmental demands.

Textile firms are also influenced by market competition to enhance their environmental performance. Competition pressure has an impact on sustainability efforts, and green business practices that uphold environmental standard help businesses stay competitive. International brands frequently show a greater willingness to abide by environmental laws and have the brand value to persuade consumers to adopt environmentally friendly habits. Therefore, textile firms frequently use the same technique and create an environmental strategy based on international rivals.

Pakistani textile firms are taking steps to improve environmental performance, such as developing long-term contractual relationships with their suppliers, contractors, and agencies with proven credentials in waste recycling. Other actions done by them to ensure sustainability include selling cotton waste produced during spinning to be used in the production of inferior yarn and other home furnishings. These activities aid firms in expanding into new market niches, growing their local and international businesses, and maintaining their competitiveness as a result of which they see an increase in market share.

Furthermore, a positive relationship between the impact of “demand from foreign buyers” on sustainable business practices exists, according to prior research (Menguc et al. 2010). Market pressure has been shown to positively influence a firm’s commitment to environmental protection, increasing investment in environmental management practices, and encouraging environmental collaborations.

The production process in Pakistani textile firms also complies with textile standards including GOTS (Global Organic Textile Standards) and BCI (Better Cotton Initiative). These standards outline internationally accepted criteria that guarantee textiles are organic, including ecological and social norms supported by independent certification of the full textile supply chain. These standards allow textile producers and processors to export their organic fabrics with a single certification that is recognized in all important markets, leading to an increase in sales and total revenues for the firms. Nevertheless, several factors exist that impede the textile firms from adopting sustainable business practices along with their quest to pursue Sustainable Business Practices.

According to empirical research, administrative attitudes and dedication matter a lot when it comes to a firm’s decision-making and adoption of environmental management techniques (Petrini and Pozzebon, 2010; Wu- et al., 2012). Lack of internal environmental expertise, a lack of skilled human resources and environmental issue management skills, a lack of support from top management, and ultimately a communication gap from top management are the primary causes that cause managerial hurdles.

The technological capabilities of businesses may also have an impact on the adoption of sustainable business practices. According to certain studies, businesses with greater Research and Development (R&D) facilities may use more pollution control techniques to green their supply chains (Harrington et al. 2008; Ervin et al. 2013). Furthermore, organizational hurdles are sometimes a result of the lack of appropriate benchmarking tools. Government information and support for domestic businesses to use sustainable practices is lacking.

Sustainable Business Practices are adversely impacted if the company has economic obstacles such high implementation costs and a lack of financial resources. Since the textile sector requires a lot of money, financial recovery takes time. They have little money or resources to spend in high-cost technical advancement, Pakistani textile companies frequently choose low-cost technological solutions for production.

Pakistani textile companies are just beginning to incorporate Sustainable Business Practices. A lagging behind status is also a result of the different economic and institutional challenges that businesses in developing countries—such as Pakistan—face compared to those in rising economies.

Our textile businesses recognize and agree that the health and development of the textile industry depend on the natural environment and its preservation. Internal management and organizational constraints do not have a substantial impact on the firm’s operations, however a variety of factors including regulatory, market, and economic considerations are more relevant in forcing firms to adopt sustainable practices. In textile companies, external considerations (such as the danger of loss of markets) rather than internal ones are what are putting pressure on sustainability. However, addressing internal issues could significantly advance sustainability in these businesses. In order to further improve the scope of sustainability for textile enterprises, greater attention should be placed on the role of regulatory authorities. The businesses should also integrate a sustainable enterprise. To aid in developing that identity, the businesses should integrate a sustainable business plan from the very beginning. The training should incorporate knowledge of sustainable practices.

The initial cost of compliance is the main obstacle to implementing these practices when it comes to rules and financial restrictions. In addition, uncertain policy changes, weak enforcement, and low knowledge reduce manufacturers’ acceptance, necessitating cost regulation. Companies that are prepared to adopt environmental measures (especially Small and Mid-size Enterprises) must receive assistance from the government. For instance, if a company has established an effluent treatment plant (ETP), assistance should be offered. Assistance in the form of subsidized loans and credits will also go a long way. Additionally, there shouldn’t be any managerial distinction made between domestic and international customers’ interests; after this is done, attention shall turn to incorporating pollution control strategies. The adoption of the proactive environmental policies by businesses should be aided by the strengthening of national and regional legislation. The adoption of a proactive environmental strategy by businesses will help them make the best decisions and commit to more extensive environmental practices. This will be made possible by the strengthening of national and regional legislation.


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October 19, 2022

Dr Gohar Ejaz

The World Bank’s latest Pakistan Development Update released in October 2022 highlights the rapid rise in inflation in Pakistan over the past year, and aptly identifies its key drivers:

* External factors, including rising global food and energy prices
* Domestic economic conditions and policy settings, including a weaker Rupee and an overheating economy
* More recently, the floods with agricultural losses and disruptions of supply chains

This unprecedented inflation has disproportionately affected the poor, given their declining real incomes and their inability to meet even basic household expenditures. Energy and food have become unaffordable, and acknowledgement of the human element is essential to recognize how immediate and dire the need for economic revival has become.

Pakistan has historically sought loans to achieve economic stability. These loans come with conditions that tend to restrict growth and affect the poor disproportionately. Meanwhile, the export-oriented industry is neglected, despite having the potential to steer sustainable economic growth as long as it is provided with basic policy support. The high priced energy for industry is a particular case in point. The country has historically suffered from some of the highest energy tariffs in South Asia. These tariffs have not only served as a means to transfer the costs of inefficiency to consumers and industries without considering affordability, but have also given way to premature deindustrialization. Meanwhile, the current stock of circular debt hovers around Rs 2.5 trillion ($11.4 billion) while in the gas sector an additional Rs 1 trillion ($4.6 billion) has accumulated – an alarming figure, which has gradually built up as a result of the poor planning that has characterized Pakistan’s energy sector over the years.

The situation is exacerbated by the misinformed and regressive policy of maintaining a high interest rate to counter inflation. Exporters’ working capital requirements have increased immensely and the requisite finance is not available, and when available it is extremely costly given the unreasonably high interest rates which no industry can afford. Without the operation of textile exporters, there will be no means of meeting the country’s forex requirements or balancing the current account.

A strong export base serves as the baseline to strengthen the economy without reliance on any external force such as foreign aid. In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated from back-to-back loans and relief packages. Earnings through enhanced exports serve as a valuable inflow to the economy, and can pull Pakistan out of its current account deficit and economic stagnation. The expansion and development of exporting industries not only reduces unemployment in the long term but is the only sustainable way out of Pakistan’s debt trap.

For sustainable business activity, there is a need for upgraded infrastructure, a strong workforce, legal and governance support. The supply of regionally competitive energy has been emphasized time and again but the lack of policy continuity in the country results in an unstable environment for businesses to thrive. This brings us to a notable difference between rapidly developing economies and those where growth is stagnant: those which prioritize growth set aside sums of public money and ensure policy continuity to support industries, particularly LSM and exporters. Pakistan has consistently failed in this regard.

Meanwhile, imports have been allowed to run amok. Non-essential goods imports must be discontinued, especially where substitutes are made in Pakistan. Pakistan is a strong producer of both wheat and raw cotton so their imports should be cut down drastically while strengthening domestic production.

In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated because of consecutive loans. The most effective mechanisms to sustain export-led growth include product and market diversification, improvements in quality, and integration into global value chains. The government support is naturally an essential component in ensuring these policies are implemented and institutionalized, leading to a successful economic future for Pakistan.

Rising food and energy prices decrease the real purchasing power of households, disproportionally affecting poor and vulnerable households that spend a larger share of their budget on these items. Meanwhile, excess government borrowing from the financial sector crowds out the supply of credit to the private sector and deepens the sovereign-bank nexus.

Resolving these constraints in the medium to long term requires concerted efforts by the government, regulators, and other stakeholders, and the most sustainable way to counteract them is by building Pakistan’s export-culture. Export enhancement has proven time and again to be the only effective economic solution, as exhibited by the ability of the textile sector to achieve record numbers despite the constraints and lack of an export culture in Pakistan.

Job creation is another crucial metric for an economy in the growth stage, as yearly increases in unemployment must be catered to. The private sector provides us with a viable means to achieve this, as export-oriented sectors are highly labour intensive. The textile sector creates jobs in every tier of the economy, as different skills are required at each stage, be it cotton picking, ginning, stitching, designing, innovating or strategic planning. The expansion and development of exporting industries thereby reduces unemployment in addition to being essential for a healthy Balance of Payments.

In the longer term, policy that prioritizes an export culture in Pakistan, specifically supporting industrial growth and productivity, can help to substantially boost the economy. Supporting the growth of large scale manufacturing industries, especially textiles, where there is evidence of a comparative advantage for Pakistan, would therefore be critical moving forward. Value addition, competitive inputs and trade competitiveness can effectively result in sustainable economic growth; as unlike aid, these measures are free of any liability. Earnings through enhanced exports can pull Pakistan out of its current account deficit and economic stagnation. The government needs to work in tandem with major exporters to incentivize diversification, while removing institutional roadblocks and barriers to growth that have held the exporting sectors back from realizing maximum potential. Policy continuity is crucial for any economy, and in this connection, the recent government decision to continue the provision of regionally competitive energy tariffs (RCET) is welcomed and appreciated.


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October 18, 2022

Dr. Gohar Ejaz

Strong policy support in the form of regionally competitive energy tariffs (RCET) enabled textile exports to increase by 56% to reach $19.5 billion in 2022, and they are projected to reach at least $24 billion by the end of FY23. This growth trajectory is indicative of the tremendous impact created by applying the right policy of viable input pricing, thereby allowing exporters to price their products competitively. The impact is particularly significant when compared with other kinds of incentives, which are subject to delays and tend to have little or no effect on export volume or competitiveness as they are not priced in the exporters’ bids.

While RCET provides an excellent base for export-led economic growth, policy discontinuity restricts Pakistan’s ability to maintain or increase its market share in the fast-expanding global textile sector. As previously emphasized in our 2019 articles “Ladder and the Snake” (https://fp.brecorder.com/2019/05/20190522477836/) and “The Snake Has Truly Bitten” ( https://fp.brecorder.com/2019/07/20190702493518/), exports have often reached and then hovered between the $20 billion and $23 billion marks. Each time an economic takeoff has been anticipated in the past, and achieved by competing countries, Pakistan gets left behind due to a combination of factors, chief among which are the lack of a long term vision, an unfavorable environment for investment and industry, and energy unavailability/inconsistency. Policies have been abruptly withdrawn time and again, thereby diverting the industry away from its path of export-led growth. Policy continuity is crucial for any economy, and in this connection, the recent government decision to continue the provision of regionally competitive energy tariffs (RCET) is welcomed and appreciated.

A robust export base serves as the foundation for a strong economy without the requirement for external forces such as foreign aid. In Pakistan’s context, the textile sector provides a sustainable path to offset the debt acquired from repeated loans and so-called relief packages. Earnings from increased exports are a key inflow to the economy that can help Pakistan overcome its current account deficit and economic stagnation. In this regard, RCET is the most efficient way of funding foreign exchange as is evidence by the fact that it is only 2.67% of total export value.

However, the structural issues in Pakistan’s energy sector have yet to be resolved, as they have a great bearing on affordability. Cross subsidies, high capacity costs and an inefficient generation mix result in a structurally weak energy environment. One of the best long-term solutions to this conundrum is to dedicate a full power plant, similar to the Haveli Bahadur Shah combined cycle gas power plant, to the Punjab export industry. The total output of the plant should be delivered directly to the exporting industry. The inclusion of wheeling charges in tariffs should be rational, and not include cross subsidy and standard asset costs. If this plant is supplied with domestic gas, calculations show that it will generate electricity at a rate of Rs 13.205 per kwh. If this plant operated on RLNG, the total delivered power cost to the export industry would be Rs 21.37/kwh. This is the optimal solution for affordable power supply to the textile industry.

One of the largest emerging sectors in small scale manufacturing is the garment industry, which has substantial local and global demand. Improvements in equipment and e-manufacturing can boost our exports and enable us to access the high-performance apparel and MMF markets. This will also help the sector to achieve its needs in terms of value addition and export bundle diversification. According to the World Bank, a 1% increase in garment manufacturing is connected with an increase in employment of 0.3% to 0.4% for both men and women.

According to trade data, there has been a significant growth in the quantity of higher value items (bedsheet, knitwear, and woven garment) exported from Pakistan, while lower value and intermediate products such as yarn and greige fabric are gradually being turned into higher value products – a very positive sign that the economy is poised to grow. 70% of textile exports were of items that underwent extensive processing to make value-added products. Keeping up with this trend will largely rely on a continuous & uninterrupted supply of gas and electricity to the entire value chain at regionally competitive energy tariffs.

Pakistan remains underrepresented in the high-end garment and apparel sectors. Current yarn and greige fabric output that is not transformed into higher value items might contribute $12 billion per year if turned into apparel. The industry has set up a detailed plan to use surplus yarn and greige fabric exported to turn it into garments for export through the establishment of 1000 garment facilities, each with 500 stitching machines and a $7 million investment. Each plant would be able to create garments for $20 million in exports while employing 700 workers. The overall investment would be $7 billion, generating $20 billion in yearly incremental exports and employing 700,000 people.

 

These efforts remain contingent upon strong and consistent policy support. If this initiative is supported by the government in letter and spirit, the industry is confident in its ability to achieve its target of $50 billion textile exports in the next 4 years provided consistent and affordable energy supply, additional working capital, new entrepreneurs, and new finance facilities. The new plants that have been installed or are being installed are not energy intensive, but are fully dependent on the total textile chain operating at affordable and competitive energy rates so that intermediate products can be supplied to these plants at reasonable prices.

Pakistan’s youth, which accounts for 65% of the overall population, signifies a very large window to capitalize on in terms of opportunities to develop the economy and evolve society. Pakistan’s population is estimated to be around 230 million (235,877,803) as of July 1, 2022, according to the latest United Nations data. Job creation is a critical measure for growth in any economy, and even more so when there is a youth bulge to cater for, as yearly spikes in unemployment must be managed. Job creation is only possible if the industry expands, and the industry will only expand if investments are made in the labor-intensive market.

The issue has not been a lack of policy formulation, but rather the reliable execution of policies to ameliorate long-standing disadvantages. With a stronger emphasis on policy implementation, there can be a tangible impact in terms of sustainable development and economic growth, significantly improving the position of Pakistan’s textile sector and exports over the next four years. The expansion and growth of the textile sector over the years has been enabled by consistent provision of RCET policy, and the facts and figures given in this article further cement this statement. The continuation of this policy alongside other means of supporting exporters are therefore essential to remain competitive and achieve sectoral expansion targets. Earnings through enhanced exports remain the most sustainable mechanism to pull Pakistan out of its current account deficit and economic stagnation.


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October 14, 2022

Dr. Gohar Ejaz

The World Bank’s latest Pakistan Development Update released in October 2022 highlights the rapid rise in inflation in Pakistan over the past year, and aptly identifies its key drivers:

  • External factors, including rising global food and energy prices
  • Domestic economic conditions and policy settings, including a weaker Rupee and an overheating economy

More recently, the floods with agricultural losses and disruptions of supply chain

Source: World Bank, Tabadlab

This unprecedented inflation has disproportionately affected the poor, given their declining real incomes and their inability to meet even basic household expenditures. Energy and food have become unaffordable, and acknowledgement of the human element is essential to recognize how immediate and dire the need for economic revival has become.

Source: World Bank, Tabadlab

Pakistan has historically sought loans to achieve economic stability. These loans come with conditions that tend to restrict growth and affect the poor disproportionately. Meanwhile the export-oriented industry is neglected, despite having the potential to steer sustainable economic growth as long as it is provided with basic policy support. The high priced energy for industry is a particular case in point. The country has historically suffered from some of the highest energy tariffs in South Asia. These tariffs have not only served as a means to transfer the costs of inefficiency to consumers and industries without considering affordability, but have also given way to premature deindustrialization. Meanwhile, the current stock of circular debt hovers around Rs. 2.5 trillion ($11.4 billion) while in the gas sector an additional Rs. 1 trillion ($4.6 billion) has accumulated – an alarming figure which has gradually built up as a result of the poor planning that has characterized Pakistan’s energy sector over the years.

The situation is exacerbated by the misinformed and regressive policy of maintaining a high interest rate to counter inflation. Exporters’ working capital requirements have increased immensely and the requisite finance is not available, and when available it is extremely costly given the unreasonably high interest rates which no industry can afford. Without the operation of textile exporters, there will be no means of meeting the country’s forex requirements or balancing the current account.

A strong export base serves as the baseline to strengthen the economy without reliance on any external force such as foreign aid. In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated from back-to-back loans and relief packages. Earnings through enhanced exports serve as a valuable inflow to the economy, and can pull Pakistan out of its current account deficit and economic stagnation. The expansion and development of exporting industries not only reduces unemployment in the long term but is the only sustainable way out of Pakistan’s debt trap.

For sustainable business activity, there is a need for upgraded infrastructure, a strong workforce, legal and governance support. The supply of regionally competitive energy has been emphasized time and again but the lack of policy continuity in the country results in an unstable environment for businesses to thrive. This brings us to a notable difference between rapidly developing economies and those where growth is stagnant: those which prioritize growth set aside sums of public money and ensure policy continuity to support industries, particularly LSM and exporters. Pakistan has consistently failed in this regard.

Meanwhile, imports have been allowed to run amok. Non-essential goods imports must be discontinued, especially where substitutes are made in Pakistan. Pakistan is a strong producer of both wheat and raw cotton so their imports should be cut down drastically while strengthening domestic production.

In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated from consecutive loans. The most effective mechanisms to sustain export-led growth include product and market diversification, improvements in quality, and integration into global value chains. Government support is naturally an essential component in ensuring these policies are implemented and institutionalized, leading to a successful economic future for Pakistan.

Rising food and energy prices decrease the real purchasing power of households, disproportionally affecting poor and vulnerable households that spend a larger share of their budget on these items. Meanwhile, excess government borrowing from the financial sector crowds out the supply of credit to the private sector and deepens the sovereign-bank nexus.

Resolving these constraints in the medium to long term requires concerted efforts by the government, regulators, and other stakeholders, and the most sustainable way to counteract them is by building Pakistan’s export-culture. Export enhancement has proven time and again to be the only effective economic solution, as exhibited by the ability of the textile sector to achieve record numbers despite the constraints and lack of an export culture in Pakistan.

Job creation is another crucial metric for an economy in the growth stage, as yearly increases in unemployment must be catered to. The private sector provides us with a viable means to achieve this, as export-oriented sectors are highly labour intensive. The textile sector creates jobs in every tier of the economy, as different skills are required at each stage, be it cotton picking, ginning, stitching, designing, innovating or strategic planning. The expansion and development of exporting industries thereby reduces unemployment in addition to being essential for a healthy Balance of Payments.

In the longer term, policy that prioritizes an export culture in Pakistan, specifically supporting industrial growth and productivity, can help to substantially boost the economy. Supporting the growth of large scale manufacturing industries, especially textiles, where there is evidence of a comparative advantage for Pakistan, would therefore be critical moving forward. Value addition, competitive inputs and trade competitiveness can effectively result in sustainable economic growth; as unlike aid, these measures are free of any liability. Earnings through enhanced exports can pull Pakistan out of its current account deficit and economic stagnation. The government needs to work in tandem with major exporters to incentivize diversification, while removing institutional roadblocks and barriers to growth that have held the exporting sectors back from realizing maximum potential. Policy continuity is crucial for any economy, and in this connection, the recent government decision to continue the provision of regionally competitive energy tariffs (RCET) is welcomed and appreciated.


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October 13, 2022

Shahid Sattar and Eman Ahmed

Against the backdrop of international price hikes and unprecedented floods, the economic outlook for Pakistan in the current fiscal year (2022-23) is likely to remain bleak, according to the ‘Economic Update and Outlook for September 2022′ released by the finance ministry. Pakistan’s debt has increased from around USD 48 billion in FY08 to USD 116 billion – an increase indicating a structural deficit of at least USD 5 billion per annum in Pakistan’s economy.

The country is in need of a focused program of export enhancement that can ensure this deficit is met each year. However, the economic downturn has severely hit the textile sector, Pakistan’s largest exporting sector, with more than 1600 factories already closed and more to follow. In the current environment we can expect 3-5 million direct job losses, leading to extreme social distress and what can only be called a self-inflicted calamity comparable to the recent floods in terms of economic destruction.

The situation is exacerbated by the misinformed and regressive policy of maintaining a high interest rate to counter inflation. Exporters’ working capital requirements have increased manifold and the requisite finance is not available, and when available it is extremely costly given the unreasonably high interest rates which no industry can afford. Without the operation of textile exporters, there will be no means of meeting the country’s forex requirements or balancing the current account.

Given this abysmal state of affairs, the need for a long-term policy featuring lower interest rates is crucial, and its implications for a brighter economic future which generates foreign currency, jobs and international recognition cannot be denied. To expand our export base and address the structural imbalance, Pakistan needs higher levels of investment, alongside holistic policy reforms that lend confidence to investors and the markets. This need cannot be met with an interest rate of 15% and an unsustainably high dollar rate.

Central banks across the world have been raising interest rates to tame inflation, but this monetary policy fails to account for supply shock disruptions. Pakistan’s interest rate remains elevated at 15%, thereby hurting businesses and stifling investment and entrepreneurship. The annual inflation rate in Pakistan increased to 27.3% in August of 2022, the highest since May of 1975, from 24.9% in July, the Pakistan Bureau of Statistics reported.

Pakistan’s interest rate has intentionally been maintained at a high level in miscalculated attempts to control inflation, by means of a contractionary monetary policy. Although policies of this nature have been effective in reducing inflation for certain Highly Developed Economies, there is no evidence to suggest the same rules apply to the case of Pakistan. On the contrary, it is proven that a high interest rate in Pakistan leads to an increase in cost-push inflation. This belief was emphasized by Nobel laureate economist Joseph Stiglitz, who recently described how within the US economy and others possessing market power, companies can afford to raise prices without losing business. Meanwhile, standard economic models suffer from even more inflation when subjected to rate hikes.

Contractionary monetary policy operates by decreasing the money supply in order to increase the cost of borrowing. This measure normally decreases GDP and dampens inflation. The State Bank chose to maintain a high interest rate, decreasing the money supply in attempts to curtail inflation. However, the opposite impact has been observed in Pakistan’s case, as here there is a directly proportional relationship between inflation and discount rate.

A high interest rate is one of the major roadblocks to entrepreneurship and innovation that needs to be mitigated so that we can empower our youth and our disenfranchised talent to bring about a grassroots level economic revolution. Furthermore, we must rid our policymaking of the economic formula whereby interest rates are raised in order to stabilize the economy, as this can only be effective in certain Highly Developed Economies: a title which Pakistan’s economy is a long way off from attaining. HDEs tend to have surplus currency tied up in mortgages or consumer financing. Therefore, it is only logical that such a formula be limited in its application to those economies which are in a similar state, while a policy more suited to developing economies should be used in Pakistan’s case.

The best mechanism is through supply-side interventions, bringing more individuals into the economy and increasing the labor supply – for which entrepreneurship and financial inclusion is critical. High interest rates not only curtail investment, but also make it virtually impossible for the concerned industries to remain profitable. The spike in interest rates has all but put a complete stop to investment, upgradation and technological advancement in various industries. Pakistan’s interest rate is now the highest in the region – even higher than that of Sri Lanka, which is reeling from a default on its debt.

One of the biggest difficulties the sector faces is finding a steady supply of high-quality raw materials at reasonable rates. This is because the exporting sectors’ inputs (raw materials, energy, dyes and chemicals, machinery, and spare parts etc) are valued in dollars in order to reduce the risks associated with currency volatility and to create a stable and secure environment for business. Industries are vertically linked, so imported inputs become more expensive for any given exporter and are not always interchangeable with domestically produced goods.

Pakistan government borrowing is around 80pc of its nominal GDP, so high interest rates only serve to raise the country’s own costs, and are therefore highly counterproductive. Tthe increase in debt servicing from Rs. 3 trillion to Rs. 4.8 trillion as a consequence of the increase in interest rates from 7% to 15%+ has a direct impact on the budget deficit. This negates any possible impact on curtailment of demand, and consequently a policy of raised interest rates is not suitable for Pakistan.

A more adaptive financial model and a focus on more productive capital investments, particularly in technological improvements, will have a wide, far-reaching impact that will bear fruits for generations to come. It will allow for a much-needed increase in our presently abysmal level of exports, and will also tackle the increasing burden of unemployment at the root.

The provision of RCET over the last 3 years has been a resounding success. Textile exports have grown from $12.5 billion in FY20 to $19.54 billion in FY22 – a very significant increase by any yardstick and well above our regional competitors. This export spur has occurred due to the focus of the government to provide regionally competitive terms for the sector to remain competitive. Although providing RCET is not a subsidy, the cost of RCET to the national exchequer has been 2.6% of export value over the last 3 years. This compares very favorably with sukuk bonds and other borrowings where dollars are borrowed at 8% and have to be returned.

The only option for a sustainable economic future for Pakistan lies in building a strong export base thereby minimizing our reliance on foreign aid, which impairs our sovereignty. A strong export base necessitates consistent supply of energy at regionally competitive rates. Furthermore, the government must focus on implementing a practical approach toward resolving policy concerns, and crystalizing a functional structure where all the stakeholders especially Pakistan’s business community must be brought on board during negotiations with international financial institutions to chalk out a consensus and steer the country’s economy out of crisis.


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October 7, 2022

Shahid Sattar and Noreen Akhtar

This paper discusses three major global environmental challenges associated with Pakistan’s textile industry. These include Greenhouse Gas (GHG) emissions, water consumption patterns and land use changes for both cradle-to-gate and gate-to-gate categories.

Pakistan and Global GHG Emissions

Climate change is the worst catastrophe mankind is experiencing around the globe. The poorer South is suffering the increasing vulnerability to climate change (Ulgen 2021) and countries such as Pakistan with little contribution to the global GHG emissions are among the top listed sufferers. The recent country-wide floods are an evidence of Pakistan bearing someone else’s emissions burden. The global GHG emissions data indicates that Pakistan contributes to around 1% to these emissions (UNEP 2021). Energy and agriculture are the main sectors responsible for most of the emissions as 46% emissions come from the energy sector and 41% from agriculture (figure 1) (USAID 2016a). The industry sector contributes 5% to the country GHG emissions while textile industry contributes 9.5% for both gate-to-gate and cradle-to-gate categories (UNCTAD 2022). Thus, the textile industry contributes around 9.5% to the country level industrial GHG emissions and 0.095% to the global GHG emissions.

Figure 1: Pakistan’s GHG emissions by sector in 2012 (USAID 2016a).

Pakistan’s per capita GHG emissions within the overall impact of 1% have increased at an alarming rate (figure 2) (Ritchie et al. 2020). For instance, the emissions have increased by 87% from 1990 to 2012 (USAID 2016a) while its textile export competitor Bangladesh’s emissions grew by 59% for the same time period (USAID 2016b) and India’s emissions grew by 180% from 1990-2014 (USAID 2018). Although, Pakistan’s emissions are far lower than India’s and global level emissions, the country still needs to make significant efforts in reducing its carbon footprint especially in its agriculture and energy sectors. To make agriculture sector sustainable, use of fertilizers can be reduced, organic seeds can be farmed and water pumping techniques can be more environmental friendly (Centre for Collective Development 2022). Also, as textile sector heavily relies on local cotton production for its functioning, it can support sustainable agriculture by assisting farmers in improving soil health as carbon sink and fertilizer management via financial and technical backup. Energy sector also needs transformation towards renewable energy sources (Walker 2016).

Figure 2: Per capita GHG emissions of Pakistan, Bangladesh and India compared to the global emissions (Ritchie et al. 2020).

Pakistan’s increasing GHG emissions, however, should not lead the world overlook its significant efforts towards fulfilling the global climate change and environmental protection vows. For instance, Pakistan ratified crucial international climate actions including UNFCCC and Kyoto Protocol. Moreover, in response to the country-wide disasters in 2010 and 2011, the Government of Pakistan (GoP) developed National Climate Change Policy (NCCP) as a major guideline to ensure climate change mitigation and adaptation in the country. NCCP was revised and updated in 2021 to ensure sustained economic growth by integrating climate change at policy level and fulfilling SDG implementation in every sector (Ministry of Climate Change 2021). Pakistan’s continuous efforts in overcoming GHG emissions also include updation of the Nationally Determined Contributions (NDCs) in 2021. Despite Pakistan’s financial needs remaining high, the updated NDCs aim to decarbonize its economy and enhance its climate resilience by cutting 50% emissions, shifting to 60% renewable energy and targeting 30% electric vehicles by 2030 (UNFCCC 2021).

Pakistan’s textile industry has also shown tremendous efforts in reducing its carbon footprint. Some of the leading textile mills such as Sarena Textiles and Crescent Bahuman Textiles have significantly reduced their emissions by using renewable energy sources and enhanced carbon sequestration via nature-based solutions such as plantations. Sarena Textiles has reduced 76% of coal usage and currently saves 29% energy from equipment and 33% water via innovative technologies (Sarena Textiles 2021). Crescent Bahuman Textiles also aims to reduce GHG emissions via green initiatives by enhancing carbon sequestration, reducing water consumption by around 50% and increasing rainwater harvesting (Crescent Bahuman 2022). Although, there is a lot of scope for Pakistan’s textile industry to enhance its monitoring as well as environmental compliance, its increasing contribution in mitigating climate change is a positive indication towards country’s efforts in decarbonizing its economy.

Pakistan’s increasing annual GHG emissions compared to the annual GDP growth are of high concern especially for the top GHG emitting energy, agriculture and industry sectors. Pakistan needs to overcome the gap between policy formulation and implementation via effective functioning of its NCCP and NDCs 2021. This requires tremendous financial and technical support from the country. However, even if Pakistan goes completely green, the global North will be emitting far more carbon and Pakistan will continue experiencing the burden of other’s emissions (News Desk 2022). Thus, the global North needs to come forward and support Pakistan in making its economic growth sustainable. One way could be the renewal of the GSP+ status in 2023. As 18% of Pakistan’s GDP rely upon the industry sector, the GSP+ renewal will be a golden opportunity for the country to comply with the already ratified mandatory international conventions in its industry sector and boost its economy sustainably (Ahmad 2022).

Pakistan and Global Water Consumption

Global water consumption is another crucial global environmental challenge associated with the industry sector. Both water quality and quantity is reducing around the globe and the current situation is getting worse. It is predicted that by 2050, 57% of the global population will live in areas that suffer water scarcity at least one month each year (Boretti and Rosa 2019). Pollution and untreated wastewater from the industries is considered one of major causes of high water consumption and quality deterioration (WWF 2022). The global water consumption data indicates that 19% of the total global water withdrawal is used for industrial purposes (Ritchie and Roser 2017). In case of Pakistan, the entire industry sector consumes 23% of the total water withdrawn at the country level (Khoso et al. 2015) of which 49% is consumed by the textile sector alone for both cradle-to-gate and gate-to-gate category (UNCTAD 2022). This means that the textile sector contributes to around 11.3% of the total country level industrial water consumption and 2.15% of the global industrial water consumption.

Pakistan was ranked 160th in the ratio of water withdrawals to water resources in 2017 (figure 3 presenting Pakistan’s freshwater withdrawal in the ‘extremely high’ category). Agriculture, domestic usage and industry are considered the largest water consumers in the country (Maqbool 2022).

Figure 3: Freshwater withdrawals as a % of total renewable water resources (Maqbool 2022).

Climate change, poor water management and increasing water pollution especially from the industrial sector are other major causes further deteriorating the already exhausting water resources in Pakistan. For instance, climate change is causing water flow decline, extreme droughts and unpredictable floods thus resulting in freshwater pollution. Also, manufacturing industries are not only consuming large volumes of freshwater, they are also creating huge amounts of untreated wastewater with hazardous chemicals. Unfortunately, only 1% of the domestic and industrial wastewater in Pakistan is treated and 64% is discharged into rivers or Arabian Sea (Hengstmann 2020), while other neighboring countries such as Bangladesh treats 17% of its wastewater (Molla 2017). These causes along with the unsustainable groundwater consumption for agricultural and industrial use are causing a sharp decline in per capita renewable water resource availability in Pakistan.

Table 1 presents a comparison of the available renewable water resources per capita in Pakistan, India and Bangladesh. For instance, in 2017, Pakistan had 1,253 m³/person/year renewable water (Worldometer 2022a) while Bangladesh has 7,451 m³/person/year (Worldometer 2022b) and India had 1427 m³/person/year renewable water resources (Worldometer 2022c). This indicates that Pakistan’s available water resources are declining at an alarming rate. Thus, the giant water consumers including both agriculture and industry can enhance water use efficiency by adopting modern and efficient water conservation options to protect Pakistan from becoming a water scarce country.

Pakistan needs to implement significant efforts towards sustainable and integrated water management. Fortunately, development and management of water resources has already received considerable attention. For instance, approval of the first ever National Water Policy Package shows a historic milestone. The policy addresses all relevant issues regarding water resource management and role of relevant stakeholders (Kakakhel 2018). Moreover, Recharge Pakistan is one of the major ventures related to water security and management. It aims to increase water storage and recharge through wetland and floodplain management via community-based natural resource management and nature-based solutions (Recharge Pakistan 2022). Pakistan has also added flood risk mitigation and enhanced water recharge as high priority actions in its updated NDCs (UNFCCC 2021). Pakistan’s updated NCCP focusses on integrated water resource management, capacity building for water management and awareness raising (Ministry of Climate Change 2021).

Pakistan’s textile industry has also shown significant improvement towards sustainable management of water resources, although the efforts need to be enhanced. For instance, Sarena Textiles through its green initiatives has reduced 33.3% water consumption and their average daily water saving is around 1380 m3 (Sarena Textiles 2021). Crescent Bahuman Textiles has set its goals to reduce 50% water consumption via its green initiatives (Crescent Bahuman 2022) and Crestex is aiming to reduce and reuse 25% water as part of its zero liquid discharge goals.

Despite having the world’s largest glaciers, Pakistan is among the world’s 36 most water-stressed countries (Kundi 2017). With the rapidly increasing population, water demand is projected to surpass the supply. This coupled with strained relations with the country’s neighbors over transboundary water resources, the growing water crisis is posing a threat to the country’s future sustainability. The current progress needs to be enhanced and immediate coordinated planning and implementation is required to avert the disaster. In this regard, crucial stakeholders including the textile industry need to efficiently monitor their water withdrawal, usage and pollution patterns keeping in mind international wastewater directives. Moreover, international stakeholders such as top export destinations can support the industry sector enhance its technical capability in water management via trainings and resource allocation. The industry should not rely upon extrinsic pressure to bring sustainable change. It should rather come from intrinsic values and desire for a better change (Hengstmann 2020).

Pakistan and Global Land-Use Change

Land use change is another global environmental challenge posing significant impacts on the natural environment due to human activities. It is the process of transforming the natural landscape, usually associated with the functional value of land for economic activity (Paun and Rashid 2017). In case of Pakistan, the important crops being cultivated include wheat, rice, sugarcane, maize and cotton. Among most vital to the country’s economy are sugarcane and cotton. During 2020-2021, around 12% increase in the cultivated area was observed for sugarcane. Cotton on the other hand was cultivated on 2,079 thousand hectares as compared to last year’s sown area of 2,517 thousand hectares showing a 17% contraction in the cultivated area (figure 4). The factors contributed to this decline are biotic stresses due to pests, abiotic stresses due to climate change and poor agricultural practices. This data indicates that land use patterns in crop cultivation in Pakistan are more associated to the sugarcane farming than cotton cultivation (Government of Pakistan Finance Division 2022).

 

Figure 4: Cotton and sugarcane production from 2016 to 2021 (Government of Pakistan Finance Division 2022).

Globally, 2.5% of the cultivable land is used to cultivate cotton. However, with the increasing demand of fabrics and changing human lifestyle, land use for cotton production is also increasing. In Pakistan, land use for the textile industry is mainly associated with the cotton cultivation covering 15% of the cultivated area (Ayub Agricultural Research Institute Faisalabad 2022) while in its neighboring country Bangladesh, only around 1% cultivable area is used to grow cotton (Parvez and Ahmed 2021). This indicates that around 0.38% of the global land use for cotton cultivation takes place in Pakistan. Although cotton production has declined in past few years, Pakistan is still among the largest cotton producers globally as it is a naturally more drought resistant crop (Better Cotton 2022a). Thus, if Pakistan aims to increase its cotton production, the associated land-use change impacts need to be given a high priority. For instance, the expansion of cotton cultivation might cause loss of native habitats and exacerbate the spread of invasive species. Moreover, the increasing use of pesticides might cause loss in soil structure and natural carbon sinks (US EPA 2022).

Multiple initiatives around Pakistan have been observed to reduce impacts of land use change associated with the cotton cultivation. For instance, Better Cotton Program launched in 2009 aims to grow cotton more sustainably and improve livelihoods of millions of farmers. As cotton cultivation is getting immensely affected by unpredictable weather patterns due to climate change, this is leading to increased pests thus reducing its production and increasing pesticide use. Better Cotton Program in this regard is supporting farmers to use environmental friendly fertilizers and pesticides and improve water use practices (Better Cotton 2022b). Moreover, Center for Agriculture and Bioscience International (CABI) has implemented its Better Cotton project to train farmers on the Better Cotton Standard System and good agricultural practices. The project aims to reduce pesticide and water use in cotton cultivation, improve yields and ultimately the livelihoods of farmers (CABI 2022a). CABI’s Sustainable Organic Cotton Production project aims to support organic cotton production and contribute to long-term availability of non-GM cotton seeds and organic inputs of farmers with a self-sustaining approach (CABI 2022b). Also, Interloop has initiated its Looptrace platform to allow supply chain stakeholders to track, trace and access transparent raw material information to meet shared sustainability goals (Sourcing Journal 2022).

Pakistan’s textile industry is also committed to enhance cotton cultivation in a sustainable manner and reduce the associated land use change impacts. For instance, Pakistan’s largest textile trade association APTMA (All Pakistan Textile Mills Association) signed agreement with the Better Cotton Initiative (BCI) to boost cotton export with environmental and social compliance (Better Cotton 2014c). APTMA has also hired experts who are working on enhancing cotton production in a sustainable manner. Moreover, ICA (International Cotton Association) has agreed with APTMA to strengthen its support towards cotton needs of the textile industry (Global Village Space 2022).

Climate change has been devastating for Pakistan’s cotton cultivation and textile industry this year. The current country-wide severe flooding and rains have intensified the already declining cotton yield and destroyed more than 45% of country’s cotton crops (Bridge 2022). The global community in this regard needs to come forward to share the burden of their emissions and support Pakistan to enhance its textile exports sustainably.

Conclusion

In conclusion, GHG emissions, increasing water consumption and land use changes are some of the major global environmental challenges associated with Pakistan’s textile industry. Pakistan needs to increase the pace of its monitoring and compliance to overcome these challenges to enhance climate change resilience but also, to stay in line with its regional export competitors. Furthermore, the global community needs to support the current initiatives and assist Pakistan decarbonize its economy. The increasing GHG emissions, deteriorating water quality and quantity and land-use changes in Pakistan need special consideration from both the authorities and the sectors highly reliant on local resources. Textile industry, for instance, needs to monitor its wastewater generation and implement the 3R (reduce – recycle – reuse) techniques. Also, the top textile export destinations can also support the industry in enhancing its technical and financial capability to reduce water consumption and pollution. Additionally, better cotton standards and sustainable initiatives need to be implemented. Pakistan is a top sufferer of climate change. Every time a climate event hits the country, its development is pushed decades back. Thus, Pakistan needs to enhance its social and environmental compliance to make its economic development sustainable and the global community needs to support this development especially in this era of harsh climatic events.

Note:

The data for both cradle-to-gate and gate-to-gate categories, that specifies the contribution of Pakistan’s textile sector towards the above discussed global challenges, is taken from the new ‘Trade and Pollution Dashboard’ (figure 5). This dashboard is initiated by the Sustainable Manufacturing and Environmental Pollution (SMEP) Program by FCDO (Foreign, Commonwealth and Development Office) (UNCTAD 2022).

Figure 5: Trade and Pollution dashboard (UNCTAD 2022).

 


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October 5, 2022

Policy Considerations for Government of Pakistan August 2022

This study, on Regional Competitive Energy Tariffs and Textile Sector Competitiveness (Phase II), conducted between April and July 2022, analyzed the regional competitiveness of the textile industry in Pakistan from the perspective of energy and related issues faced by the members of the All-Pakistan Textile Mills Association (APTMA) though an exhaustive desk research, field surveys, and analyses. The focus of the field work, in June 2022, was on the north and south regions of Punjab—Lahore, Faisalabad, Kasur, Sheikhupura and Multan—and on north Karachi and Lasbella in Sindh and Balochistan respectively. The survey covered all types of textile units in the value chain—spinning, weaving, processing, and composites. This policy note is based on the results of the field and desk study—highlighting the importance of continuing Regionally Competitive Energy Tariffs (RCET) to catalyze the textile exports.

Pakistan has a large untapped potential in the global textile trade, with presently represents just 2 (two) percent of an almost 900bilUSD market! Pakistan’s competitive advantage is embedded in ready-made garments and made ups and exports have been increasing steadily over the last five years. This also highlights the need to improve the upstream ginning, spinning, weaving, and processing value chain efficiencies within Pakistan.

The processing sector consumes almost the entire local pre-processing outputs        Pakistan’s textile exports are concentrated towards USA, China, and Europe; however, the knitwear exports are not only increasing but also heading towards diverse markets. Garments and composites have seen an increase in sales, abroad, post COVID-19—with a relatively higher increase to USA markets; primarily due to lesser Pakistani textile industry downtime during the pandemic.

A common misconception is the burden of industry on the electricity consumption in Pakistan—all industries combined use less electricity (only 26 (twenty-six) percent) than the households (more than 50 (fifty) percent)—in comparison Chinese and Vietnamese industries use 60 (sixty) and 53 (fifty-three) percent, respectively. Similarly, power and fertilizer consume more than 50 (fifty) percent of the national gas supply with while the rest of the industry in Pakistan, including textiles, consumes less (19 (nineteen) percent) than the fertilizer industry alone.

The share of the Captive Power Plants (CPP) used by Pakistan’s exported oriented Textiles industry has been decreasing over time due to these policies—82 (eighty-two) percent of the CCPs in Bangladesh are gas operated while the same percentage in Pakistan is 75 (seventy-five) percent. The story in India is very different—69 (sixty-nine) percent of similar CPPs are coal-fired, while 20 (twenty) percent use furnace oil and only 11 (eleven) percent use gas.

Gas based CPPs in textile sector produce 1300MW of power. Pakistani Textile units have adopted waste retrieval technologies and have replaced old generators with latest ones, thermal and electrical efficiencies have improved and touching 50 (fifty) percent for most of the mills. These CPPs produce electricity with a generation efficiency capacity of 52 (fifty-two) – 60 (sixty) percent against the 25 (twenty-five) – 30 (thirty) percent of the national power plants. Energy cost as share of revenue has decreased owing to the improved energy efficiencies achieved by the textile mills across Pakistan. Despite greater efficiencies, energy costs have a significant share in the final conversion costs of textile mills and these costs cannot be ignored for achieving competitiveness!

Pakistani textiles industry consumes less than 9 percent of the overall national gas supply yet is the first to take the hit on any nationwide gas cuts. This adversely impacts the export sector of Pakistan, being heavily reliant on the textiles industry, as 75 (seventy-five) percent of the textile industry relies on gas-based electricity generation due to its inadequate supply from the national grid. The downstream textiles value chain—processing and composites—rely almost entirely (67 (sixty-seven) to 75 (seventy-five) percent) on gas for their electricity requirements—thus targeting gas cut towards the textiles industry is a direct curb on exports and foreign exchange gains.

Pakistan’s electricity and gas tariffs for the Textiles industry remain the highest in the region—rendering firms uncompetitive—despite the RCET tariffs’ being in play. The general industrial tariff remains at 0.15USD/KWh, twice that in Vietnam and 1.5 times higher than Bangladesh and India. Likewise, Pakistan’s Textiles industry faces highest gas/LNG tariff in the region. Pakistan’s textile industry is paying 9USD/MMBtu, which is 3.5 times more than Uzbekistan, and 1.5 times the Bangladesh’s industrial tariff.

Pakistan’s Textiles industry must price its power inputs at a tariff lower than the regional average tariff of 0.072USD/KWh, to stay regionally competitive. The current RCET for electricity (from the national grid) is higher than the regional average. RCET is an imperative across the whole value-chain, not just for the value-added/exporting elements—if upstream such as spinning firms cannot produce yarn at a competitive rate, processing firms would lose their market competitiveness even with lower energy tariffs.

RCET also attracts further investment by the Textiles Industry of Pakistan. Since 2019, RCETs attracted in new investment of 318milPKR by each composite firm and 153milPKR by each spinning mill.

RCET resultant additional investment generates additional employment in the local Textiles Industry. Implementation of RCET has resulted in on 4 (four) percent increase in employment by textile firms since 2019—on an average, each textile firm employs 2,077 workers—which is significant for a sector that is the second largest employer of the nearly 50mil strong overall workforce, after agriculture.

RCET has shown an increase of nearly 4 (four) percent in output at firm level across the Textiles Industry value chain in Pakistan. The average output value produced by each textile mill is 7.2bilPK, hence RCET resulted in 283milPKR of increased production by each firm—implying 60.3bilPKR increased production.

RCET benefits the firms, employees, and government. The additional investment, employment, and output are not simply benefits accruing to the mills, rather it impacts tax revenues directly for Pakistan as a whole! Increased production means higher revenue generation by government as well.

Tax revenue is only one part of the fiscal equation for Pakistan’s government, for, a 1 (one) percent increase in investment by the textile firms is associated with 7.3 percent rise in exports. On average, the firms[i] export 30milUSD annually and 1 (one) percent increase in investment implies 2.1milUSD of new exports by each firm.

Linking this back to competitive gas tariffs provision by the government of Pakistan, for every 1USD of LNG imported[ii], textile industry creates USD3 of new exports. Subsidy to the textile industry results in forex inflow at significantly lower cost than borrowing forex through Euro and Sukuk bonds

[i] Refers to the firms sampled and surveyed in this present study Regional Competitive Energy Tariffs and Textile Sector Competitiveness (Phase II)

[ii] An estimated 150milUSD of LNG is consumed by the Textiles sector annually, in Pakistan. Uneven—no predictability and lack of availability—supply of grid electricity compounds the efforts to stay competitive! The Textiles value chain is a sophisticated and continuous process, any disruption results in loss of almost complete day of production. An hour of loadshedding results in production losses equivalent to 0.76milPKR and 1.76milPKR for the spinning and the composite mills, respectively.

The 75 (seventy-five) percent of the Textiles mills which are operating primarily on gas based CPPs to compensate for the uneven electricity supply suffer due to gas shortages which get worse in the winter for the northern Textiles manufacturing zone. Average foregone revenue losses amount to 21milPKR/d for spinning and 24milPKR/d for the composite segment due to stoppages in gas supply—the HH sector is given priority in Pakistan so that people can cook ‘naan and roti’!

The Textiles Industry and its value chain have diversified structure of energy demand and require multiple energy source and efficiency options, all of which are being considered and implemented in Pakistan. The green or sustainable energy inputs paradigm too will require a phased approach given the nature of this demand. Pakistani Textile Industry has done well to start adapting and adding multiple fuels—such as biomass and solar—to certain parts of the value chain processes, however a complete switch will require substantial additional investment and time. This is only possible if RCET continues, and the industry continues additional investment. An important footnote here is that the Pakistan Textile Industry may already have a lesser ‘grid emission factor’[i] than the national electricity grid!

Pakistan’s Textile Industry is caught in the cotton-energy-forex triangle; though not alien to other Textiles producing countries, its impact is exacerbated by the mismanagement of the policies within this triangle by the government—often based on misperceptions. The diminishing quality and quantity of local cotton production, the uneven energy supply, and the unpredictable forex costs and availability, need aware management to enable the Pakistan Textile Industry to retain a competitive edge in the global markets. Broad considerations for the government of Pakistan emerging from this RCET II study are as follows.

Entire value chain – The entire Textiles Industry value chain, and not just the direct exporting parts, are equally dependent on RCET, being interdependent and more so as the up-stream value chain has a higher energy demand.

Stable grid electricity – upgrading the existing grid infrastructure and ensuring even (available and predictable) supply to the Textile Industry is key to boosting exports, further investment, creating jobs, and improving productivity.

Restricting new gas and electricity connections – Deterring new entrants and expansion, continued upgrading and job creation and higher outputs for exports through non-provision of new electricity and gas connection directly retards economic growth of Pakistan.

Output growth is the road to modernization—higher energy and process efficiencies and higher output – Correct policies by the government of Pakistan in the recent past have shown that RCET and supporting policies to enable the Textiles Industry to stay competitive has led to significant growth in exports, revenues, output, employment, and investment. The path to further modernization and technological advancement and environmental sustainability of Pakistan’s Textiles Industry lies in supporting its regional competitiveness.

PKR devaluation is not a panacea – A devalued PKR while rendering small parts of the Textiles value chain competitive, render most of it uncompetitive. Raw cotton in Pakistan is consistently degrading in quality, and its overall production is also declining, and the Textiles Industry must import cotton. A major part of the national energy, whether gas or electricity, is imported. Both form a substantial part of the input costs and are immediately impacted by PKR devaluation

1- Refers to the firms sampled and surveyed in this present study Regional Competitive Energy Tariffs and Textile Sector Competitiveness (Phase II)

2-  An estimated 150milUSD of LNG is consumed by the Textiles sector annually, in Pakistan.

3-  A “grid emission factor” refers to a CO2 emission factor (tCO2/MWh) which will be associated with each unit of electricity provided by an electricity system. It is a parameter to determine the baseline emissions for CDM projects in the renewable energy sector (hydro, wind, solar PV, and geothermal power, etc.).

https://www.iges.or.jp/en/pub/list-grid-emission-factor/en


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