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July 10, 2024

By Shahid Sattar and Absar Ali

Ten days into the new fiscal year, the FY25 budget is already in disarray.

Amid calls for a nationwide strike, the turnover tax on petroleum dealers was reversed. This was followed by a strike from the All Pakistan Flour Mills Association against newly imposed taxes, while the newly formed Salaried Class Alliance is on the streets Monday through Friday.

After two years of severe economic hardship, the public expected relief and a fairer redistribution of the tax burden. What it received is the exact opposite.

The “tax to GDP ratio” has become a strange obsession, demonstrating a lack of direction, and the government’s unwillingness to reduce its own wasteful expenditures and address structural flaws that have plagued the economy for decades. This is reinforced by the fact that while the tax to GDP ratio is frequently referred to, we never hear about the government expenditure to GDP ratio.

It needs reminding that the tax to GDP ratio is little more than a symptom, not a cause, of deep underlying problems that remain unaddressed to safeguard the ruling elite’s interests. In the same breath where a crushing burden of taxes was announced for the public, and private sector enterprises, there was no reduction in government expenses. Instead, only an increase in allowances and exemptions for the state’s own employees.

Perhaps the state of the country is best explained by the fact that a 30-year-old Assistant Commissioner must use a Rs. 20 million vehicle, accompanied by three guards and two clerks—one to carry his water bottle, another to hold an umbrella over his head—to investigate whether vegetable vendors on the poverty line are overcharging Rs. 20 on a kilo of tomatoes.

Economic growth and public trust are crucial for improving the tax to GDP ratio, and the FY25 Budget misses the mark on both. The World Bank estimates that around 40% of Pakistan’s population lives below the poverty line, with 96% at subsistence level. This indicates a limited capacity for the majority to contribute to the government’s wasteful expenditures and need for boosting incomes to increase revenue collection.

Around 20% of Pakistan’s GDP comes from agriculture, 20% from industry, and 60% from services, of which 20% is wholesale and retail trade. Yet, agricultural income and retailers remain excused from contributing their fair share. This means the government wants to extract taxes worth 15% of GDP from only 60% of GDP, effectively subjecting 40% of GDP to no taxes while the remaining 60% are subject to 25%. While reality is more complex, this simple illustration demonstrates the incentives created for capital and human resources to exit more productive tax-ridden sectors for less productive under-taxed sectors. The result is that the share of GDP that is relatively tax-free will increase, while that being taxed will decrease, leading to an overall reduction in the tax to GDP ratio.

Effective tax policy must be guided by long-term development priorities and a vision for growth. It has been repeatedly emphasized that the lack of productive capacity is the country’s most pressing issue. Because domestic production is neither sufficient to meet domestic demand nor enough to generate exportable surpluses to meet import requirements, there is a persistent shortage of foreign exchange and surplus demand that leads to repeated episodes of devaluation and inflation.

     

Of the $30.65 billion exported in FY24, about one-third is by only 100 top firms, most of which are in the textile and apparel sector. Moreover, the 10.5% increase in exports compared to the abysmal performance last year is largely due to an increase in exports of unprocessed foods driven by external circumstances. Compared with FY22 exports declined by 6%, with textile exports down 15% from $19.3 billion in FY22 to $16.7 billion in FY24. There is also a reduction in the share of domestic value added as basic industry producing yarn, cloth and other inputs has been wiped out due to prohibitive energy, borrowing and other operational costs, with yarn imports having surged seven times from 2 million KG in July 2023 to 14 million KG in May 2024.

             

Given these realities and that the country’s gross external financing requirements stand at over $25 billion annually for the next five years, the ratio we should worry about is the export to GDP ratio.

At around 10%, Pakistan has the lowest exports-to-GDP in the region, with Bangladesh at 13%, Sri Lanka at 20%, India at 22%, and Viet Nam at a whopping 94%. In view of these horrid numbers, the government should have prioritized and incentivized productive export-oriented activities with a focus on increasing domestic value addition in exports. Instead, the 1% fixed tax on export proceeds has been changed to a 2% advance tax on turnover adjustable against a 29% tax on profits, not only raising the rate but also adding to the cost of compliance.

To make matters worse, the sales tax exemption on local supplies for export manufacturing has been withdrawn because—according to the Chairman FBR—audits revealed that five companies, out of around 1800 beneficiaries, had misused it. Because the FBR’s incompetence does not permit increased checks and balances, it decided to resort to collective punishment and do away with the entire program instead.

The sales tax exemption on local supplies for export manufacturing was valuable trade facilitation that ensured a level playing field for domestic manufacturers of raw material and intermediate inputs, primarily benefiting SMEs. Its withdrawal removes all incentives for exporters to use domestically manufactured inputs and will cause a further reduction in domestic value addition in exports. These policies are akin to providing protection to imported inputs by making domestically manufactured inputs significantly more expensive.

And it doesn’t stop there; 0% base tariff goods, including critical inputs for textile and apparel manufacturing that are either not produced domestically or in insufficient quantities to meet industry demand, have been slapped with an additional customs duty of 2%. Like the withdrawal of the sales tax exemption, this too will have a disproportionate impact on basic industries, especially SMEs.

Very few firms possess full vertical integration, and the benefits of duty-free import for export EFS do not extend across the entire value chain. For instance, a spinner cannot import under EFS because the yarn they manufacture goes through several stages of value addition—such as weaving, processing, and dyeing—before reaching the final exporter. Despite persistent efforts for a multi-stage EFS with a robust traceability system, it has been actively sabotaged by the FBR.

One of the textile and apparel sector’s main challenges is that around two-thirds of its exports are cotton-based compared to only one-third of international textile and apparel trade. Diversification of exports towards man-made fibre-based products is essential for the industry’s growth and the imposition of the ACD on synthetic/artificial fibres not produced domestically, and the failure to rationalize duties on purified terephthalic acid and polyester staple fibre will prove severely detrimental towards this goal.

When, consequently, investment is diverted from productive export-oriented activities towards less productive and less taxed agriculture and real estate, the same voices will complain that savings aren’t being utilized towards productive activities and that tax collection is not increasing, while conveniently ignoring the fact that it is their tax policies that incentivized such behaviour in the first place.

There is an endless list of regressive measures that the Finance Act 2024 has imposed in hopes of increasing the tax to GDP ratio. However, the two most essential ingredients for this recipe are fostering economic growth and building public trust; the budget fails to achieve either. Instead, it only perpetuates a cycle of fiscal mismanagement and public disillusionment.

Without addressing the underlying structural issues, incentivizing productive activities, and ensuring equitable tax policies, the government is merely setting the stage for further economic decline. The current budget is not a roadmap to recovery but a prescription for continued doom and gloom.

 

 


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June 7, 2024

By Shahid Sattar | Absar Ali

The turnover tax regime in Pakistan poses significant challenges for small and medium enterprises (SMEs), placing them at a disadvantage compared to vertically integrated firms.

Despite contributing around 40% of GDP, 25% of export earnings, and employing 78% of the non-agriculture labour force, according to the SBP, small and medium enterprises (SMEs) face numerous challenges that hinder their growth and development.

These include limited access to finance, as SMEs often struggle to secure financing due to stringent collateral requirements and high interest rates which limit their ability to invest in growth and innovation. Poor infrastructure, such as unreliable electricity supply and poor transportation networks, increase operational costs and reduce efficiency, especially in rural areas.

Many SMEs also suffer from inadequate management skills, leading to poor decision-making and inefficient operations. Complex and cumbersome regulatory requirements, often difficult to navigate for SMEs, further inhibit their growth. (Khan, Hussain & Afraz, 2013; Khan, 2022; Zeshan, 2023)

SMEs being large firms of the future, this is also one of the reasons Pakistan has very few large firms, and even these are relatively small by global standards. For instance, according to the Pakistan Export Directory, the largest exporter in 2021 exported goods worth Rs. 52 billion, the 10th largest Rs. 29 billion, and the 100th largest only Rs. 5 billion.

“Among these barriers, the turnover tax stands out as a significant impediment that disadvantages SMEs as compared to vertically integrated firms. The turnover tax in Pakistan mandates that all businesses, regardless of profitability, pay a minimum tax of 1.25% on their turnover.”

While this policy aims to create a uniform tax environment, it inadvertently imposes a heavier burden on SMEs due to the cumulative nature of the tax across multiple production stages.

When a single, vertically integrated firm manages the entire production process, the turnover tax is applied once on the final product. However, SMEs, which typically rely on multiple independent businesses for various production stages, face a different reality.

Each stage—from raw material processing to manufacturing, distribution, and retail—involves separate entities, each subject to the turnover tax on its revenue. This results in the tax being applied multiple times across the production chain, significantly increasing the overall tax burden on SMEs.

For example, in the textile industry, an SME might source yarn from one company, fabric from another, and finally sell the finished product. Each transaction between these businesses incurs the turnover tax, creating a compounding effect that does not affect a vertically integrated firm in the same way. This cumulative tax burden increases costs for SMEs, making their products more expensive and less competitive compared to those produced by integrated firms.

This compounded tax significantly hampers the competitiveness of SMEs. Vertically integrated firms, by consolidating all production stages, incur the turnover tax only once, resulting in a lower overall tax liability. SMEs, unable to vertically integrate due to financial and operational constraints, end up paying much higher cumulative taxes. This creates a market environment where SMEs struggle to compete on price and profitability, stifling their growth and innovation.

The financial strain imposed by the turnover tax also limits the ability of SMEs to reinvest in their businesses. With higher taxes eating into their margins, SMEs find it challenging to fund expansions, adopt new technologies, or enhance their workforce, further hindering their competitive edge.

To support the growth of SMEs and create a more equitable tax environment, several policy reforms can be considered. Implementing lower turnover tax rates specifically for SMEs can alleviate the compounded tax burden they face, helping them to price their products more competitively. Providing tax rebates or credits for SMEs that engage in multiple stages of production could further offset the cumulative effect of the turnover tax and encourage SMEs to expand their operations without facing prohibitive tax penalties.

Facilitating access to finance and resources for SMEs to achieve greater vertical integration can reduce the number of taxable events in the production process, while also fostering firm growth. Government programmes that support mergers and collaborations among SMEs are essential to achieve this goal. Introducing a graduated tax structure that imposes lower rates on the initial stages of production or for lower turnovers can also help reduce the overall tax burden on SMEs, making the tax system more progressive and fairer.

In conclusion, reforming the turnover tax policy is crucial to ensure that SMEs have a fair chance to compete with vertically integrated firms. Addressing the inherent disadvantages posed by the current tax system will not only support the growth of SMEs but also drive economic diversification, innovation, and employment. By creating a more equitable tax environment, Pakistan can unlock the full potential of its SME sector, fostering a more dynamic and robust economy.


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June 6, 2024

By Kamran Arshad

As Pakistan prepares for a significant increase in electricity prices next year, driven by further rupee devaluation and capacity payments of over Rs 2.1 trillion, addressing these issues that have bogged down the entire economy has become a question of survival. One of the biggest contributors to prohibitive power tariffs is the heavy burden of capacity payments of over Rs 2.1 trillion per annum, which necessitates an urgent action.

Pakistan’s energy sector has long been entangled in flawed contractual arrangements with Independent Power Producers (IPPs). These contracts, dating back to the Power Policy of 1994, were intended to resolve the energy crisis by attracting private investment. However, the terms of these agreements have led to a spiralling circular debt, reaching Rs2.64 trillion as of February 2024.

The incentive structures offered to IPPs, including guarantees indexed to the US dollar, mean any depreciation of the Pakistani rupee increases returns for IPPs and places a heavier financial burden on the government. Initially, the return on equity for IPPs was set at 18%, later reduced to 12% in the Power Policy of 2002, but it remains high compared to global norms.

Additionally, cost comparisons with similar projects in other countries suggest that many IPPs were funded through over-invoicing on capital goods, resulting in no “real” underlying equity. Consequently, Pakistan is burdened with perpetual returns on ghost equity. An analysis of various published accounts and balance sheets further reveals that actual dollar-based returns to many IPPs exceed 70%.

Additionally, the government’s decision to incorporate residual fuel oil (RFO) plants, known as Peaker plants, to boost base capacity has proven problematic. These plants are inefficient, costly to operate, and environmentally unfriendly.

While the inclusion of Peaker plants is not inherently problematic, their disproportionate share in Pakistan’s energy mix, currently at 14%, is concerning. Globally, these plants typically operate during peak demand periods and constitute a maximum of 4-6% of total consumer bills.

Pakistan has an installed capacity of approximately 44,943 MW, with a huge disparity between a base-load of around 12,500 MW and summer peak load of around 30,000 MW due to shifting of winter heating loads to gas.

However, due to contractual obligations, the government must pay for the entire installed capacity year-round, regardless of utilization. In contrast, global grid planners operate some plants solely during peak demand periods, paying only when the capacity is actively utilized, while Pakistan’s generation mix is heavily skewed towards take-or-pay base-load plants.

There are two main types of energy contracts: take-or-pay and take-and-pay. Pakistan operates under a take-or-pay contract system with IPPs, where a fixed percentage of their capacity must be purchased regardless of actual demand.

This setup can be unfavorable for buyers, as they must pay for electricity up to the contracted capacity, leading to increased unit costs. In contrast, take-and-pay contracts involve buyers paying solely for their electricity consumption, though this can lead to higher prices due to negotiation or competitive buying.

The tariff structure in IPP contracts also raises issues. Consumer tariffs include various components like Energy Purchase Price (EPP), Capacity Purchase Price (CPP), T&D losses, Distribution and Supplier Margin, and prior year adjustments.

Besides IPP charges, consumer tariffs also include add-ons from Distribution Companies (Discos), such as technical losses (typically 5-10%) and factors like theft and uncollected receivables, which inflate these add-ons to over 20%.

In FY 2022, EPP comprised roughly 60% of the tariff, with CPP at 40%. By FY23, both EPP and CPP were around 50%, marking a shift from historical trends. Projections for FY24 suggest a further deviation, with CPP expected to rise to 67% and EPP decreasing to 33%. This increasing emphasis on fixed charges significantly inflates tariffs, posing challenges for consumers.

Moreover, there is significant alleged misreporting and overbilling done by IPPs as the tariffs enshrined under the take-or-pay contracts are guaranteed under international law. For instance, the actual oil consumption of several oil-based plants is allegedly less than what is billed by the IPPs; there have been alleged attempts to audit these occurrences, but any such efforts are thwarted by IPPs through, among other means, stay orders, etc.

Similarly, the O&M margins are also overstated, where the expense is Rs 500 million it is being billed at Rs 1.5 billion per annum. All other heads are similarly overstated but because the sanctity of these contracts is protected under international law and the government of Pakistan has surrendered its sovereign rights there is little that can be done to reevaluate these contracts.

Currently, electricity tariffs in Pakistan are prohibitively high. Over the past 24 years, tariffs have surged from Rs 1.37/unit in 1990 to Rs 34.31/unit in 2024, a 25-fold increase. This rise is not solely due to variables like PKR-USD parity but also due to factors like the introduction of private generation and the government’s tendency to pass on its own socio-economic obligations to certain power consumers like industrial and high-end domestic through cross-subsidies.

This scenario has contributed to premature deindustrialization, causing a decline in electricity consumption and elevated electricity costs. Immediate action is required to lower power tariffs for industries to 9 cents/kWh, stimulating demand for electricity and effectively utilizing idle capacity. Furthermore, the addition of new capacity to the system should be halted for the next 3-4 years.

Removing cross-subsidies, which act as indirect taxation on exports, is essential. Increasing tax collection to directly subsidize energy for economically disadvantaged segments and transitioning to other direct support mechanisms like unconditional cash transfers, as advised by IMF and World Bank consultants, is more economically efficient compared to cross subsidies in power tariffs.

Moreover, to reduce the undue burden of capacity payments within current contractual agreements across all consumers, there must be a significant increase in power consumption. Typically, industries drive electricity demand globally.

However, in Pakistan, inefficient allocation leads to unproductive sectors consuming a significant portion of electricity (around 47%) while industries consume only 28%. This results in industries bearing the burden of inefficiencies through cross-subsidies and additional transaction costs.

Competition plays a pivotal role in the effectiveness of take-or-pay contracts. Competitive bidding often results in favourable arrangements, especially in cases involving multiple investors and suppliers in large countries. However, problems may arise in government-to-government contracts without competitive bids, highlighting the importance of clear contract pricing through market mechanisms.

“In advanced countries with competitive electricity markets, take-or-pay contracts are prevalent. Here, electricity prices are influenced by supply and demand in spot markets, offering a mix of options for both buyers and sellers to mitigate risks effectively. Even in Pakistan, the ADB-funded Jamshoro coal power plant has demonstrated cost-effectiveness through competitive bidding.”

 

 

However, while these points must be kept in mind while negotiating future contracts, ultimately, the resolution to Pakistan’s existing capacity payment woes lies in stimulating industrial growth, which will significantly increase power consumption and reduce the per-unit burden across consumers.


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June 3, 2024

By Shahid Sattar | Amna Urooj

The recent upsurge in circular debt (CD) accumulation coincided with the signing of “take-or-pay” contracts for imported coal and RLNG-based plants. These contracts, intended to address energy shortages, came with volatility and a hefty price tag.

This escalation in electricity generation costs has severely impacted Pakistan’s transition to renewable energy by diverting financial resources away from potential investments in renewables and locking the country into long-term dependencies on fossil fuels.

The persistent rise in circular debt (CD) within the power sector, currently amounting to PKR 2.6 trillion, is fueled by a multitude of factors, including high transmission and distribution (T&D) losses, inefficiencies within power distribution companies (Discos), and unbudgeted energy subsidies.

Frequent hikes in electricity tariffs aggravate Pakistan’s CD by increasing non-payment rates and T&D losses, as these losses are calculated as a percentage of the tariff. Instead of temporary fixes, policies must address the root causes of this debt.

For instance, transmission and distribution losses stood at 16.45% in FY 2022-23, while the inefficiencies and low collection rates of DISCOs have led to significant commercial losses, with outstanding debt from defaulters exceeding PKR 900 billion.

According to World Bank, Pakistan’s high energy subsidies to the domestic sector, currently estimated at PKR 976 billion (0.9 percent of GDP) for FY 2024, further strain the financial system. This explains the increasing financial burden on the power sector, highlighting the urgent need for a shift towards lower cost energy sources.

By reducing dependence on imported fossil fuels, where long-term forex-based prices are currently rising and unpredictable, Pakistan can alleviate some of these financial pressures, stabilize power prices, and pave the way for a more sustainable and economically viable energy future through indigenization and the induction of a local supply chain and renewables.

However, the current fossil fuel-based power plants should be retired, potentially through public debt financing, to address overcapacity issues and reduce the CD crisis. Advancing the planned retirement of outdated and inefficient power plants while ensuring that new additions focus exclusively on renewable energy is need of the hour.

Investing in renewable energy not only offers a sustainable solution to the circular debt crisis but also brings numerous economic and environmental benefits. Renewable technologies, such as solar and wind, have near-zero marginal costs of production, which can significantly lower overall electricity generation costs. This makes renewables highly competitive in the long term.

For example, the International Energy Agency (IEA) reports that new solar projects are now the cheapest source of power on a levelized cost of energy (LCOE) basis, with solar energy costing around $60 per MWh, while gas is $20 more expensive at $80 per MWh. Redirecting funds from LNG and coal infrastructure to renewable energy projects aligns with global trends favoring climate-friendly investments and will ensure a resilient energy future for Pakistan.

But where do we stand in terms of renewable energy in the country? Pakistan’s energy production and consumption landscape is predominantly fueled by fossil fuels. As of recent data, thermal sources—comprising natural gas, oil, and coal—contribute to nearly 60% of the country’s total installed capacity. Specifically, natural gas accounts for approximately 33%, oil for 15%, and coal for about 12% of the energy mix.

In contrast, renewable energy sources such as hydropower, wind, solar, and biomass make up a smaller fraction of Pakistan’s energy portfolio. Hydropower constitutes around 30% of the installed capacity, while wind and solar energy contribute approximately 4% and 2%, respectively.

Despite the declining costs of renewable technologies and the substantial potential for clean energy, the pace of renewable energy development has been insufficient to offset the use of fossil fuels to any significant extent. As of 2023, the total installed capacity of renewable energy sources, including hydropower, wind, solar, and bagasse/biomass, exceeds 13,000 MW out of 45,885 MW.

The truth is Pakistan’s current energy mix has significant environmental impacts. The extensive use of natural gas, oil, and coal contributes to high levels of carbon emissions and air pollution has adverse effects on public health and the environment.

While Pakistan emits less than 1% of the world’s planet-warming gases, its emissions are insignificant on a global scale, yet Pakistan suffers disproportionately from the outcomes. For instance, power plants burning fossil fuels are major sources of sulfur dioxide (SO?), nitrogen oxides (NO?), and particulate matter, leading to respiratory illnesses and other health problems among the population.

Lahore is already bearing the brunt of it, ranked 5th in the 2023 IQAir World Air Quality Report. The city frequently experiences severe air pollution, directly linked to emissions from these power plants, resulting in increased cases of asthma, bronchitis, and other respiratory conditions. Fossil fuel extraction and combustion contribute to soil and water pollution, further degrading the country’s natural resources.

Economically, the high costs associated with fossil fuel imports place a substantial burden on Pakistan’s financial resources. The country spends a significant portion of its foreign exchange reserves on importing oil and gas (roughly one-quarter of Pakistan’s imports are oil and gas), which makes its economy vulnerable to global price fluctuations.

In fiscal year 2022-23, energy imports accounted for a large share of the total import bill, intensifying the country’s trade deficit. Socially, the energy crisis in Pakistan leads to widespread energy access issues, with many rural and remote areas lacking reliable electricity supply. This energy insecurity affects education, healthcare, and overall quality of life, hindering social and economic development.

Switching to renewable energy in Pakistan offers numerous benefits across environmental, economic, and social dimensions. Environmentally, renewable energy significantly reduces greenhouse gas emissions and mitigates climate change impacts. For instance, projections indicate a potential 50% reduction in projected emissions by 2030, with a 35% reduction contingent on international grant finance and a 15% reduction from the country’s own resources.

Economically, the transition creates jobs within the renewable energy sector and provides long-term cost savings compared to fossil fuels, enhancing energy independence and security. Socially, renewable energy improves public health by reducing pollution, enhances energy access in remote areas, and empowers local communities through decentralized energy systems. These combined benefits underscore the urgent need for Pakistan to accelerate its shift towards sustainable energy solutions.

Moreover, the implementation of distributed energy solutions and localized energy grids with renewables can further strengthen these benefits. By enabling DISCOs to purchase power from the grid while supplementing it through solar rooftops, particularly in areas with limited energy access, and allowing direct purchases from dedicated plants, Pakistan can ensure a more sustainable and resilient energy use that rooftop solutions alone cannot achieve.

Wind energy also presents substantial opportunities, especially in the wind corridors of Sindh and Balochistan. The Gharo-Jhimpir wind corridor alone has an estimated potential of 50,000 MW, with several successful projects already operational.

For instance, the Jhimpir Wind Power Plant, with an installed capacity of 50 MW, has been effectively harnessing wind energy and contributing to the national grid. These projects not only support energy diversification but also promote energy security and reduce carbon emissions. To further enhance resource utilisation and cost efficiency, the government should mandate that wind installations also incorporate solar power. This hybrid approach would ensure optimal use of available land and infrastructure, resulting in greater energy output and more sustainable energy solutions.

A key development in Pakistan’s renewable energy sector is the expansion of net metering. As of June 30, 2023, net metering consumers reached approximately 56,000, a nearly 50% increase from the previous year. In FY22-23, net metering generated 482 gigawatt-hours, a remarkable 220% year-on-year growth.

Despite this impressive growth, 482 gigawatt-hours represent less than 0.4% of the total energy sold/generated, highlighting its relatively small impact on the overall energy market. Rather than penalizing net metering through gross metering, which would discourage consumer participation, it is crucial to continue and support net metering policies.

The proposal for gross metering raises serious concerns. Gross metering, which requires consumers to sell all the electricity generated by their solar panels to the grid at a fixed Feed-in-Tariff (FiT) and then buy back the electricity they consume at retail rates, is a travesty of justice.

The significant rate disparity—selling electricity at 11 rupees per unit while buying it back at up to 62 rupees per unit—makes solar investments financially unsustainable. This policy shift would compel consumers to seek mechanisms to go completely off-grid, undermining the growth of renewable energy. Instead, the government should focus on revising unsound tariff structures to support renewable energy growth, consumer benefits, and grid stability.

In addition to net metering, hydropower remains a critical component of Pakistan’s renewable energy strategy, leveraging the country’s abundant water resources. The total hydropower capacity, including WAPDA and IPPs, stands at 10,635 MW as of June 30, 2023. Major projects like the Tarbela and Mangla dams continue to play pivotal roles.

Wapda plans to add up to 10 GW of hydropower capacity by 2030 through the phased completion of its under-construction projects. Future projects, including the Diamer-Bhasha Dam, are expected to add significant capacity. However, managing seasonal variability is crucial for optimizing hydropower generation. Effective water management and storage solutions are essential to balance supply during dry periods and maximize generation during peak flow seasons.

Technological innovations play a pivotal role in overcoming challenges and advancing the renewable energy sector in Pakistan. Recent advancements in solar and wind technology have significantly lowered costs, making renewable energy more competitive with traditional fossil fuels.

The average cost of solar power generation has dropped to PKR 3.67 per kWh, making it cheaper than many conventional energy sources. In addition, the development of battery storage systems and smart grid technologies is crucial for stabilizing the power supply and managing the intermittency of renewable energy sources.

Supporting the integration of renewable energy and enhancing grid flexibility is essential. The National Transmission and Dispatch Company (NTDC) is modernizing the grid infrastructure to better accommodate the distributed and variable nature of renewable energy. This includes implementing advanced forecasting tools, real-time monitoring systems, and automated control mechanisms to quickly respond to changes in power generation and demand.

Strategies such as demand response programmes, which adjust consumer power usage during peak times, and the development of microgrids, capable of operating independently or alongside the main grid, are also being adopted. These measures not only improve the resilience and reliability of the power system but also facilitate the seamless integration of renewable energy, supporting Pakistan’s ambitious goal of achieving 30% renewable energy by 2030.

Building on Denmark’s remarkable achievements in renewable energy, Pakistan can draw valuable lessons. In 2022, Denmark announced an ambitious target to achieve net-zero emissions by 2045, aiming for 110% emissions reductions by 2050.

The Danish government has strategically focused on offshore wind, biomethane, district heating, carbon capture and storage (CCUS), and hydrogen. This comprehensive approach is guided by robust energy and climate governance under the Danish Ministry of Climate, Energy and Utilities, ensuring annual policy actions and funding through the ‘year wheel’ of the Climate Act of 2020.

This strategic focus on renewable energy sources, coupled with Denmark’s technology leadership, showcases how a well-coordinated policy framework and technological innovation can drive a successful energy transition. By adopting similar best practices, Pakistan can enhance its renewable energy adoption, ensuring a sustainable and economically viable energy future.

“The future of Pakistan lies in harnessing the power of the sun, wind, and water to create a sustainable and prosperous nation. By embracing renewable energy, Pakistan can address its energy challenges, improve public health, and build a resilient economy. As the famous quote goes, “The best time to plant a tree was 20 years ago. The second-best time is now.” It is time for Pakistan to plant the seeds of a renewable energy revolution.”


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May 27, 2024

By Shahid Sattar

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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May 21, 2024

By Shahid Sattar | Amna Urooj

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

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

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

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

 

 

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

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

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

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

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

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

 

 

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

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

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

 

 

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

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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May 15, 2024

By Shahid Sattar | Absar Ali

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

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

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

 

 

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

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

The economy is deindustrialising at an unprecedented pace.

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

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

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

 

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

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

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

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

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

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

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

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

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


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May 3, 2024

By Shahid Sattar | Muhammad Mubasal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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April 26, 2024

By Shahid Sattar | Noreen Akhtar

In recent years, sustainable development has garnered significant attention across various industries. Among these sectors, the textile industry has notably advanced in adopting eco-friendly practices predominantly guided by large companies promoting their persona of eco-friendly business models. One of the key focus areas includes the use of recycled or alternative man-made fibers (MMFs) such as the recycled polyester staple fiber (rPSF) to reduce the heavy reliance on virgin materials and associated environmental pollution. Currently, man-made fibers make up 72% of global textile fiber consumption, and the demand for polyester in the global market is expected to grow at Compound Annual Growth Rate of 4.95% (USD 29 billion) by end of CY27.

Polyester staple fiber (PSF), also produced as recycled PSF (rPSF), is one of the most used fibers in the used clothing textile industry and has emerged as a champion of eco-friendly fashion due to its natural characteristics and environmental advantages. PSF is a synthetic fiber manufactured directly from Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG) or Polyethylene Terephthalate (PET Chips). In contrast, rPSF is produced from recycled PET chips, polyester waste, or post-consumer PET bottle flakes. The recyclability that associates rPSF with resource and energy efficiency, circular economy and waste reduction makes it a more environmentally friendly option for textile manufacturing compared to virgin PSF.

Characteristics and Opportunities of rPSF

The distinctive natural properties and environmental benefits of rPSF have proven to be game-changers, attracting more environmentally mindful consumers and supporting textile businesses that aim for a greener future. In addition to its lower economic costs, rPSF closely resembles cotton yarn in properties and appearance. Its longer durability and key properties such as flexibility, high toughness, heat resistance, stain resistance, wrinkle resistance, and versatility are driving factors behind the growth of rPSF in the global market.

rPSF provides numerous environmental benefits and environmental compliance opportunities to manufacturers, aligning their supply chains with globally emerging sustainability and environmental regulations.

Circular Economy: The textile industry has traditionally followed linear business models, characterized by the unsustainable extraction of virgin raw materials and excessive land-filling of post-consumer textile waste. However, the use of rPSF in textiles can change the paradigm, promoting a circular economy. rPSF is produced by upcycling and reusing post-consumer plastic waste materials, offering a sustainable alternative to traditional production methods. Incorporating recycled materials into production processes through diverting plastic waste such as PET bottles from the ecosystem not only extends the use of thrown plastics but also enhances responsible and sustainable production practices.

Energy and Resource Efficiency: rPSF reduces the overall environmental footprint of textile products as the manufacturing includes recycling of post-consumer plastic waste and other recycled polyester products, thereby requiring less use of energy and virgin raw materials in the supply chain.

Water Stewardship: Water inefficiency is a major environmental concern in the textile industry, with the production of water-intensive fibers being a key contributing factor. rPSF, on the other hand, requires less water for its production processes compared to production of virgin raw materials.

Climate Change Mitigation: The production of rPSF typically requires less energy compared to virgin polyester production, which helps reduce greenhouse gas emissions associated with energy consumption. By upcycling post-consumer plastic waste into rPSF, the need for new petroleum-based raw materials is reduced, further decreasing carbon emissions from extraction and refining processes.

Meeting Consumer Demand: Consumers are becoming more aware of the environmental impacts of the products they buy, including textiles, and are increasingly seeking out sustainable and eco-friendly options. This has led the initiation of transformative strategies, such as the EU Green Deal, to promote sustainable growth and climate resilience.

The EU Strategy for Sustainable and Circular Textiles in the EU Green Deal mandates measures to improve the durability, reusability, and recyclability of textiles, as well as to enhance consumer awareness and promote sustainable consumption patterns. The strategy aims to make textiles more sustainable throughout their lifecycle through promoting circularity, reducing their environmental and climate impacts, and improving the industry’s competitiveness and innovation. Thus, rPSF holds a significant potential in helping textile manufacturers comply with this strategy as it promotes resource efficiency, waste reduction, circularity and product durability.

Similarly, Carbon Border Adjustment Mechanism (CBAM) is another key element of EU’s efforts to address carbon leakage and support climate resilience. Once CBAM is effective, the only textile products that will enter EU markets will be those with minimum or no embedded emissions in their supply chains. Therefore, textiles with lower carbon emissions such as those made with rPSF will be more competitive in the EU market under CBAM.

Challenges

There are several challenges and risks associated with the use of rPSF in the textile industry. One of the major environmental concerns is the release of microplastics into the natural ecosystem. This challenge is intrinsically tied to rPSF, as microplastics/microfibers are released during manufacturing as well as laundering of products made with rPSF. This poses a challenge to comply with the international traceability requirements, as traceability requires data inputs of environmental performance of products.

Secondly, Pakistan has limited recycling infrastructure which is compounded by a broken and informal system of plastic waste collection. Pakistan has a largest network of waste pickers who play a crucial role in collecting plastic waste from around the cities. However, these waste pickers are part of the informal economy and are not integrated to a formal system of waste collection. This leaves tons of plastic waste collected by these informal waste pickers unmonitored, most of which ends up in the landfills or burning sites, ultimately leaking to the ecosystems.

Current Policy Landscape: In Pakistan, there is a 5% import duty on Purified Terephthalic Acid (PTA), a key raw material used in the production of polyester and resultantly a 7% cascading duty on rPSF. rPSF is also subject to additional anti-dumping duties of up to 12%. These duties were hiked from 4% and 6% to 5% and 7%, respectively, in June 2016 to afford protection to domestic manufacturers of PTA and rPSF. Pakistan’s sole PTA manufacturing facility, however, is based on 30-year-old technology that has become obsolete and is outperformed by newer, more productive facilities in China and India, resulting in significantly higher prices compared to those prevailing internationally.

The disparity between domestically and internationally manufactured inputs eliminates both the domestic and international competitiveness of domestically manufactured MMF. This is supplemented by the absence of fully developed rules for duty-drawbacks on rPSF which prevents exporters from using imported rPSF for export manufacturing. Together, these factors have hindered the development of an MMF manufacturing culture and capacity in Pakistan.

What needs to be done

Pakistan’s textile industry, at present, is battling with environmental challenges. Water pollution is a significant concern due to the sector’s heavy use of water in processes like dyeing and finishing. The discharge of untreated or inadequately treated wastewater into water bodies has serious environmental implications. Energy consumption is another issue, with the sector being one of the largest consumers of energy in the country. This not only contributes to greenhouse gas emissions but also adds to the sector’s operational costs.

Ensuring environmental compliance in response to the increasing sustainability demands of global buyers is crucial for the survival of Pakistan’s textile industry. Achieving this requires Pakistan to review its current policies, including import and anti-dumping duties on rPSF, to support textile businesses in enhancing their environmental practices and thriving in competitive markets through expansion into MMF manufacturing.

By re-evaluating and ending import and anti-dumping duties on rPSF, Pakistan can potentially reduce the cost barriers that hinder the adoption of environmentally friendly practices and materials in the textile industry. This would incentivize the use of sustainable alternatives such as rPSF, which can help reduce the industry’s environmental impact. Meeting global sustainability standards can open up new markets and increase demand for Pakistani textiles, enhancing the industry’s long-term sustainability and resilience. India and Bangladesh – our regional competitors— have already introduced duty-free rPSF in their industry. If we do not take immediate action, we would lose the case for using rPSF to enhance market competitiveness.

The demand for rPSF from major textile exporting countries such as India and Bangladesh is rising. With textile sector becoming highly competitive and economically significant in the Asia-Pacific region due to growing global demand for textiles and apparels, these countries are boosting their sustainable textile manufacturing through rPSF application. In case of Pakistan, the demand for rPSF and its sustainable usage in the manufacturing industry is rising which regrettably is not fulfilled due to heavy import and anti-dumping duties. This has caused over reliance on domestically generated cotton, which is already inadequately available majorly due to climate change-induced calamities. The raw material shortage compounded by climate impacts and heavy duties on rPSF has significantly made the supply chains unpredictable and unsustainable and Pakistan’s textile industry uncompetitive.

“Integration of rPSF into textile manufacturing holds a significant potential in reducing plastic pollution from the ecosystem. This, in Pakistan, requires a well-established domestic system of plastic waste collection, sorting and recycling equipped with modern technology. The system should also be connected with the textile producers to divert locally produced rPSF for their manufacturing.”

This efficient sustainable system of domestically producing rPSF will not only protect manufacturers from duties imposed on imported rPSF but will also significantly overcome Pakistan’s ever-rising plastic pollution. Lastly, to overcome the challenges of microplastic leakage, modern technology such as microplastic captures should be installed at the manufacturing facilities by the firms to enhance environmental performance of their products.

Pakistan is one of the top ten countries importing post-consumer textile waste. In 2022, it ranked first with the import of worn out clothing equivalent to 422.8 million USD. 90% of the imported post-consumer textiles are PSF based. These imports majorly enter resale markets and ultimately landfills and incinerators, that adds to the already existing nearly unmanageable waste management challenges in the country.

To address the challenges related to importing rPSF and managing plastic and post-consumer textile waste, the government should form a joint venture with the private sector to set up a demonstration unit, which would establish the commercial viability of rPSF. This unit would collect, process, and recycle both plastic and post-consumer textile waste. An expression of interest should be promptly issued to invite private sector companies to participate in partnership with the government with long-term lending from EDF, ensuring the facility becomes commercially viable.


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