Press Release

29^th July 2022

Rahim Nasir

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:

• Reduce the import bill by at least $ 5 billion, especially energy’s, through ensuring energy efficiency.
• Shockingly, petroleum imports increased by 50% in June 2022 in volume terms. Pakistan imported petroleum products worth $24 billion last year. Gas needs to be used for productive purposes only. At present gas is being supplied to ceramics, steel and glass also.
• Declare an energy emergency and introduce measures to conserve energy which can save Pakistan’s economy in more ways than one:
• Aggressive conservation – cuts import bills by more than 25% & saves $6 Bn.
• Implement both Price & Administrative measures to curtail consumption.
• Curtail domestic gas supply to reduce consumption & waste by 18% UFG.
• Single point Energy supply to Domestic Gas.
• Fast track calibration of cooking burners to save 200 MMCFD of Gas/RLNG.
• Improve documentation and inclusion of unbanked persons
• Reduce external pressure ‘hawala’ from $10 to $5 billion by documentation as hawala can survive on undocumented sector only; introduce scheme whereby State Bank of Pakistan opens up bank accounts for those currently having no account with a pre-approved overdraft facility of PKR 10,000 that can be used as seed money for entrepreneurship.
• Revamp and improve the export paradigm by ensuring competitive tariffs and improved facilitation.

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)
Pakistan	15
Sri Lanka	14.5
Bangladesh	5
India	4.9
Vietnam	4

Source: tradingeconomics.com

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:

• One basic savings bank account is opened for unbanked person.
• There is no requirement to maintain any minimum balance in PMJDY accounts.
• Interest is earned on the deposit in PMJDY accounts.
• Rupay Debit card is provided to PMJDY account holder.
• Accident Insurance Cover of Rs.1 lac (enhanced to Rs. 2 lac to new PMJDY accounts opened after 28.8.2018) is available with RuPay card issued to the PMJDY account holders.
• An overdraft (OD) facility up to Rs. 10,000 to eligible account holders is available.

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:

• Simplify Taxation Regime (online portal or one window operation)
• Allow currency to depreciate
• Provide credit on simple terms (minimal documentation) linked to export receipts
• Sunset clauses for protection given to industries
• Any tax levied must be on net profits, not revenue / no turnover taxes.

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:

• Implementation of Textile Policy (2020-25)
• Assurance of uninterrupted energy at regionally competitive energy tariffs for a sustained period.
• Removal of all hindrances for setting up of new factories & upgradation.
• In line with stated government policy of no duties on raw material, duty on PSF to be abolished to enable Pakistani export products to compete internationally.
• Availability of long-term Financing as well as working capital at competitive rates.
• Rationalization of GST applicability through a lower rate. According to a very recent IMF report, the cascading impact of GST has harmed Pakistani exporters’ competitiveness.
• Improving standard duty drawback schemes
• The government to simplify regulation related to exports; cumbersome bureaucratic procedures negatively affect new exporters.
• Export subsidies such as DLTL, where given, must be linked to the performance of the recipient firms and be automatically withdrawn when thresholds are crossed.

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 8^th, which will be followed by shutdowns for Eid from 9th to 14^th 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:

1. A lack of major donor participation and capacity building for sectoral agencies in the planning and conduct of EIA.
2. The level of institutional support, capacity (especially within respective government agencies), and EIA experience (gathered from donor-funded projects): EIA quality was generally good in the water resource sector, for example. In the industrial sector, government agencies have less experience and capacity to support the EIA process.
3. The attitude of proponents of industrial initiatives: Industrial projects are generally local and privately owned (rather than publicly traded), with minimal in-house environmental knowledge, capability, or skills. Despite the fact that the proponents of many industrial projects spend less than appropriate money on the compilation of the EIA report, approval is frequently given due to the proponents’ political power and connections (Kabir and Momtaz 2013).

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).

Conclusion:

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:

1. The proper adoption of water and wastewater recovery and reuse, in-time water-related maintenance, and doable process modification for water conservation which is to be ensured by optimizing water-use efficiency with the development of a water management system that includes continuous water consumption patterns of each process.
2. Regular monitoring of the wastewater quality produced by processes, as well as a check on chemical inventories, could lead to the detection of add-ons that have a negative impact.
3. To maintain and stabilize the whole operation, standard operating procedures should be devised based on several situations and variations of received influent.
4. Chemical ionic/TDS load reduction during processing: optimal use of salts, dyes, and alkali.
5. The availability and technical skills of specialists and Knowledge-Intensive Business Services (KIBS) to conduct EIAs and analyze and approve project environmental impacts.
6. Baseline data availability and quality, particularly for ecological systems: the physical and chemical qualities of the soil, air, and water, as well as social and demographic data on local communities, should be included in this baseline data to enable for an assessment of the impact on the local people and potential vulnerabilities.

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.

1. In order to ensure environmental compliances, the government should offer finance to the SME’s so that they can arrange the necessary technological equipment such as the waste water treatment plants.
2. The policy tool of stick and carrot should be used to ensure environmental compliances to promote transparency and sustainability.
3. Carbon credits should be introduced to the textile sector in Pakistan. They are a way to cut down on greenhouse gas emissions by providing enterprises with a monetary incentive to reduce their carbon emissions. The SME’s should be especially targeted for this.

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.

References:

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

https://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/documents/meetingdocument/wcms_579469.pdf

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

https://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/documents/publication/wcms_802429.pdf

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

https://www.fibre2fashion.com/industry-article/3406/water-efficiency-in-textile-processe

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.

 

 

The solution to Pakistan’s perpetual BOP, fiscal, and debt issues which have led it repeatedly to the IMF is the sustained acceleration of export-led growth. Sustainable development and economic growth necessitate export-led growth, as a strong export base serves as a self-sufficient and highly beneficial method to strengthen the economy without external debt. In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated from consecutive loans. The most effective mechanisms to sustain export-led growth include product and market diversification, improvements in quality, and integration into global value chains. Government support is naturally an essential component in ensuring these policies are implemented and institutionalized, leading to a successful economic future for Pakistan.

The need for the development of an export culture in Pakistan is often overlooked by policymakers who tend to seek out short-term economic fixes. These fixes cannot steer sustainable growth for Pakistan’s economy, and the same is to be said of seeking IMF loans and bailouts. For decades, we have sought loans to achieve economic stability, which tend to be conditional and very difficult to repay. Meanwhile, policymakers have neglected the local business community – particularly the export-oriented industry – which has the potential to steer sustainable economic growth as long as it is provided with basic policy support, and in particular, competitively priced energy.

According to the latest PBS data, Pakistan’s trade deficit crossed $39 billion in first 10 months of the current fiscal year, as the rate of increase in imports was twice the surge in exports. The 10- month trade deficit was $15.4 billion – over two-thirds more than the same period of the previous year.

The World Bank’s Pakistan Development Update, released in April, postulates that while economic activity remained strong from July-December 2021, pressures of high demand and rising global commodity prices resulted in double-digit inflation and a steep rise in imports. These developments adversely impacted the rupee. These issues are exacerbated by structural weaknesses in the economy such as low investment, low exports, and low productivity growth.

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

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

Greater exports are the only mechanism to break the begging bowl and achieve real economic and political sovereignty. Pakistan must target higher economic growth by prioritizing value-addition, particularly in the highly productive textile sector, which is the backbone of the economy and where regionally competitive energy is the primary path towards real progress. Export-oriented industries proved the critical role of these tariffs, by immediately showing an upward trend in production, creating new jobs and reaching full capacity for several months when competitive energy rates were applied.

Enhanced trade competitiveness leading to an increase in exports is undoubtedly a sustainable path to economic growth, as unlike aid, it is not tied up in liability. Remittances are also an unreliable metric to tie hopes of economic growth to, as the rise and fall of remittances is unpredictable in the long run. The earnings through exports serve as a valuable inflow to the economy, and will pull Pakistan out of its current account deficit and economic stagnation.

Value addition, competitive inputs and trade competitiveness can effectively result in sustainable economic growth; as unlike aid, these measures are free of any liability. Earnings through enhanced exports serve as a valuable inflow to the economy, and can pull Pakistan out of its current account deficit and economic stagnation. Job creation is another crucial metric for an economy in the growth stage, as yearly increases in unemployment must be catered to. The private sector provides us with a viable means to achieve this, as export-oriented sectors are highly labour intensive. The textile sector creates jobs in every tier of the economy, as different skills are required at each stage, be it cotton picking, ginning, stitching, designing, innovating or strategic planning. The expansion and development of exporting industries thereby reduces unemployment in addition to being essential for a healthy Balance of Payments.

In the longer term, policy that prioritizes an export culture in Pakistan, specifically supporting industrial growth and productivity, can help to substantially boost the economy. Supporting the growth of large scale manufacturing industries, especially textiles, where there is evidence of a comparative advantage for Pakistan, would therefore be critical moving forward. It is essential to note that the value of exports is just as important as the volume, and this signals product diversification and entry into high-value added goods. The government needs to work in tandem with major exporters to incentivize diversification, while removing institutional roadblocks and barriers to growth that have held the exporting sectors back from realizing maximum potential.

 

The international financial institution — World Bank (WB) — which is an influential source of funding as well as a vital knowledge platform for developing countries, has recently released a report containing economic data sets in a post-Covid world for developing South Asian Economies such as Pakistan, India, Sri Lanka, Afghanistan, Bangladesh and Nepal.

The report provides data for economists and policy makers in the aforementioned countries for formulation and implementation of holistic, evidence based policies to re shape norms in order to move forward after the economic dampening effects of the Covid crises. The report examines recent economic trends, the economic impact of the Ukraine conflict on South Asia, growth estimates, risk scenarios, and the conclusion that in order to reshape norms, certain economic adjustments have to be made.

The unequal recovery from the epidemic has left South Asian countries including Pakistan with a slew of policy issues, which have been worsened by the recently erupted conflict in Ukraine, the primary one being the massive increase in LNG and crude prices. While numerous nations struggle to fund fiscal and trade deficits due to rising inflation, it is equally important to realize the importance of designing a new course to address rising inequality, unleash fresh development potential, and accommodate an energy transition.

In order to reform their economies, the policymakers will have to redesign their tax structures, increase competition, promote challenge vested interests and work on gender conventions. Three key aspects can be analyzed from the report for Pakistan’s contemporary economic situation to forecast for the future vis-à-vis other South Asian countries.

Stronger headwinds

Despite the fact that the region’s economy is recovering, the recovery has been uneven across sectors, countries, and population groups. While digital service production and exports have increased, other sectors such as construction, transportation, and tourism have yet to fully recover.

While some nations are seeing robust GDP growth, Afghanistan is experiencing a humanitarian catastrophe, Pakistan is reeling from a political crisis, and Sri Lanka is undergoing a balance-of-payments problem. While high-skilled workers kept their jobs or sought new ones during the pandemic, just a few unskilled migrant workers returned to the cities. Men have also been able to find new work opportunities faster than women.

Major exporters in the region continue to see export values substantially above pre-pandemic levels due to rising commodity prices and domestic inflation. Because of their textile industries, Bangladeshi and Pakistani industrial production is higher than pre-pandemic levels, and has increased faster than the global average, as shown in the graph below.

It can be inferred from Figure 2 that Pakistan comparatively performed well in terms of Merchandise Exports and Industrial Production vis-à-vis its South Asian competitors. The major chunk of credit of this upward trajectory goes to the ‘Textile Sector of Pakistan’, which the report also states. Pakistan had the region’s mildest export drop in 2020, whereby the textile sector led the way to a quick recovery.

At the height of the epidemic in April 2020, Pakistani products exports were down 54% year on year. The textile sector, which accounts for more than 60% of total products exports, has led the rebound since late 2020. Pakistan was the first Asian country to ease Covid limitations. This endorsed Pakistan to redirect orders away from other contenders, subsequently resulting in a 40 percent increase in goods exports in January 2019. Knitwear, cotton textiles, and bed-wear are among the commodity groupings that have benefited from export subsidies, as well as a significant reduction in import duties on textile intermediates and a favorable exchange rate in recent years.

Pakistan’s exports for March 2022 climbed by 21 percent, and exports for Jul-Mar’22 increased by 26 percent because of the textile sector. Growth has been enabled by the implementation of Regional Competitive Energy Tariffs during the last three years, leading to a $500 million increase in monthly export capacity. Moreover, more than 100 new textile units are being established, with investments totaling $5 billion made through the TERF/ITERF schemes, resulting in the creation of millions of new employments. Textiles have often proven to be a viable and long-term answer for guiding the country toward economic stability.

Other sectors are also receiving incentives from the government in order to diversify exports but the textile sector was the main star of the show as it has demonstrated that given competitive inputs, Pakistan exports can make rapid headway. On the other hand, additional regulations were implemented to encourage firms to expand into new markets, particularly in the pharmaceutical, engineering, and chemical industries. According to the WB, the country must diversify its exports and increase its low exports-to-GDP ratio (now about 10%), for example, by tariff reductions to encourage manufacturers to export and compete in global markets. Therefore, the high bar set by the textile sector needs to be not only maintained but also needs to be taken a step forward for a sustainable economy. This can be only possible through continuation of governmental support initiatives to the sector.

To weather the new external shocks on top of the pandemic’s consequences, carefully calibrated monetary and fiscal policies are required. Because fiscal space is limited and, more importantly, the primary shocks to South Asian economies have been negative supply shocks, there is little room for widespread fiscal stimulation. Broad-based demand stimulus will just lead to higher inflation when supply is limited. As a result, it is preferable to concentrate on the quality of government spending. Targeted income support, for example, is more efficient than price subsidies for poor households suffering with rising food and energy expenses. Because increased inflation has reduced real interest rates and financial conditions in the United States, there is room for central banks to establish higher nominal interest rates.

The path to a new normal needs to be charted

The prediction for South Asia’s GDP growth in calendar year 2022 in the study by WB is 6.6 percent, which is a full percentage point lower than the World Bank’s January forecast. The net effect of the negative impact of the war in Ukraine and certain good surprises, particularly the stronger-than-expected performance of the services sectors, has resulted in this downgrading. In 2022, higher import prices will put more strain on the region’s current account balances. According to this analysis, the war could cut South Asia’s income growth by 2.2 percentage points this year, 1.3 percentage point owing to weaker GDP growth and 0.9 percentage point due to terms-of-trade losses, primarily due to increased fuel import prices.

Owing to this it is very crucial for Pakistan to transform its energy sector through encouraging power sector reforms, development of a true bilateral energy trading platform, investments to reduce load shedding, boost low-cost generation, improve transmission, strengthen governance, and reduce losses.

Sri Lanka, which is already struggling to pay its import bills, and the Maldives, whose oil imports as a percentage of GDP are the highest of any South Asian economy, and 20 percent of tourists in the Maldives come from Russia and Ukraine, are expected to be the most affected. Higher food prices are making humanitarian help to Afghanistan more difficult. A potential indirect effect of lowering import demand in Europe would have an impact on Bangladesh.

According to the WB, Pakistan’s GDP growth would decelerate to 4.3 percent in FY2021/22 (ending June 2022) and 4.0 percent in FY2022/23. This occurs in the context of monetary tightening measures that began in September 2021, significant base effects from the previous year, and persistently high inflation, which is eroding real private consumption growth.

Beyond that, structural measures to promote macroeconomic stability, increase domestic revenue collections, improve the financial viability of the energy industry, and improve export competitiveness are expected to eventually pay off. This sheds the spotlight again on the textile sector of Pakistan which has time and again proved its ability to positively impact the GDP of the country by consistently maintaining its export growth rate. Trailing on this trend, it is a turning point for the country to focus on the textiles for an upward trajectory of the GDP growth rate. This would ensure a stronger economy independent of loans from international loan agencies.

Altering gender social norms

Apart from the Middle East and North Africa, South Asia falls behind other regions in terms of gender outcomes and attitudes toward gender equality. People’s unique opinions are more conventional than social conventions. Even after controlling for economic growth, social norms and personal attitudes are key drivers of gender outcomes, such as female labour force participation.

The position of women in all socioeconomic settings has remained a critical prerequisite for not only the economic, social, and political advancement of that civilization, but also for global progress. However, this fact is accompanied with the regrettable existence of a reality that prevents women from achieving the aforementioned liberation. This is exemplified by the fact that half of Pakistan’s population (49.2%) is underutilized, despite the fact that they have enormous economic and social advancement potential.

This bifurcated population is a picture of Pakistani women, who are mostly excluded from the country’s policy equation in all domains. According to The World Economic Forum’s Global Gender Gap Report 2020, the Global Gender Gap Economic Participation and Opportunity revealed a value of only one-quarter of Pakistani women engaged in the workforce, either employed or looking for work. On the other hand, 85% of Pakistani men are economically active.

Similarly, women in Pakistan earn only 18% of the labour income (World Bank, 2020). Furthermore, in 2020, the WB estimated that women hold only 5% of senior leadership positions in Pakistan, ranking it 146th out of 153 countries studied in the research. This is a sad state of affair as female managers outperform their male colleagues when it comes to boosting employee engagement, according to a Gallup survey based on almost four decades of research and the analysis of 27 million employee responses. Research has also shown that women in top echelon positions may have a progressive upshot on the firm’s sustainability.

Conclusion

Thus, the report has provided valuable economic data sets pertaining to crucial economic factors for the South Asian Economies. The necessary measures which Pakistan can take to tackle these can be encapsulated as:

• Improve the effectiveness of fiscal policy in order to promote recovery and growth. Instead of blanket transfers and price controls, more efficient and targeted support for people and businesses would alleviate pain and make room for investment in trade, energy, and technology dissemination infrastructure. Committing to fiscal rules and future income and expenditure reforms would aid in reconciling spending demands with increasing budget restrictions in the face of rising debt.
• Policy changes and assistance are needed to encourage the spread of technology. Increased domestic and international competitiveness may increase the incentives for the adoption of productivity-enhancing technology. The capacity for technology adoption could be boosted through boosting managerial and technical skills, as well as expanding access to funding and digital infrastructure. Domestic distortions, such as those caused by fossil fuel subsidies and local content restrictions, could stimulate green technology adoption.
• Given the fiscal constraints, energy tariff interventions should be highly focused to ensure competitive edge for Pakistani products in international markets which lead towards more enhanced investments, employment rates and production exports etc.
• Pakistan should not only include its women labour force in all policy domains but also work towards uplifting of women from lower professional echelons to higher professional echelons for a sustainable future. All hurdles to women’s engagement, including gender-biased norms, must be addressed in order for interventions to be successful.

 

Pakistan’s Balance of Payments crisis is spiraling out of control, with the country heading towards a historically high deficit mark. Pakistan Bureau of Statistics (PBS) shared data last week, showing the trade deficit reaching $35.393 billion during July-March FY2022, compared to $20.802 billion during the same period of 2020-21. This issue is only likely to be exacerbated if we do not put an end to borrowing. Instead, turning towards policies that will propel exports can serve as an effective strategy, creating valuable foreign exchange and countering the country’s deficit problem. To this effect, exports and industrial competitiveness are largely dependent on continuous supply at regionally competitive tariffs. Policymakers in Pakistan must strive to maintain the export growth momentum that has built up over the past few years, particularly steered by textiles which are the country’s top export. This growth was the result of concerted efforts and investments, which must remain a top priority for the government, and policy continuity must be ensured at all costs.

It is unfortunate that gas / RLNG supply issues continue to plague the export sector/captive plants. The gas / RLNG supply was reduced to 50 percent by SNGPL of the average consumption of September, October and November 2021 on 31^st March 2022 with the assurance that the full supply be restored within a few days. At present the mills are effectively operating at 75% capacity. While the industry awaits restoration, the trade deficit of the country continues to spiral without the support of valuable foreign exchange brought by a stable stream of exports. Meanwhile, gas / RLNG continues to be supplied to non-export sector without curtailment, exhibiting a grave misallocation of resources which requires immediate rectification. The cost of consistent and competitive energy is equivalent to 2.5% of export value and exponential economic growth can be achieved once industry is provided with a stable and secure energy environment. At present, RCET is applicable till June ’22, while the industry requires a 5-year predictable supply and competitive tariffs across the entire value chain to sustain growth and investment.

The recent export growth in Pakistan has occurred despite a wide array of issues in energy. Power supply, reliability, quality, pricing and gas availability remain a bane for the country’s economic development. This brings us to the countless pending cases of extension of load and new connections. A major obstacle that has pushed industries away from the national grid and toward captive units is the lack of grid reliability, with a non-standard supply to the industrial sector that has resulted in huge losses. Furthermore, unwarranted interruptions in supply are endemic, along with constant, inordinate breakdowns, fluctuating voltage and flicker which result in huge financial and performance losses, and consequently lower production. Issues of shutdowns, breakdowns and tripping may be mitigated through up-to-date maintenance etc., but the issue of non-standard supply requires concerted technical efforts that can only be made at the DISCOs level.

An export target of $20 billion has been set for the textiles and apparel industry for FY 2021-22 – a downward revision from the previous target of $21 billion due to the issues outlined above. The textile sector’s expansion and opening of new factories was expected to propel exports further, but unfortunately these new units did not receive gas or electricity supply and were consequently unable to launch successfully. This coupled with the ongoing curtailment of gas is making the revised lower target look like a distant dream – a loss that the ceconomy can hardly sustain.

If policymakers are unable to propel exports towards their maximum potential, the economy is at risk of sinking deeper into the debt trap. For decades, we have sought loans to achieve economic stability, which come with countless conditions. We must not neglect the local business community – particularly the export-oriented industry – which surely has the potential to steer sustainable economic growth as long as it is provided with basic policy support, and in particular, competitively priced energy. Furthermore, the government must fast-track the implementation of the Textile Policy of Pakistan, so that a holistic plan to propel textile exports is set in motion and all issues are addressed.

Orders to Sri Lanka, Bangladesh, India, and China have been moving to Pakistan and it is crucial to fulfill these orders with competitive pricing and high quality products. However, this necessitates that our energy rates remain low and the government remains onboard with the required policy environment for exports to thrive. Furthermore, DLTL is an ineffective mechanism unless it is automated. Consistent policy and competitive rates are required across the textile value chain, as exporters prefer to source their inputs from wherever they can be found cheapest – we cannot afford to lose customers due to uncompetitive pricing at any tier of production.

Pakistan needs a paradigm shift in the array of textile exports, with diversification into higher value sports and performance apparel. It needs to advance in synthetics (a capital and technology-intensive market) to increase its market share, as the cotton sector is becoming increasingly redundant while the countries investment in cotton remains quite high. For successful restructuring, the government of Pakistan must reduce customs duties on imported machinery. Distortions in sales tax must also be removed, along with ensuring rationalization of the anti-dumping policies applied on polyester staple fiber.

The importance of supportive leadership from a government that envisions the potential of the textile sector is absolutely crucial. The country already faces immense competition from its regional competitors in terms of competitive energy rates and GSP+. Policymakers in Pakistan must also remain cognizant of new and emerging textile exporting countries, such as Uzbekistan which has full market access to the Eastern bloc and has now been granted GSP+ status by the EU. With energy costs lower than ours – RLNG at $2.1/MMBtu and electricity at 4.5 cents/kWh – and better cotton quality, Uzbekistan is a promising new entrant, set to capture high market shares.

A reliable and supportive energy environment paired with more efficient use of monetary policy and customs tariff can largely improve industrial competitiveness and reverse what appears to be the beginning of Pakistan’s premature deindustrialization. In Pakistan’s case, there is laggard advancement in the tertiary sector, as technological upgradation or advancement have not accompanied our LSM contraction. Instead, poor policies, mismanaged resources, a growing trade deficit and borrowing without planning for sustainable growth in complementary sectors has given rise to deindustrialization.

In order to prevent premature deindustrialization, Pakistan’s government must provide adequate support to the manufacturing and exporting sectors, thereby enabling them to steer economic growth and counter the rising trade deficit while also creating new economic and industrial zones for innovation and entrepreneurial opportunities. An uninterrupted supply of regionally competitive energy, addressal of issues of captive power and product diversification framework require a holistic framework embedded in industrial policy. To this effect, it is hoped that the government will implement the Textile Policy of Pakistan expeditiously, keeping in mind that a strengthened, supported textile industry has consistently proven to be the vanguard for of economic growth in Pakistan.