Shahid Sattar and Amna Arooj
The exchange rate is a crucial component of trade and a dynamic macroeconomic determinant. The trade balance is impacted by exchange rate fluctuations. The growth process is slowed down as a result of unstable exchange rates since they have an impact on capital flows, slow down commerce, and undermine investor confidence. The evaluation of investment operations, hedging, and financing, as well as the reduction of operational risks, are all aided by a stable exchange rate for financial institutions and businesses.
The evolving economic dynamics have changed the world economy and caused numerous difficulties in recent years. This includes rising food prices, inflation, and oil prices. Like many developing countries, Pakistan has also faced backlash because of the international changes as well as national developments such as political instability. Galati and Ho (2003) assert that changes in the news have a significant impact on currency rates. They investigated the idea that any good or positive news raises the value of a currency, but bad news causes it to decline. This has been recently witnessed in terms of the ever developing political instability in Pakistan.
The exchange rate has a two-way relationship with the exports and imports inter alia. The relationship works both ways whereby the fluctuating rate affects the exports and imports, similarly the fluctuating imports and exports affect the exchange rate. In addition to exports and imports, there are other macroeconomic factors that influence the exchange rate. These include interest rates, the current account balance, and the national debt.
The central bank controls the interest rates in an attempt to manage the exchange rates. Foreign investors prefer investing in countries with high interest rates because they can earn greater returns than in other nations. If the interest rate is higher, foreign capital will be drawn in, which will raise the exchange rate. If a country’s current account is in the red, foreign capital is borrowed to close the gap. Local currency loses value due to excessive foreign currency demand.
Moreover, the interest rate in Pakistan was increased by 125 basis points to 15% in July 2022 – following a 13-year peak in inflation, the rate was raised from 13.75 percent. Consequently, this is causing detrimental effects on the fuel cost as well as the inflation. Despite having a high interest rate (15%) in Pakistan, exchange rate devaluation isn’t in control; although the detrimental effects of high interest rate are quite visible in the form of lower investments, absence of progression in almost all industries among others. This calls for a spontaneous, long-term strategic action from the government side at large to bring back the economy on track by lowering the interest rate.
Pakistan has been under the grip of debilitating exchange rate for quite a time now. In the midst of escalating political unrest and economic difficulties, Pakistan’s currency hit a new low against the US dollar, shattering all previous records. The interbank closing rate of one dollar on 1st August 2022 was 238.84 Pakistani rupees.
Pakistan’s current account deficit (CAD) increased significantly during the course of 11 months (July to May) in 2021/2022, according to the State Bank of Pakistan (SBP). According to data from the balance of payments (BoP), the current account deficit in the equivalent months of the previous fiscal year was $1.18 billion. The enormous trade imbalance caused by the sharp rise in import costs may be to blame for the current account deficit’s massive growth. According to figures issued by the Pakistan Bureau of Statistics, the country’s trade deficit jumped by 58.18% to $43.42 billion between July and May 2021/2022 compared to $27.45 billion during the same period of the previous fiscal year (PBS). Comparing the first 11 months of the current fiscal year to the same months of the previous fiscal year, the country’s import bill increased by 44.51 percent to $72.29 billion. However, export revenues also increased by 28% to $28.87 billion during the reviewed period from $22.57 billion during the same time of the previous fiscal year.
Source: Ministry of Commerce
The increase in export revenue is primarily because of the performance of the textile sector in Pakistan. With exports rising from $12.5 billion just two years ago to nearly $20 billion now, the textile industry has set a new record. The implementation of the Regionally Competitive Energy Tariff (RCET), investments totaling more than $5 billion in development, and the establishment of 100 new textile facilities, which resulted in an increased export capacity of $500 million per month, all contributed to this tremendous boom. This doesn’t stop here, the sector has a potential to deliver $2 billion/month worth of exports, if provided with conducive environment.
In the upcoming fiscal year, textile exports are anticipated to reach $25 billion or more subject to energy availability at competitive rates. However, Pakistan will be obliged to look for additional $6 billion in loans from overseas, which under the current economic conditions would not even be doable, if this export momentum is lost owing to problems with energy supplies, cost restraints, and a crippling exchange rate.
In the longer run, the large devaluation of the rupee is worse for exporters especially textile exporters because it raises input costs, making exports less competitive. One of the biggest difficulties the sector faces is finding a steady supply of high-quality raw materials at reasonable rates.
Additionally, circumstances have developed that have caused Pakistan’s textile sectors’ inputs, just like all of its other exporting sectors’ inputs to be measured in dollars in order to reduce the risks associated with currency volatility and to create a stable and secure environment for business. This includes raw materials, energy, dyes and chemicals, machinery, and spare parts, inter alia. Simply said, a country’s exports become less expensive and its imports become more expensive as its currency depreciates. However, in a globalized economy, industries are vertically linked, and exported goods often contain a significant amount of imported components. Therefore, imported inputs become more expensive for any given exporter and are not always interchangeable with domestically produced goods.
Aftab and Abbas (2012) concluded that exchange rate instability has significant negative relationship with sectoral export of Pakistan except waxes and animal oils, aircraft, transport equipment and arms. A negative indication indicates that a rise in relative price is to blame for the decline in export demand. Their study also implied that the textile and textile articles showed a negative sign. Arize et al. (2003) also concluded in his study that in both the short- and long-term, an increase in exchange rate volatility has a considerable negative impact on export demand.
Equally important is the fact that Exports rise in response to (real) currency depreciations and decline in response to (real) currency appreciations. This might not always be the case, though. Over a two-year period, a gain in exports of 4.9 percent results from a real devaluation of 10%. However, exporters adjust to the “new normal” just one-third as quickly after a depreciation as they do after an appreciation. Exports decrease more quickly following (real) appreciations than they do following depreciations because of supply limitations, pricing to market, and informational frictions (Varela, 2022).
After the rupee’s fall in 2018–19, Pakistani textile and apparel exporters did not increase export volumes. The primary explanation for this is that changes in profit margins stabilize export prices in the local currency, and this effect is accentuated during depreciations: US dollar export prices react to fluctuations in the nominal exchange rate by 15% more than they do during appreciations. The more the exchange rate changes, the more asymmetrically export US dollar prices respond, demonstrating that purchasers level out Pakistani rupee pricing.
If we look at Pakistan’s experience with rupee depreciation, we can say that it has always resulted in cost-driven inflation and relentlessly harsh economic conditions. Pakistan has suffered significantly from currency devaluation both as a buyer and a seller. Devaluation of the Pakistani rupee will result in a devaluation of Pakistani labor and talent on the global market, which will act more as a stimulant than a medicine and lead to unheard-of inflation.
It is time to abandon the widespread misconception that exporters welcome rupee devaluation and end the practice of favoring excessively undervalued currencies. The central bank and government should concentrate on achieving an exchange rate that is competitive in the market and achieves actual exchange parity. The policymakers should create the right conditions for a maximal export response to currency depreciations. This will enable a conducive environment for not only exporters in general but also the economy. There has been no concrete step taken so far by the government to put a halt to the ever depreciating Pakistani currency. Moreover, given present situation, we are not in any position to raise bonds and have no access to capital markets anymore. This is of grave concern.
The Pakistani government must support the exporters in their efforts to get ready for the impending challenge by keeping up with the evolving economic situation. It needs to support the export drive as the dollars earned through exports are the cheapest, more sustainable with the added benefit of no compulsion to return them, no interest, and still the cheapest with only 3-4% cost. Hence, focusing upon dollars generated through exports are far better option than bonds. Pakistan has to make a quantum jump, but even if it manages to improve its export performance through textiles, it may have a better chance of holding onto and eventually expanding sustainable, export-derived, dollarized revenue.
29th July 2022
Pakistan is currently on the brink of economic collapse. With depleting foreign currency reserves, rising inflation, the exchange rate in free-fall and irrationally high interest rates, the country is headed towards a path similar to the economic downfall of Sri Lanka.
We at APTMA are pushing for all leaders and policymakers to develop a consensus on how to navigate from this situation of extreme distress and pull the economy out of this downward spiral. We recommend the following key areas for reform.
The first is political stability. A lack of political stability is a serious impediment to economic progress. Not only does it shorten policymakers’ horizons leading to suboptimal short term macroeconomic policies, but it is also the cause of frequent policy U-turns and leads to non-completion of ongoing projects. Stability and consistent policy implementation are crucial for economic growth and for the export sector to thrive and contribute dollar earnings to stabilize the Balance of Payments for a sustainable economic outlook.
The exchange rate is a major cause for concern. The ER instability has significant negative relationship with sectoral exports of Pakistan such as textile. A negative indication indicates that a rise in relative price is to blame for the decline in export demand. Pakistan has been under the grip of debilitating ER for quite some time now. The value of one dollar reached its highest point ever on 27th July 2022 when it hovered at around 237 Pakistani rupees. In the long run, the large devaluation of the rupee is worst for exporters especially textile exporters because it raises input costs, making exports less competitive.
It is time to abandon the widespread misconception that exporters welcome rupee devaluation. The central bank and government should concentrate on achieving an ER that is competitive in the market and achieves actual exchange parity. Dollars earned through exports are the most sustainable with the added benefit of no compulsion to return them, no interest, and the cheapest with only 3-4% cost. Hence, focusing upon dollars generated through exports are far better option than bonds.
Moreover, the need for a long-term policy featuring lower interest rates cannot be underestimated, and its implications for a brighter economic future which generates foreign currency, jobs and international recognition cannot be denied. We need more investments in Pakistan, alongside holistic policy reforms that lend confidence to investors and the markets. This need cannot be met with an interest rate of 15%.
Roadblocks to entrepreneurship and innovation need to be mitigated so that we can empower our youth and our disenfranchised talent to bring about a grassroots level economic revolution. 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. 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.
The current account deficit increased by 517 percent in FY22 compared to FY21. To counter the dangers of our mounting debt, we must immediately take the following steps:
Furthermore, we must take steps to add value in our exports and thereby improve global perceptions of Pakistan. This would require an environment that facilitates exporting industries to focus on quality improvement through new processes, thereby developing new products and entering fresh markets.
With a myopic focus on short staple fiber raw cotton, we rely on a shrinking market while neglecting the rapidly expanding market for MMF. The MMF tariff regime effectively prevents Pakistan from aligning its products in tandem with the rest of the world. The duty protection given to obsolete plants in Pakistan is denying the Pakistani industry any chance to compete in this booming market, internationally or domestically. We must do away with such hurdles so that progress can be made in value addition, diversification and market expansion.
Lastly, leaders must prioritize export-led economic growth. Enhanced exports enable the inflow of foreign currency to finance imports, service debt, stabilize exchange rates and to overcome the persistent problem of the balance of payment deficit.
The textile sector has performed exceptionally well in the last 2 years. Textile exports have increased by 43 percent in FY22 as compared to FY18. Textile industry has invested a sum of $5 billion over the past few years in new plant & machinery and upgradation. Further expansion and increase in exports are limited by the inconsistent availability of energy at Regionally Competitive Energy Tariffs (RCET). Given that the past export spur occurred due to the priority of the government to provide regionally competitive terms for the sector, this policy must be consistently maintained in the future to enable economic stability and subsequent growth.
Gohar Ejaz, Shahid Sattar and Eman Ahmed
The majority of people in developing economies do not have bank accounts, creating an inequitable economic world that impacts the individual’s social and economic well-being (Donner and Tellez, 2008; Duncombe and Boateng, 2009). Financial inclusion in Pakistan is rudimentary compared to other countries that follow export-led growth models. The country’s regional competitors have performed better in most areas pertaining to access to finance.
Pakistan, a developing country with a population exceeding 220 million, boasts a high mobile phone penetration of 73% (Pakistan Economic Survey, 2014/15). However, 88% of the total population is unbanked and financially marginalized, out of which 63% of the population resides in rural communities (World Bank, 2014). There is consensus amongst policy-makers to increase financial access through financially inclusive banking practices (Anwar, 2013).
In addition to financial exclusion, there are other roadblocks to entrepreneurship and innovation that need to be mitigated so that we can empower our youth and our disenfranchised talent to bring about a grassroots level economic revolution. 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 belie the impression of a stable economy in the short run, while long-term economic health continues to be endangered due to the volatile nature of an economy with an interest rate as high as 15%. Furthermore, 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.
|Country||Interest Rate % (July 2022)|
Subsequently, the low level of investment has worsened the state of affairs, particularly for productive sectors which are now struggling to maintain productivity and. The abrupt rise in factory shutdowns and closing of textile businesses are causes for concern. The cost of doing business increases indefinitely with the rise in interest rate, which also implies hindrances in access to capital, leaving businesses to fend for themselves and struggle to make ends meet with no fallback option. Investors are also less likely to put money into active projects as the high interest makes these options volatile and high-risk.
All these factors result in a spillover effect with mass downsizing, stifled economic activity and stagnation in GDP growth. Thus, it comes as no surprise that technological advancement is rendered a distant fantasy for an industry facing an economic crisis.
A more adaptive financial model and a focus on more productive capital investments, particularly in technology, 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.
When a bank account is opened, it’s a step towards joining the economic mainstream. It is a sustainable mechanism to fast-track grassroots entrepreneurship, innovation and economic stimulus from the bottom up. With financial inclusion as the ultimate goal, Pakistan’s government should follow in the footsteps of Modi’s PMJDY, whereby the State Bank of Pakistan opens up accounts with a pre-approved overdraft facility of PKR 10,000 that can be used as seed money for entrepreneurship. It is proposed that the State Bank may also provide overdraft facility and debt moratorium for those unable to repay the loan in time.
In order for Pakistanis to be eligible for this scheme they must currently have no bank account. The only document required to be presented when opening the account should be the individual’s CNIC, verifiable through NADRA biometric. As for cases of overdraft, interest can be charged on the PKR 10,000 amount. However, in case of default, the government should step in to cover the amount. If this scheme is successful, an estimated 50 million accounts will be opened, with a potential disbursement of PKR 500 billion. The current scenario wherein charges are applied to accounts with balances below a certain minimum is detrimental to efforts for financial inclusion, so this scheme will be free of any such charges.
Investing PKR 500 billion into the people of Pakistan who are currently unbanked and at the lowest rung of the economic ladder, is bound to have a multiplier effect on the economy, simultaneously enhancing opportunities for employment, entrepreneurship, value addition, education, gender parity and effective resource allocation for economic growth – enabling a sustainable exit from the path of recession upon which the country is currently treading.
The impetus behind this proposal is the success of India’s revolutionary banking scheme, which continues to improve financial inclusion even now. In 2014 Indian Prime Minister Narendra Modi launched a plan to provide a bank account for every household, in a landmark initiative to help the poor. (BBC) Pradhan Mantri Jan-Dhan Yojana (PMJDY) is India’s National Mission for Financial Inclusion to ensure access to financial services, namely, a basic savings & deposit account, to access remittance, credit, insurance, pension in an affordable manner. Under the scheme, a basic savings bank deposit account can be opened in any bank branch by persons not having any other account. Under the banking scheme, account holders receive a debit card and accident insurance cover of up to 100,000 rupees ($1,654; £996). They also get an overdraft facility of up to 5,000 Indian rupees.
Benefits under PMJDY:
As per latest government data, PMJDY now has 42.89 crore beneficiaries (basic bank account holders) with ₹1,43,834 crores total balance. More than half of the beneficiaries are women (23.76 crore) while 28.57 crore are from rural and semi urban areas.
A senior official of State Bank of India said the average balance in the accounts which is hovering around ₹3,000-3,500 across banks is ‘an indication’ that the scheme has now become a channel for savings for the low income families. The Global Findex data base of the World Bank has also shown ‘substantial’ increase in financial inclusion in the country after 2014. As per the index, 80 per cent of people above 15 years of age in the lower-middle income group have a bank account now compared to 53 per cent in 2014.
Morawczynski et al. (2010) argues that financial inclusion success should not only be limited to the withdrawal of payments from bank accounts. The term should also incorporate the usage of accounts for undertaking economic activities. Therefore, ‘full financial inclusion’ entails participating in a wide spectrum of financial transactions, such as depositing savings, accessing credit/insurance and making payments in the banking sector (Ehrbeck, 2011; Bold, Porteous and Rotman, 2012).
Meanwhile in Pakistan, penetration in the financial sector is extremely low, with only 2.4% of the population having access to credit from formal financial sources. Out of the total adult population of Pakistan, the financially excluded population make up 53%.
Although financial inclusion is usually categorized as access to formal financial services, in developing countries including Pakistan, a significant proportion of people prefer and have access to informal finance. Informal access can occur through the organized sector (though committees, shopkeepers, moneylenders etc), or through friends and family. An estimated 19 percent have voluntarily excluded themselves through lack of understanding or need, due to preference, poverty or religious reasons.
BISP holds the largest database of underprivileged families in Pakistan – recorded by the National Database and Registration Authority (NADRA) after conducting the largest and first ever door-to-door poverty survey. Since we seek to propose a similar scheme, it is important to analyze the benefits and constraints of BISP so that we are able to utilize an upgraded version of a tried and tested model for Pakistan. Dr. Atika Kemal’s research paper, titled “Mobile Banking in the Government-to-Person Payment Sector for Financial Inclusion in Pakistan” provides a comprehensive framework for us to develop a new and improved model based on an understanding of the impacts of BISP.
The poverty score card survey assisted BISP in identifying 7.7 million households categorized as the ‘poorest of the poor’ (BISP Report, 2014). Primarily funded by the Government of Pakistan, BISP disbursements crossed PKR. 70 billion (USD $667,908,500) by 2015. It continues to receive unprecedented financial and technical support from multilateral and bilateral donor agencies such as the World Bank and DFID as well (BISP Report, 2014).
Known for being the country’s main safety net program, BISP provides transfers of Pakistani Rupees (PKR) 26000 per person annually (approximately $113/year) that are received by around 5.3 million women from low-income households.
Many governments in developing countries have set financial inclusion as a fundamental policy goal, in digitizing G2P flows (Bold, Porteous and Rotman, 2012). A case study of the BISP in Pakistan showcased that transparency in delivering G2P payments was the primary objective for digitizing BISP payments, while financial inclusion was a secondary goal. Therefore, digital innovation is not always the perfect solution or ‘silver bullet’ for development.’ Incentivizing the disenfranchised segments to open bank accounts and enter the formal economic system, thereby boosting entrepreneurship is a sustainable mechanism to enable an uplift to the economy.
The need for a long-term policy featuring lower interest rates cannot be underestimated, and its implications for a brighter economic future which generates foreign currency, jobs and international recognition cannot be denied. We need more investments in Pakistan, alongside holistic policy reforms that lend confidence to investors and the markets. This need cannot be met with an interest rate of 15%.
Dr. Gohar Ejaz
With the glaring example of Sri Lanka defaulting on its debt, the risk of Pakistan facing a similar fate should be an impetus to spur ambitious reforms in almost every area of the economy. A default situation results in a damaged relationship with investors that will have far reaching consequences, so we must take a hard look at our policies, institutions and markets in order to identify roadblocks and inefficiencies. Only then can we enable economic stability and sustainable growth.
Pakistan needs to nurture an export culture, focus on investment, productivity, and exports, while removing bottlenecks such as sludge, financial, energy, and tariffs.
It is troubling to note the pace with which long-term growth is declining. This decline is taking place on multiple fronts. On the front of productivity and investment, there has been a negative trend implying a less efficient economy over time. Pakistan does not have an export culture, despite the fact that export-oriented units have a 30% higher productivity rate than companies serving domestic market. The export trend remains quite flat, and growth is volatile.
Furthermore, there is little room for markets. The overbearing government footprint currently stands at 67 % of GDP. This makes progress extremely difficult, as the government is an active player in various sectors: Pakistan’s state-owned enterprises include energy, transportation, financial, trading, and manufacturing. Rather than allowing market forces to do their job, the government assumes the role of fixing prices: wheat, electricity, gas, medicines, milk, petrol.
‘Sludge’ is defined as the ‘excessive or unjustified frictions’ that make it harder for customers to achieve their goals, such as complicated forms and websites that are hard to navigate. This accurately describes most market activity in Pakistan, with the over-regulation characterizing 39 % of GDP. Unnecessarily bureaucratic and time-consuming processes abound in seeking registration, licenses, certificates, and other permissions.
Due to the ongoing IMF Program, there is no fiscal space available to the government, making it difficult to increase public investment. Taxes remain high, and the country finds itself in a long-term Balance of Payment crisis. In short, the available policy choices are limited.
Historically, we focused on taxation, not on growth. We have to shift this focus to growth by prioritizing investment, productivity, and exports. In attempting to do so, we face a number of bottlenecks. The energy sector is in particular need of reform, as mismanagement and weak reform is rampant. One reform that should be seriously considered is limiting households to a single point supply of energy, so that limited resources such as gas are prioritized for more productive uses. The gas crisis is worsening as international exploration companies have left Pakistan and local companies are not performing, leading to lower domestic gas production. There are massive transmission & distribution losses to be addressed (Rs. 473 billion during 2021 out of which Rs. 402 was recovered through tariff and Rs. 71 billion was added to circular debt). Meanwhile, LNG imports are hampered by Government Regulation/PPRA.
In order to address the inefficiencies of gas companies, it is recommended to unbundle downstream monopolies between ‘pipeline’ and ‘retail’ business. The business model for gas companies should be based on profits from operational efficiency, by investing in the maintenance of the distribution network and banning domestic expansion projects. Furthermore, we must do away with politically motivated gas allocation policy, and rethink the policy of importing LNG and injecting more gas in a leaking distribution system. In order to achieve gas market liberalization, there is a need for third-party access to regasification terminals, transmission, and distribution systems.
When it comes to the electricity sector, the economy would benefit from DISCOs being divided into smaller units (city-wise) for better administration and management. Listing of DISCOs on the Pakistan Stock Exchange should be mandated with a condition that a single party cannot hold a share of more than 5%. The billing system at the DISCO level should be decentralized.
Given the current situation, we are not prepared to implement CTBCM. Independent evaluation of CTBCM is needed. It is best to facilitate ‘wheeling’ at the marginal cost to make it attractive for sellers (generation companies) and buyers (bulk power consumers). This will decrease the cost of energy for the industry
Moving on to financial issues, we see that Pakistan has the lowest ratio of credit to the private sector among the developing countries. Moreover, we have the highest currency in circulation (40% as compared to the maximum of 20% in other countries), which also impacts the banking multiplier by limiting liquidity available for the private sector.
Taxation reforms are also greatly needed. A lower uniform rate for GST will foster compliance and lower the incentive to cheat. The distinction between filers and non-filers should be abolished as it just creates a nuisance and does not contribute to improving the tax net.
In Pakistan, a fundamental structural issue is insufficient forex earnings to sustain the economy. To this effect, the country has huge export potential that is not being adequately leveraged. To tap this potential, policy must be formulated to:
The ideal way forward is through developing an export culture wherein all investments and operations are focused to maximize exports. To this end, the textile sector is the key player, since it contributes 62 percent of all exports.
The sector has performed exceptionally well in the last 2 years, with textile exports increasing by 43 percent in FY22 as compared to FY18. The industry has invested a sum of $5 billion over the past few years in new plant & machinery and upgradation.
Further expansion and increase in exports is limited by the sustained availability of energy both gas & electricity at Regionally Competitive Energy Tariffs (RCET).
This export spur has occurred due to the focus of the government to provide regionally competitive terms for the sector to remain competitive.
However, to maintain this momentum and to increase exports exponentially what is required is:
Pakistan’s domestic cotton production has declined over the last decade, dropping to 7.42 million bales in 2021-22, which is about half than the textile sector requirements. The sector has therefore had to resort to importing cotton from a number of countries in order to compete in the textile export industry; in the past two years, this bill has reached $3 billion.
Cotton, once Pakistan’s favorite cash crop, had its area under cultivation decline by over 1 million acres over the course of ten years. Decline in cotton crop caused by a number of variables involved. To offset this decline and reduce the crop to its former glory, we must encourage the textile industry to grow its own cotton, reform variety approval system to speed up the process as well as to support private sector R&D organizations. Identification and development of new areas for cotton can also provide great returns.
As we are targeting holistic reform, we must also emphasize the role of the real estate market, which has huge potential to bring growth once it is effectively deregulated. We must also prioritize improvements in public life, by rethinking cities to better serve as engines of growth, removing car use subsidy to reduce the burden on city development, and enabling alternative in-city mobility policies from public transport to walking. Making the internet widely and cheaply accessible, possibly by fully funding access in 2023-24, will maximize job opportunities.
There remains a need to tackle economic distortions and to formulate effective policies for economic sustainability. This requires a specific focus on supplementing the export sector’s role in steering growth, along with greater efforts to empower, educate and harness the potential of our youth, to encourage investment in human capital and to develop a system whereby external shocks and political instability do not hamper economic progress.
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 can strengthen the economy significantly, bringing Pakistan out of its current account deficit and economic stagnation.
Shahid Sattar and Eman Ahmed
Pakistan’s immense economic potential will remain elusive as long the most productive sectors that enable export-led growth are deprived of energy availability and consistency. Despite the textile exporting sector’s capacity to deliver over $2 billion per month in exports, recent government decisions to suspend gas supply to the sector have jeopardized the sector’s capacity to deliver.
Gas/ RLNG to the textile industry has been suspended from July 1st to July 8th, which will be followed by shutdowns for Eid from 9th to 14th July. This shutdown of 15 days will translate to a loss of at least $1billion that would have otherwise positively impacted the Balance of Payments. More than 50% of output is likely to be lost in the month of July, with the very real risk of losing orders on a permanent basis.
The textile industry has achieved a new record in terms of exports reaching $19.5 billion from $ 12.5 billion just two years ago. This fantastic growth was enabled by implementation of Regionally Competitive Energy Tariff (RCET), investment of over $ 5 billion in expansion and establishment of 100 new textile units resulting in enhanced export capacity of $ 500 million per month.
Textile exports were expected to increase to $25 billion plus in the coming fiscal year. If this momentum is lost due to energy supply and cost constraints, Pakistan will be forced to seek additional $6 billion in loans from abroad which under the circumstances may not even be possible. Textiles have repeatedly delivered their commitments and proven that they are a viable and long-term solution towards economic stability. However, energy unavailability, uncompetitive pricing of critical inputs and unjustifiably high taxes continue to jeopardize export-led growth.
The government has been no stranger to taking bold steps that are intended for economic stabilization, such as increasing the fuel price substantially over the past several weeks. In the same vein, we urge the government to consider its misallocation of resources as a detriment to this very goal of stability. There must be an equally bold decision to aptly prioritize the gas supply for export-oriented sectors which are the greatest contributor to economic stability and growth, rather than allowing heavy gas usage in the domestic sector, which is unproductive and does not make any contribution to the national exchequer.
Gas remains the major or only source of energy for 75 percent of the textile industry in Pakistan but still consumes only 8.6 percent of the total national gas supply. Processing mills have the highest use of gas and accounts for 75 percent of their energy mix—while 67 percent of the electricity in composite firms is being generated through gas.
Source of Power Generation for Textile Industry-Pakistan (Survey Sample)
Average Use of Gas in Energy Mix (Survey Sample)
The full potential of our energy resources is not unlocked because of overuse in non-exporting sectors. A policy to ensure pure economic use of the scarce resource has to be implemented in order to ensure a sustainable economic future. For domestic users, single point source i.e. electricity should be implemented to prevent overuse and wastage.
Good business sense dictates that policy needs to be holistic and prioritize the largest value addition to society, so that economic disasters can be prevented. However, policymakers in Pakistan tend to be caught up in rectifying mistakes of the past and by the time a useful policy is implemented, plenty of damage has already been done e.g. exports have already sunk and buyer relationships have been destroyed due to an inability to meet orders.
While the manufacturing and consumer goods sectors have a moderate need for reinvention and innovation, what they really need is minimal disruptions in the form of regulatory limitations, to be empowered to keep up with new technologies, and the ability to stay abreast of the competition, and the role of the government is central in each of these aspects. It is no surprise that Pakistan ranks low in the ease of doing business and competitiveness indices, as many potential startups are burdened by overregulation that hinders them from taking off. Meanwhile, the textile sector remains under immense pressure to maintain the majority of Pakistan’s exports, and therefore must be considered critical for Pakistan’s economic prosperity. These policy recommendations are synergistic – they can only be fruitful if implemented simultaneously. As the textile value chain is fragmented, there is a need for uniformity and facilitation at each step of the process, and any incentives that are provided must be available across the chain.
Earnings through exports serve as a crucial inflow to the economy. Policy support is an absolute requirement that ties into this, but the measures taken by the government are often insufficient. It is essential to direct our confidence and incentives towards our local business community as well as our entrepreneurs. We must also push for improvements in quality education, training and job opportunities for the youth. Considering the export-led economic prosperity that is taking Bangladesh and Vietnam to new heights, Pakistan must mitigate its reliance on primary and traditional commodities, prioritize free trade agreements, rationalize tariff structures and fast-track the shift towards manufactured, value added services and nontraditional goods for export.
The textile sector of Pakistan exports over 80% of its products, and the export-oriented industries are 25 percent more productive than non-exporting firms, and their productivity increases as exports increase. However, inefficiencies cannot be exported, so these must be mitigated from all input materials before results can be seen. Since exports in Pakistan are labor-intensive, expansion in this industry is a way to ensure large-scale job-creation, and an increase in foreign currency to pay for required imports. With the right policies in place, a diversified set of high quality exports will provide a crucial uplift to economic activity and lead to a cycle of development and improvement in perception. In the coming fiscal year, textile exports were expected to increase to over $25 billion. For this mission to be successful, consistently supportive energy policy is absolutely essential. Only then can we prevent the need to seek $6 billion in foreign aid in the coming year – a scenario which would lead Pakistan to default and sink the economy further into the debt trap.
The world is witnessing an unprecedented and multifaceted environmental crisis which will impact the lives of all who live on this planet. This can be elucidated by the fact that the world temperatures are rising, droughts are occurring frequently and lasting longer, tropical storms are getting severe, glaciers are melting faster, permafrost is melting, rising sea levels are threatening estuarine ecosystems and coastal communities. Industrialization is one of the primary causes of this change in climate. As a result, amongst many other initiatives taken by various national and international organizations, the Quality Management System (ISO 9000), issued by International Organization for Standardization (ISO) in 1987, compelled manufacturers to consider the environment by reducing the use of carbon based raw materials, rationalizing the use of energy in processes or seeking out clean energy sources, and using non-harmful packaging materials that are bio-degradable.
Environmental Impact Assessment (EIA) is another tool for planning and guaranteeing sustainable development. EIA is used in order to ensure that the environment and natural resources are protected and conserved during the development of industrial and infrastructure projects. Therefore, the end goal is to promote cleaner manufacturing practices and long-term sustainability as remedies to emerging environmental issues.
Textile and garment industries play an important role in developing countries’ economies such as that of Pakistan and Bangladesh. This sector was amongst the first few sectors to go through the industrialization process, and today it is one of Pakistan’s and Bangladesh’s most important economic sectors. In April 2022 alone, Bangladesh’s textile export reached $3.93 billion. Pakistan, on the other hand, experienced the highest-ever monthly textile exports of $1.739 billion in April 2022.
However, pursuing such exports with time has increased waste generation leading to harmful environmental impacts. The major environmental effects include the discharge of large amounts of chemical loads as a result of the high consumption of water and harmful chemicals used in this industry, as well as the associated water pollution, high energy consumption in manufacturing processes and related air emissions, packaging and solid waste production issues, and the formation of unpleasant odors caused by bleaching, dyeing, and printing processes. To summarize, textile manufacturing consumes a significant amount of water and chemicals. The garment industry worldwide uses an estimated 79 billion cubic meters of fresh water per year across its whole value chain.
Table 1: Textile wastewater pollution causes and characteristics
Source: Patagonia, Inc.
EIA of Textile Sector in Bangladesh at a Glance:
In Bangladesh, the sector’s environmental repercussions are becoming increasingly costly. In the delta-based country, water pollution is extremely acute. The Bangladeshi government has classified three rivers biologically “dead” due to untreated wastewater entering them in the capital, Dhaka. Other rivers are categorized as polluted and devoid of dissolved oxygen (IamRenew News 2020). Garment industries are the second-largest source of pollution in the Dhaka watershed, accounting for over 60% of pollutants (NRDC 2012).
Bangladesh established EIA guidelines in 1992 and passed EIA legislation in 1995 and 1997. The Environmental Conservation Act of 1995 and the Environmental Conservation Rules provide the legal framework for EIA in Bangladesh (1997). EIA assumes that businesses will build waste/pollution treatment plants, follow environmental regulations, report occurrences, and have plans in place for corrective action if necessary. However, a critical weakness in environmental management is the lack of monitoring methods and procedures for their implementation, which is linked to the country’s severe environmental degradation (Bahauddin 2013).
The efficiency of Bangladesh’s EIA system has been examined through an independent study and the results reflected that although the bulk of the statements were determined to be satisfactory (65%), most were rated as “just satisfactory,” and 35% were rated as low to extremely poor, according to the independent evaluation of the quality of 40 EISs. Other investigations of the quality and effectiveness of EIA processes in Asia and Africa have shown similar outcomes (Kabir and Momtaz 2013). Quality, on the other hand, varied greatly depending on the industry. Infrastructure (roads, bridges, and urban projects); energy (electricity, gas, and mineral resources); water resource management; and industrial (cement factory, textile, and leather industries) were all included in the study.
The overall lower level of Environmental Impact Statements (EIS) quality in the industrial sector was attributed to three factors:
EIA of Textile Sector in Pakistan at a Glance:
Since Pakistan has significant, vertically integrated garment industry, the full textile and garment manufacturing process can be sourced internally (Angeulov, 2016). Table 2 depicts Pakistan’s rankings in the global Environmental Performance Index (EPI) in 2016 by the Yale Centre for Environmental Law and Policy. The EPI grades countries based on how well they perform on two high-priority environmental issues: protecting human health from environmental harm and protecting ecosystems. EPI scores for waste water treatment are also reported in Table 2. The indicator weights the proportion of treated wastewater from households, municipalities, and industry by the population served by the sewage system.
Table 2: EPI Scores of Different Countries
Source: Hsu et al (2016) Environmental Performance Index
When it comes to regulating water use and wastewater treatment in Pakistan, the textile industry is frequently overlooked. However, in light of an acute water crisis for sectors and mounting pressure from regulatory authorities and worldwide clients, large textile players have begun to focus on increasing water efficiency and developing wastewater treatment and reuse technologies. However, this is not the case for the Small and Medium-Sized Enterprises (SMEs). These SME’s have been confronting various issues that are causing them to only partially adhere to the local environmental laws and regulations. Lack of management engagement, financial resources, technology constraints, lack of employee involvement, lack of government incentives, uncertainty about environmental regulation changes, and lack of capacity of industry owners and staff are only a few of the significant problems. Furthermore, the current scarcity demands for water conservation at each step of textile manufacturing such as reusing wash water, opting for concurrent washing methods and many more. However, the SME’s in the sector are unable to afford such techniques thereby increasing the environmental impacts in negative connotations.
Table 3: Status of Environmental Compliance in Textile Industries of Pakistan
Source: World Wide Fund (WWF) Asia
Only 15% of Pakistan’s municipal and industrial wastewater is treated before being disposed away (Murtaza et al., 2012). The majority of wet textile manufacturers do not treat or only treat a small portion of their effluent before dumping it into the Arabian Sea.
The effluent treatment plant installation problems are generally connected to building costs and space requirements. Because they require expensive capital, complicated technology, specialized people for operation and maintenance, mechanical replacement parts, high energy, and a sludge disposal location, Effluent Treatment Plants (ETPs) can be costly to develop and maintain. However, as the quantity/quality of waste produced increases, so does the capital cost, operational cost, land area, and complexity of effluent treatment technology. The other major factor is that both the public and commercial sectors have failed to realize the necessity of wastewater treatment and the availability of safe drinking water.
Moreover, one of the key causes for the inadequate implementation of current environmental legislation is that Pakistan did not spend adequately in strengthening the ability of environmental managers, lawyers, specialists, and experts to administer and implement these laws and regulations. Budgetary allocations for trainings were ignored, and no Environmental Laboratories with advanced technology to monitor and analyze data were established.
Figure 1: Comparison of the Number of Conviction Cases in Environmental Tribunals in Textile with Other Industries
Source: Punjab Environmental Tribunal, Lahore
Another important point is that environmental restrictions are not the driving force behind industrial wastewater treatment programmes in Pakistan; rather, foreign clients such as IKEA, Walmart, H&M, Levis, and others are pressuring companies to invest in cleaner manufacturing processes and wastewater treatment. International consumers have imposed stringent requirements on textile exporters in Pakistan and around the world, including zero discharge of hazardous chemicals (ZDHC) in discharged effluent and a focus on water conservation and reuse following thorough treatment. Furthermore, considering the impending acute water shortage and high water costs are additional driving factors to emphasise the necessity of industrial wastewater recovery and reuse, especially textile (UNEP, 2013; Yukseler et al., 2017).
To improve the effectiveness of the legal and institutional arrangements, a credible monitoring and enforcement system should be put in place, as well as state-of-the-art technologies and modern approaches. It is estimated that around 80% of industrial units are medium and small-sized businesses with limited understanding of environmental difficulties and other factors, as well as technical ability and financial means to address these challenges. To address these concerns, it is necessary to offer textile industries with ongoing technical assistance for self-monitoring of pollution levels, which they can then report to regulatory agencies such as EPAs for a climate resilient, sustainable Pakistan.
Recommendations for the Industrialists:
Recommendations for the Government:
The continuity of the textile export to the West in the future is subject to Pakistan meeting all environmental protection criteria otherwise it will steadily lose market share as more and more sourcing companies insist on compliances and import regulations are tightened with regard to environment and social compliance.
To wrap up, environmental compliance has to be ensured through an amalgam of cooperation of both the industrialists and the government. The cooperation is just not something that needs to be done for the sake of it but rather something that ‘has’ to be done in true letter and spirit since contemporary trade scenarios and business culture for the lower-middle income countries like Pakistan revolves around incentive structures for sustainable development through duty free access such as those covered under Pakistan’s Generalized Scheme of Preferences (GSP+). Compliance of environmental rules and regulations is quite esoteric in nature and hence curated policy measures need to be taken by both the textile industrialists and the government to ensure a forward progression of the country’s economy and environmental protection for the greater good.
Abbas, S., & Halog, A. (2022). Analysis of Pakistani Textile Industry: Recommendations Towards Circular and Sustainable Production. Retrieved 28 May 2022
Gadhi, T.A., Mahar, R.B., and Bukhari, S.A. (2019). Wastewater treatment and reuse to approach zero water discharge in Al-Rahim textile industries: Substantial increase in water use efficiency in textile processing. U.S.-Pakistan Center for Advanced Studies in Water (USPCAS-W), MUET, Jamshoro, Pakistan
International Labour Organisation (ILO). (2017). Environmental Scoping Study: Decent Work in the Garment Sector Supply Chains in Asia. Retrieved from
International Labour Organization (ILO). (2021). Effective regulations? Environmental impact assessment in the textile and garment sector in Bangladesh, Cambodia, Indonesia and Viet Nam. Retrieved from
Naqvi, S., Arshad, D., & Nadeem, F. (2018). Water Footprint of Cotton Textile Processing Industries; a Case Study of Punjab, Pakistan. Retrieved 30 May 2022, from https://wwfint.awsassets.panda.org/downloads/wf_textile_in_pakistan_2018.pdf
Toprak, T., & Anis, P. (2017). Textile Industry’s Environmental Effects and Approaching Cleaner Production and Sustainability: an Overview. Journal Of Textile Engineering &Amp; Fashion Technology, 2(4). doi: 10.15406/jteft.2017.02.00066
Water efficiency in textile processes. (2022). Retrieved 30 May 2022, from
World Wide Fund for Nature (WWF). (2018). Review of Existing Environmental Laws and Regulations in Pakistan. Retrieved from https://wwfasia.awsassets.panda.org/downloads/review_of_existing_environmental_laws.pdf
Political instability is a serious impediment to economic progress. Not only does it shorten policymakers’ horizons leading to suboptimal short term macroeconomic policies, but it is also the cause of frequent policy U-turns and leads to non-completion of ongoing projects. This scenario paired with mounting debt and a continued reliance on foreign loans leaves Pakistan with a weak economy and a lack of direction.
Socio-political instability results in a high-risk, low-investment environment. Vietnam provides us with an example eerily similar to Pakistan’s case, as during the early 1980s, the country was heavily reliant on foreign and domestic loans due to a lack of foreign direct investment and inefficient state-owned enterprises, paired with high debt accumulation, poor international relations and balance of payment deficit. Much like the state of affairs in Pakistan, which has escalated recently, Vietnam suffered from an unstable political environment. Countless reforms were attempted but Vietnamese insist that these were unsuccessful until existing political dynamics and elite capture within the country were effectively addressed, after which the country made an impressive economic recovery with a particular focus on investing in human and social capital.
The political environment in Pakistan has been unstable over the long-term, leading to an uncertain business environment, reduced investments and slow pace of economic development. However, the effects of escalating instability over the past few weeks have been immediately evident. Exporters have started facing losses as a result of the government’s move of impounding containers to counter protests.
In an effort to offset the balance of payments deficit, the government instituted a ban on intermediate inputs and textile imports but unintentionally endangered the livelihoods of millions of people. Traders have emphasized that foreign cloth caters to most of the local requirements as it is cheaper than locally made cloth. “A good quality foreign cloth was available at Rs300 per yard while Pakistani cloth was Rs800 per yard.” (Press Reader) The people will be forced to use expensive locally made cloth which will increase their budget, while the price of school uniforms will also increase.
The country is struggling to find its footing amidst mounting foreign debt and policy inconsistency born out of frequent changes, emphasized by the IMF as “the number of times in a year in which a new premier is named and/or 50 percent of the cabinet posts are occupied by new ministers” in the paper How Does Political Instability Affect Economic Growth?
With its high income disparity and limited resources, Pakistan relies largely on foreign debt for its functioning and development, and while also suffering a major trade deficit. This, along with recurrent rupee devaluation and increased consumer price inflation, has further deteriorated the economic outlook.
Pakistan’s largest industry share continues to be occupied by textiles, and the sector provides an opportunity for unprecedented GDP growth. With consistent policy and appropriate measures to give Pakistan’s export sectors the necessary facilitation they require, it is possible to change the negative projections into positives. This is an opportunity to set a precedent for the coming years, and to streamline the way trade is managed in the country.
Modern Monetary Theory (MMT) research shows that a high government deficit, a trade surplus via imports and/or exports, and to some extent, foreign remittances, have been the most pertinent factors in boosting a country’s growth rate and GDP. Pakistan has a high fiscal multiplier, so even nominal investment in the country provides substantial returns in the form of employment and exports etc. The fiscal multiplier explains the expected total increase in GDP resulting from additional spending or a reduction in tax. Thus, a higher fiscal multiplier exponentially impacts the overall domestic output (GDP). Slight increases in government deficit are major drivers of growth.
According to the World Bank, 1% growth in garment production is associated with 0.3% to 0.4% increase in employment for both men and women. Investment in human capital is the most essential component of the revised policies and programs to facilitate Pakistan’s economic growth in the coming years.
Foreign remittances boost short-term growth but carry the underlying implication of brain drain and loss of high-skilled labor to other countries. The returns for Pakistan that would have been realized by retaining this skilled labor go untapped, although cash inflows from their foreign jobs do provide a certain degree of support locally. Thus the MMT strategy provides useful indicators for where the focus must lie in moving forward with Pakistan’s export-led sectors, but a narrowed down approach with identification of individual areas for development is necessary.
This brings us to the textile policy, set for implementation in 2022 with a view towards realizing the potential of value addition in each segment of the textile value chain, utilizing the potential of home-grown cotton augmented by Manmade Fibre/Filament to boost value added exports, and the efforts required to become a major player in global textiles. Great emphasis has been placed upon investment in human capital, as if history and competition are to be good indicators, there is a need to build a strong and motivated workforce before other goals can be actualized.
The policy posits that improving worker skills and literacy will allow for increased productivity of workers, wage increases, and a reduced level of waste. This will enable, among other things, the production of higher-quality products, garments and non-garments. It will require a comprehensive vision for skill development, reskilling the current labor force through greater access to informal training and skill-building, and improving the quality of foundational education.
With a holistic approach to spearheading economic growth and institutionalizing certain international standards, Pakistan can achieve sustained long-term economic growth that makes use of opportunities that were previously neglected. The realization that increased trade and government deficits have played a key role in economic growth all along has broader implications for the way in which future policies ought to be formulated. Furthermore, acknowledging the human factor at every stage of the process, in terms of worker welfare, skill development, investment in youth and retention of top graduates is bound to ensure great returns and an improved standard of living in Pakistan. Lastly and most importantly, stability and consistent policy implementation are crucial for economic growth and for the export sector to thrive and contribute dollar earnings to stabilize the Balance of Payments for a sustainable economic outlook.