The Electricity Landscape in Pakistan: An Overview

Pakistan has historically suffered from some of the highest electricity tariffs in South Asia. These tariffs have not only served as a means to transfer the costs of inefficiency to consumers and industries without considering affordability, but have also given way to premature deindustrialization. Meanwhile, the current stock of circular debt hovers around Rs2.5 trillion ($14 billion) – an alarming figure which has gradually built up as a result of the poor planning that has characterized Pakistan’s energy sector over the years.

An efficient and reliable energy environment is critical for industrial competitiveness and is the only way to reverse the beginning of Pakistan’s premature deindustrialization. In order for the economy to emerge stronger out of its current industrialization phase, energy policies must reflect thorough planning for sustainability and effective resource management, along with a formula to reduce the trade deficit and limit borrowing in order to tackle the ballooning circular debt. Pakistan’s economy is heavily reliant on the exporting sector, and as long as the energy sector is not overhauled to remove inefficiencies, the economy cannot thrive. This is because the costs of inefficiency ultimately fall upon the business/ industrial sector, and inefficiencies cannot be exported if exports are to remain competitive.

Unfortunately, this reasoning continues to fall on deaf ears, as the National Electricity Plan (NEP) 2022-2026 presents a policy framework influenced by political economy of the power sector rather than economic rationale, and appears to be the latest in frequent energy sector initiatives that are rarely seen to completion. Issues of unreliable supply, poor service, and weak infrastructure have not been tackled effectively, leaving Pakistan’s energy sector trapped in a “bad equilibrium.” The role and scope of the regulator NEPRA is being severely curtailed and compromised through the compilation of this NEP without adequate stakeholder input as NEPRA would be obliged to follow the diktats of the plan in letter and spirit without any application of their mandated principles.

Over the course of about fourteen years, the country has shifted from excess demand to excess supply. Pakistan is scheduled to have as much as 50% abundant electricity supply by 2023 according to the Ministry of Energy, while there are no substantive plans in place to increase demand.  Meanwhile, Pakistan continues to invest heavily in imported coal and RLNG even though developed nations and most of the developing world has long since made the shift to renewable energy. In 2019-2020, Pakistan’s LNG import bill stood at USD 2,559 million.

Within the above context, the NEP 2022-2026 comes as an utter disappointment, as it continues to perpetuate the ills that have characterized the energy sector since time immemorial, rather than developing an economically sustainable energy market regime. It outlines three comprehensive policy goals for the power sector: access to reasonably priced energy, energy security and sustainability. However, the plan fails to place the energy framework in the larger context of industrialization and economic growth, and is therefore riddled with countless fallacies. It appears to serve as a means of clearing up the backlog of legal and illegal expenses by placing all costs of inefficiency on consumers. This paper presents an in-depth critique of each section of the NEP.

Demand Creation Measures

For starters, it is expected that the circular debt will soon hit a daunting 8 percent of country’s GDP (currently 3 percent – total circular debt has stretched to Rs 2.476 trillion through the first six months of the present fiscal year) due to capacity payments. Consequently, the swelling cost of surplus power has resulted in ever-increasing consumer power tariffs. This scenario necessitates an intervention in the form of demand creation, which the new NEP fails to address. Pakistan has a surplus of 10,000 megawatts (MW) of electricity during peak demand season i.e. summer, which increases two-fold in the winter as the electricity demand eases (Ministry of Energy). Rising power tariffs will destroy the competitiveness of industrial sector, which requires a predictable and competitive tariff to sustain growth, so it is critical to include demand creation measures for the NEP to be effective.

In addition, the NEP does not examine the impact of the country’s current revenue-based load shedding, another factor which impedes demand creation and punishes concumers. Furthermore, the winter months come with an increased demand for gas supply, while the country has faced an acute gas shortage for several years. The increased heating requirements and low gas supply necessitate alternatives such as electrification of heating appliances.

National Electric Vehicle Policy (NEVP)

Pakistan’s government approved an ambitious national electric vehicle policy in November 2021. The policy seeks to capture 30% of all passenger vehicle and heavy-duty truck sales by 2030, and 90% by 2040.

Infrastructure, ministerial coordination, and a steady electricity supply are all important aspects of this policy. As Pakistan’s energy sector is highly unstable, with frequent dim-outs and breakdowns, ambitious goals such as the NEVP require sustained policy support and a stable grid – both of which are lacking in Pakistan.

Pakistan’s ambitious NEVP is to act as a catalyst to steer Pakistan into an electric automotive future. However, it fails to devise any strategic business-oriented models for pursuing NEVP.

Competitive Trading Bilateral Contract Market (CTBCM)

It is important to note that any new initiatives, such as CTBCM, would certainly entail high costs, both economic and ideological, that outweigh potential benefits. There are a number of structural issues underscoring the power sector in Pakistan, so initiatives such as CTBCM that idealize competition are not grounded in reality. CTBCM has severe limitations, as the generation side is already completely tied up in long-term generation contracts, rendering distribution competition an irrelevant exercise, due to a complete lack of free suppliers in the foreseeable future. Furthermore, a costly generation mix is likely to arise, as wholesale prices will not decline sufficiently despite apparent competition. In contrast, a stable, fair and transparent policy regime would do well to attract the desired investment in generation.

Free market development is the only way forward in order to guarantee competitive tariffs, and thereby competitive exports. However, without a workable wheeling policy, a free market cannot develop. The national electricity policy runs contrary to the CTBCM, and also mandates open access charges, leaving little room for competitive suppliers to offer low-cost electricity tariffs. It appears the role of the regulator has been nullified, as the regulator is normally in the position to make decisions such as whether wheeling should be allowed for market development. It has been made clear that wheeling has been beyond the scope of NEPRA, as they were evidently unable to implement it, so it is hard to imagine how they will undertake CTBCM.

Additionally, similar charges including cross-subsidization and stranded costs are being proposed as standby charges for mills primarily being run on captive power and having grid connections on standby.

Firstly, standby charges should be based on an actuarial assessment of the quantum of electricity likely to be drawn on at any point in time. These fixed charges cannot and should not be based on the full connected load, as at any point in time only a small proportion would actually be drawn by the mills – at most 10 to 20%. Secondly, such charges should exclude irrational and inefficiency-based costs as well as imprudently incurred capital costs.

Cross-Tariff Subsidization and Fixed Costs

Despite the fact that cross subsidies have been condemned by numerous scholars (Moerenhout et al., 2019) on account of their irrationality, they are being continued and even enhanced according to the new NEP. The primary reason for the continuation of this policy is that the actual costs of individual electricity users is difficult to measure and consequently households reap benefits from the decreased electricity price in lieu of the policy (Chen et al., 2018). However, this is ultimately a social obligation of the government that they are allowing to fall onto consumers. Furthermore, who can reasonably decide which consumers pay the price, especially when the government should be covering these costs of its own accord.

Although the government may have developed this policy to improve social stability, the reality is that only the most privileged are in a position to reap the benefits. Most of the subsidies are enjoyed by families with better economic conditions under the pretext of their greater willingness to consume electricity (Li et al., 2018). Cross subsidies in electricity prices are meant to shield vulnerable groups, but the wealthiest consumers end up benefitting due to their hefty electricity consumption which ultimately makes it hard to relate fairness to cross subsidies. Therefore, the economic costs of such policies swell. NEP fails to address this dynamic.

Furthermore, cross-subsidization and fixed costs for entry into the open market contradict the spirit of the CTBCM and will derail Bulk Power Consumers (BPC’s) interest in shifting due to the high open access charge. Consumers will either shift to captive power or relocate their manufacturing units to low-cost countries, leaving bilateral markets barren, resulting in lower industrial output, fewer exports, and weaker economic development. Cross-tariff subsidization violates all utility operating standards. The consumer end tariff should be based only on the cost of service to a specific category of consumers. The government’s socioeconomic or political commitments should not be allowed to infiltrate the regulated energy industry.

Capacity Payments

The recovery of capacity payments is only possible through measures to increase consumption while reducing price significantly. Current capacity payments of roughly Rs. 900 billion (which are expected to increase to Rs 1.5 trillion in 2023) can only be met if a substantially wider base load consumption of power is established. This can only happen if tariffs are reduced substantially to stimulate broad-based utilization, enough to cover energy costs and contribute to fixed costs at much lower rates with far higher utilization. The tariff of electricity should be lower at higher usage rates and at the margin it should be equal if not less than domestic gas price. Thus the power sector sustainability can only be assured if domestic gas pricing is revised to be at par with electricity pricing.

Efficient and Liquid Market

One of the key components required of the power sector in order to be sustainable and competitive is efficient and liquid markets, which the NEP does not appear to recognize.

Apart from a lack of funding necessary to make the energy sector liquid, the data management system is poor. In fact, there is no accurate database of consumers at present. The power division must work to develop and update its database on priority basis for correct analysis and prognosis.

Furthermore, security deposits should be redefined in accordance with consumption patterns allowed by NEPRA, which will allow the recovery of almost 100 to 150 million USD.

To fast-track the establishment of a market, all PPAs of existing IPPs should be renegotiated to guarantee purchase of only 50% of capacity, to be traded or sold directly on B2B basis through wheeling and or through a power exchange. All road blocks and additional charges on wheeling are to be rejected so that B2B power business and market development is promoted and can be competitive.

Moreover, a mechanism to simplify the transition process of existing IPPs should be developed and deployed as soon as possible to serve as a proof of concept for the take and pay regime and ultimate switch to the CTBCM. A process should be put in place to remove the least needed IPPs from current PPAs through discounted buyouts, etc. This crucial feature is ignored in the NEP.

Competitiveness

The competitiveness of the sector has to be driven by consumers, enabling them to make choices about the way they source and ultimately use energy. It is suggested that an adequate and reliable source for achieving competitiveness in the electricity sector be introduced into the NEP, and that the bid process be avoided as it is inadequate to handle all of the complexities of market design. While considering distribution or retail tariffs, NEPRA should not consider costs whereby some generation plants are mounted on take-or-pay guarantees at the expense of competitively acquired capacity. Such costs cannot be classified as prudently incurred.

Technological Revolution

Globally the power industry is experiencing a huge technological revolution across its entire value chain. In Pakistan, it has been nearly 15 years since loans were being taken to import smart meters, but no progress has been seen on this front till date.

If Pakistan hopes to keep pace with the global technological revolution in energy, the following must be taken into account:

1. A timeline should be provided concerning exploration and deployment of other innovative technologies in the power sector, i.e., battery storage, etc.
2. An upgrade of the power system load dispatch & control and management at the national and regional levels is required.
3. It should be made obligatory for all consumers over 5KW connection to procure their own prepaid smart meters which must be prequalified by DISCOS but on sale through private sector in order to assure no cost or procurement by DISCOs.
4. The GoP should set targets for greenhouse gas emissions so that environmental responsibility does not come at the expense of financial sustainability.

Grid Reliability

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.

Management contracting of DISCOs should be prioritized in order to enhance efficiency, improve demand predictions, and limit line losses. Productivity in power generation and distribution can only be achieved through management contracting.

The implementation of advanced technology has been opposed by the management and workers of the sector who are resistant to change; this is unfortunate as new technologies would solve several glitches. This issue can also be addressed by introducing contract management in the sector.

Merger of Authorities

The government has decided to merge NEPRA, OGRA and NEECA to form a unified regulator to ensure integrated oversight of the country’s energy sector. The Merger of the regulators with expanded and more precise responsibilities is an important reform for the electricity sector. However, such a merger is meaningless if the prime regulator is not doing its job effectively. There should be no opportunity for arbitrage. Similarly, the coordination between all such authorities should also be made fool proof for an efficient collaboration.

This new merger is reminiscent of that between the Ministry of Energy, the petroleum and power divisions, and it is hoped that with a proper overhaul and thorough consideration of the recommendations in this paper, there may be positive outcomes from this merger. It is far more efficient to keep the number of ministries limited to reduce the deeply bureaucratic system in Pakistan, where ministries tend to serve as ‘post offices’ rather than following the model of a modern economy.

An alternative solution to this is strictly applying the criteria for selection of members and revoking amendments allowing bureaucratic capture. This can be further solved by increase in the number of members of NEPRA to 9 by appointing 4 professional members apart from the provincial members.

Stock Market

In order to systemize and professionalize the working of DISCOs while reducing political interference, the mandatory listing of all DISCOs and public sector energy SOE’s on the stock market should be enforced. This will ensure operational and disclosure standards in line with good corporate governance.

Conclusion

The NEP appears to be based on a single premise: do everything possible to save the sinking power sector, even if it means penalizing customers rather than working to enhance the sector’s efficiency. A policy is as much a declaration of intention as it is a prospective opportunity for effective and flexible planning. Therefore, it is hoped that the NEP is malleable enough to take into consideration our suggestions, and refrain from placing the costs of inefficiency on consumers and sectors that should be supported as they help the economy to grow.

The only path to sovereignty and economic growth for Pakistan is through large scale improvements in the energy sector. It is high time those in power view the scenario from this perspective and reassess the broad consequences of the policies they propose.

Shahid Sattar and Eman Ahmed

In the Prime Minister’s address to the nation this week, he lauded the export growth achieved over the past 2 years, particularly through textiles which are the country’s top export. It is important to highlight that this unprecedented growth is the result of concerted efforts and investments, which must be continued in light of the visible progress made by the economy through industrial development. In further good news for the industry, the Prime Minister announced a five-year tax exemption for overseas investors to bolster investment in Pakistan. “No country can become great without a manufacturing base and industrial growth,” he said.

The details of the PM’s new industrial package are yet to be made public, but matters seem to be improving for industries, as the 2022 industrial policy’s overarching objective is to incentivize investment in industry, acknowledging the fact that industrial growth is critical for sustainable economic prosperity due to its role in generating jobs, achieving higher exports and meeting goals/targets. The Prime Minister also mentioned that this policy would divert money invested in plots into industrial growth.

While these are positive indicators for the future of the industrial sector, the growth of exports and industrial competitiveness is largely dependent on regionally competitive energy tariffs. With $21 billion textile exports expected in FY22 (a 36% increase), the industry has set a target of $26 billion for the following fiscal year. The cost of RCET 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.

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 and cotton quality better than that of Pakistan, Uzbekistan is a promising new entrant, set to capture high market shares.

The export growth achieved so far in Pakistan has been in spite of a wide array of issues in energy. Power supply, reliability, quality, pricing and gas availability are at the core of Pakistan’s bid to accelerate economic development, yet concerns abound. Due to the intense competition among regional countries, even a minor cost difference in relative terms has an exponential impact on competitiveness in the international market. Our regional competitors are offering stable and consistent supply of electricity and gas/RLNG at much lower rates than Pakistan.

Meanwhile, Pakistan’s Balance of Payments crisis is spiraling out of control, with the country heading towards a historic $20 billion deficit mark. Without ensuring that exports are supported to reach 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.

Issues of energy supply are another key impediment to the country’s progress. The Gas / RLNG supply to export-oriented industries was inexplicably cut off on December 15, 2021, and then only 38 percent to companies signing affidavits under duress restored on December 29, 2021, resulting in a permanent loss of 30% of exports for the month of December and January whereas capacity was $ 2 billion.

The Ministry of Energy (MoE) had committed to restore full gas supply to captive power plants of the export sector with effect from 15^th February 2022. With disregard to this commitment, MoE subsequently notified the industry that only 75 percent gas will be provided, only to the mills that have submitted an affidavit which will effectively suspend supply to units that do not comply with “unachievable” efficiency criteria – 70% of industry. Surprisingly, SNGPL still continues to supply gas to the non-export industry, which is a clear violation of the merit order which reduces the gas available for the export sector and violates established principles over the last several years.

The requirement of the affidavit goes against the legal rights of the mills, for which it is critical to ensure uninterrupted gas /RLNG supply. Mills who have not signed affidavit have been deprived of gas/RLNG supply as a result of this illogical policy distortion. For the sector to get back on track, it is essential to restore supply expeditiously and make amends. Meanwhile the industry is still waiting for MoE to arrange a consultation on the TORs for the NEECA efficiency audit despite being promised the consultation in a plethora of meetings.

This raises questions on power supply reliability as the alternative source of energy in addition to the countless pending cases of extension of load and new connections. Most mills at present cannot fulfill the energy needs for power or gas as each connection in itself is insufficient to function optimally.

Furthermore, as modern textile machinery involves sensitive equipment, it requires consistent standard power supply without interruptions or variations. Unwarranted interruptions, inordinate breakdowns, fluctuating voltage and flicker are resulting in huge financial and performance losses, and consequently lower exports. Sample details of shutdown, unstable voltage, tripping, jerks and mainline failure from 1^st January to 6^th February on actual grids is give in table below.

Each stoppage/jerk leads to the halting of machinery from 30 minutes to 2 hours. This loss is in addition to the in-process material that is lost. As a result, the output of textiles is therefore hovering at less than 75% of installed capacity. While it may appear that shutdowns, breakdowns and tripping can be somewhat mitigated, in reality the issue of non-standard supply requires concerted technical corrections which can only be carried out at the DISCOs level through changes in perception.

Previously, NEPRA has allowed the power supply to B3 consumers, which include the majority of the textile sector, to be increased from 5 MW to 7.5 MW. However, all B3 consumers are subsequently being charged for grid sharing, including transmission line charges, as well as the full cost of land for enhanced full sanctioned load whereas the incremental load is only above 5 MW’s, even though it is logical to place this requirement on incremental loads above 5 MW.

The loads up to 5 MW’s are already approved, processed, and paid for. Sunk costs cannot be redeemed or recovered, nor can investments that have already been made and correctly accounted for in records/yearly balance sheets. Nonetheless, demand notifications have been issued to the sector for the whole load, including existing sanctioned load / capacity, which is obviously not commercially viable and tantamount to denying load extension. This runs counter to the governments stated objective of maximizing electricity usage.

Apart from issues in energy, the lack of investment in the cotton sector presents further impediments to economic growth:

• Cotton seed which is unproven, substandard and not resistant to pests and diseases (old generation BT cotton)
• Seed supply chain completely destroyed needs to be restructured for the supply of quality seed
• Lack of the International Transgenic technology through proper channel.
• Cotton Seed Variety approval system is very slow and it takes years to make a variety commercially available to the cotton farmers. Private R&D seed companies are ignored in the approval process
• Plant Breeder rights have been formulated but not implemented to confirm stewardships of the variety
• The currently available Pesticides have failed to yield results on the major cotton pest i.e. White Fly, contrary to the claims made by various companies
• One major reason of the cotton crop diminishing is sugarcane cropping up in the best cotton sowing area.

Measures to improve the country’s exports necessitate a greater focus on cotton sector improvements. Future policies must be geared towards an improved, genetically modified and certified seed system, an efficient variety approval system, support for private sector R&D organizations, linkages with research bodies (public, private, local, international), seed companies and other stakeholders, innovative technology using advanced mechanization, targeted input and production subsidy to farmers, and lastly the implementation of Pakistan Cotton Control Act and Cotton Standardization Act 2009 to improve the quality of cotton.

Building the economy necessitates identifying gaps, devising effective policies and working towards consistent improvement despite daunting challenges. The textile industry has invested $5 billion in new plants, machinery & equipment, and more capacity is being added, the results of which can be seen in increased production and exports, but all of this is now risked due to energy concerns. This appears to be a repetition of the past as, whenever the textile sector begins to grow, irrational policy changes destroy the upward momentum. To support the sector’s development going forward, the government must ensure uninterrupted and regionally competitive gas and electricity supply to the entire value chain to enable the sector to keep on marching towards success.

Download: PIDE REPORT – New

Download: Textiles and Apparel Policy 2020-25

by Shahid Sattar 

Private investment has been declining in Pakistan for several years, which is no surprise given how rapidly private investors have been losing confidence in the economy. Investment is heavily based on perceptions, and hurting industry sentiments with frequent policy changes serves to destroy business confidence and break the pillar of trust in the government. Market perceptions and demand are two critical factors for encouraging investment, and while the demand is present for now, perception is quite poor thereby putting export growth at risk and giving our competitors an advantage. The government needs to take measures to rebuild confidence which has largely been sullied by the energy sector with its frequent and illogical policy distortions.

Fundamentally, the traditional sources of equity capital for investment are business profits, savings and through the stock exchange. In Pakistan’s case, the country suffers from one of the lowest gross savings rates in the world. As of 2019, Pakistanis saved 12.3% of GDP. For comparison, the world and South Asian average is 24.69% and 27.97%, respectively. The country’s current account has been in near-constant deficit throughout the last 15 years. The trend can be coincided with the degree of savings (as a % of GDP). Despite maintaining a stable trajectory, savings rate has never been adequate enough to compensate for the current account deficit. In fact, it has actually declined since reaching its peak in 2003 at 24.5%, resulting in a low savings-investment trap. Factors such as low income, high double-digit inflation, persistent macroeconomic instability and a low growth rate in Pakistan have all led to the historically low savings rate in the country.

The main impediment to a higher savings rate is by and large the limited availability of disposable income. To increase savings, minimum wages must be increased to at least PKR 25000 – a policy recently announced by PM Imran Khan and supported by APTMA. In 2021, the Patron in Chief of APTMA proposed to Imran Khan’s government that the best way to serve the poor and disadvantaged working classes was to raise the minimum wage by at least 20%, which is expected to improve not only standards of living but also the savings rate. Incentives to invest and access to stock market need to be significantly increased for the industrial sectors to prosper. With a more fulfilled workforce, productivity improves, and this productivity coupled with the government’s provision of RCET have contributed to higher profitability, thereby leading to a surplus and driving investment, creating a cycle conducive to economic growth. Furthermore, in Pakistan the average firm size tends to be much smaller than the global standard, while other regional textile players benefit from much larger and more integrated firms. The government must take measures to incentivize larger, amalgamated firms which can access the stock exchange and raise more capital for expansion and investment.

In addition to Pakistan’s imports being greater than the exports, they are also more expensive, since exports largely comprise raw materials while imports mainly consist of finished goods which have higher values. This persistent current account deficit has had an adverse impact on the country’s GDP, foreign exchange as well as employment levels. Furthermore, the export sector experiences several barriers in the form of taxes, high tariffs, poor and inconsistent policies, lack of technological advancement and poor diversification, all of which have rendered Pakistan’s exports somewhat uncompetitive. To a large extent the RCET policy offset these disadvantages; however, despite global trade increasing rapidly, Pakistan’s exports have still been unable to make a notable share in the global market.

Investments in the textile sector will enable the sector to expand and diversify, while creating jobs in the process, thereby increasing employment in the country and moving towards sustainable growth and economic prosperity. However, this target cannot be achieved if the energy tariffs in the country are not regionally competitive. Pakistan already experiences lack of investment, both domestic and foreign, owing to the unstable political and business environment. Yet, in the last year $5 billion investment was made in the textile sector due to higher profitability, increasing orders, RCET and TERF.

The industrial sector of Pakistan can be characterized by limited resources, lack of technology, unskilled labor force and lack of investment. Moreover, there is increasingly high foreign debt which has put continuous pressure on the economy. Therefore, it is crucial to support industries with export capacity in order to improve their productivity and provide them with an environment where they can work at their full potential. The textile industry in Pakistan contributes more than 60% to the country’s exports and is a major source of employment in the country, driving the country to a path of sustainable economic growth.

Development of value chain relationships is an essential part of the modern-day economy. Now that Pakistan has been able to establish an industrial base, its needs to make efforts to develop vital supply chains. For this purpose, it particularly needs to focus on its cotton sector keeping in view the ever-rising demand for cotton by the textile industry. Pakistan is the fifth largest cotton producer in the world; however, inconsistent policies, low investment and lack of technological upgradation have created bottlenecks in the sector, resulting in heavy reliance on cotton imports to meet the industrial requirement. Efforts should be made to improve global value chains by strengthening industrial and agricultural connections to foster innovation and productivity.

Fundamental changes are required in the country’s agriculture policy in order to enhance production and conserve the forex lost to excessive agricultural imports. Should Pakistan’s agricultural sector achieve 50% of the productivity that is the norm of neighboring countries with comparable soil conditions, the GDP of Pakistan stands to rise by many trillions of rupees which would pave the way for an exportable surplus and a secure economic future for Pakistan. At present 50% of Pakistan’s cotton is imported, even though we have the capacity to produce more than we need and under normal circumstances, should be exporting it.

Growth in the domestic market and other prospects like Free Trade Agreement with China, the regional Textile Production-Consumption Hub and CPEC, all provide investments opportunities.  The China Pakistan Economic Corridor in particular provides a unique opportunity for Pakistan to boost its strategic and economic position. It has the potential to transform Pakistan into a regional hub for trade and investment. The project covers four key economic areas which include energy, transportation, infrastructure and industrial cooperation. CPEC, once fully implemented, has the potential to transform Pakistan’s economy from a low growth mode to a high and sustainable growth economy by removing key infrastructural bottlenecks and promoting balanced regional growth and connectivity.

Regional and global connectivity is crucial to meet technological requirements, improve marketing and branding and eventually creating global recognition. The quality of exports must be improved by minimizing inefficiencies and enhancing productivity. Measures to expand and diversify the country’s export market will in turn result in employment opportunities in the country. Moreover, the export earnings, necessary for balancing import payments, will increase, thereby, reducing the trade deficit. This requires correct and favorable policies that would lead to sustainable growth in the export market and overall uplift the country’s economy.

To maintain the pace of industrial expansion and increase in exports, there must be continued investment in upgradation and expansion, as well as new projects. Profitability and competitiveness must be maintained, with a focus on export-led growth in order to maintain Pakistan’s economic and political sovereignty through the implementation of a long term policy of uninterrupted energy supply and regionally competitive energy tariffs. Furthermore, measures are required to ensure access to capital funds and availability of credit. Policies should target and facilitate young innovative companies in order to build them up and help to modernize Pakistan’s business environment.

 

Shahid Sattar and Amna Urooj

The fastest-spreading virus known to humankind till today – Omicron, is not only hitting the global population but also the global economy. The newly emerged strain of COVID-19 virus was first detected in Southern Africa in late November 2021 and is on its way towards a further debilitation of the already crippled world economy. The world economists have a widespread agreement amongst themselves that the virus which is here for over two years now has severe negative impacts on the global economy by impacting global stock markets, affecting industries, disturbing travel and tourism, influencing oil prices, and most importantly jolting the international trade which is highly dependent upon supply chain spanning the globe.

Previously, COVID-19 has obstructed international trade considerably and in several ways. The upshot of the damage in an importing country was principally due to a decline in the aggregate demand in that importing country. The reduction in demand occurred due to a reduction in people’s earnings and also their visits to retail outlets due to restriction on movement. On the other hand, in the case of exporting countries, the subsequent damage exhibited as a drop in the production scale and the export stock in that particular country. The main cause of this was that in exporting industries such as textiles, where remote work is less or not feasible at all, exports fell consequently. This is because the governmental response included introducing lock downs to curb the spread of the virus. Such phenomenon can be backed up by conclusions of various research studies such as that of Meier and Pinto (2020) which concluded that American industries with a hefty coverage to intermediate goods imported from China incurred a great loss in manufacturing sector. This, however, doesn’t stop here as the continual emergence of different strains and their sub-strains are disturbing the global economy and the latest, most contagious strain Omicron is no different. Different countries are facing different economic issues with regard to it and are using different economic policy measures to curb the impacts.

China, the epicenter of the virus, succeeded in controlling the pandemic and downward sloping economic growth quickly by its “zero-COVID tolerance policy” which it still holds on to. This meant quite stringent lockdown measures. The second-largest economy, documented the first contraction in decades due to the epidemic in the first quarter of 2020. Until now, policy easing persisted with a rate cut. However, an official growth target may or may not be published in March. According to Capital Economics, as of now, it is not clear yet that how the new variant will impact China’s manufacturing sector. Meanwhile, the country will review its policies regarding issues and difficulties faced by foreign trade companies in a timely manner through scientific ways as it has done previously.

The clothing factories and gas deliveries around one of China’s biggest seaports in Ningbo have already started facing shutdowns due to the increased outbreak of the new variants in the country, directly affecting the exports in the near future. The main hub of exports production Guangdong is also getting affected causing lockdowns in Beijing which is on its way towards organizing the Winter Olympics. China continues to follow its zero-COVID tolerance policy as the vaccinations are not considered effective enough to deal with the accelerating infection rate, the country’s hospital capacity is also lower. However, equally important is the fact that another nationwide lockdown coupled with a real estate sector slowdown, is expected to leave a negative impact on the country’s economy by dampening the growth rate. Economists predict that China’s zero-tolerance policy is expected to do more bad then good in the current fiscal year. For example, Goldman Sachs, has just slashed its forecast for Chinese economic growth in 2022 from 4.8% to 4.3% which is coarsely equivalent to half of last year’s growth rate. Morgan Stanley is of the similar opinion.

Interestingly, as a response to this, the leaders are ensuring that economic outlook is stabilized through easing out the policy stance for the upcoming important Party Congress in October 2022 whereby the Chinese President Xi Jinping is also extensively anticipated to pursue a historic third term in office, emphasizing the prerequisite of stability in the meantime.

The easing out of policy stance includes an easing of monetary policy e.g. marginally lowering various interest rates along with cutting banks’ reserve requirements. The central bank has also proclaimed additional set of rate cuts. The lack of electricity has also eased since the onset of October 2021. Consequently, so far, there doesn’t seem to have been a long-term effect on trade. Customs data show that the China’s trade surplus was $676 billion in 2021 which was an all-time high indicating that China’s strategy might actually be aiding. According to Pinpoint Asset Management, a possible reason for this can be a shift of export orders to China from other developing countries. To wrap up, the country does not seem to have any tangible exit strategy from the pandemic.

 China’s neighbor, Vietnam, has taken fewer heavy-handed policy actions so far, but like China has levied some of the stringent COVID-related policy measures as revealed by the University of Oxford through its COVID-19 stringency index. The Southeast Asian nation ensured that its factories keep running in the course of its deadliest COVID wave last year. This included lodging workers on site. It is probable that it will do alike in the most recent wave. Since, it is estimated that Omicron variant could augment further burden on supply chains disrupted by the pandemic, Vietnam is also imposing updated border controls to seal themselves off in an attempt to curb the spread.

Quite recently, it has admonished millions of its workers to relinquish trips home during the Lunar New Year holiday due to qualms that mass travel will increase the infections and consequently lead to a probable shutter of factories in one of the world’s key manufacturing powerhouses. The country is a linchpin in the global supply chain while being a pertinent manufacturing base for top companies such as Intel and Samsung, and with a large export turnover from the textile sector the local governments are trying hard to keep the factories open.

Quite recently, the factory activity appeared to be on the restoration with Manufacturing Purchasing Managers’ Index (PMIs) presenting growth in Vietnam recently. The country’s PMI jumped to 53.7 in January 2022, recording one of the highest growth in the ASEAN region. Moreover, the Central Institute for Economic Management forecasts that Vietnam’s economy will grow by 6% in 2022. On the other hand, World Bank, predicts it to be 6.8%. However, if the Omicron remains uncooperative, the labor demand of the Ho Chi Minh City will be around 255,000-280,000 staff members which would be the maximum at more than 78,000 in the year’s first quarter directly affecting the exports of the country. Moreover, the government is keen to enhance more debt to boost growth, even if it essentially raises its deficit ceilings. If this happens, Vietnam will be treading on a road to economic recovery.

Bangladesh, the world’s second-largest exporter of apparels is most likely to suffer in exports in the current wave only if its export destinations impose lockdowns and businesses shutdown. For example, if the pandemic continues in the next two to three months, the country’s export to Germany will suffer as after the USA, Germany is the second-largest export destination of Bangladeshi export goods. The country exported over $5.6 billion worth of goods to Germany last fiscal year of which more than 95% were apparel articles. Unfortunately, Germany reported record 208,000 new COVID-19 cases on 2^nd February 2022 and also expects a rise in death cases. This suggests that not only German economy will be hit hard but it will also impact the exports of Bangladesh as this may result in fewer procuring of consumer goods like leather goods, readymade garments and jute products.

An export earnings target of $51 billion has been announced by the Bangladeshi government for the fiscal year 2021-22, projecting a 12.37% year-on-year growth. $43.50 billion of the target will be achieved from goods consignment with a growth of 12.23% and the rest $7.5 billion from services with a growth of 13.15%. On the contrary, recently the prices of fabrics, yarn, transportation and energy have amplified, accelerating the cost of production of the Ready Made Garment (RMG) sector making it go through tough times. The Bangladesh Textile Mills Association (BTMA) has also reported a loss of $ 1.75 billion to the textile sector in the last three months due to energy crisis. Similarly, although apparel exports are on the rise, indicating no Omicron effects yet, the retailers are witnessing high footfalls in the two pertinent export destinations even in the post-Christmas lean period, as conveyed by industry insiders.

On the bright side, the Bangladeshi apparel industrialists are hopeful that despite the Omicron, new orders will continue to flow in and the export growth trajectory will sustain for at least the following few months in United States and European markets. Not only this, because of increasing freight costs, the retailers are also attaining 5%-6% higher prices and no exporters have been confronted with any withdrawal or hold-up of orders yet.

India has witnessed few signs of instability and ambiguity due to ongoing Omicron wave and despite that, it intends to stabilize it by tapping appropriate, economy friendly policy measures through provision of cushion to trade and businesses by the government. The country’s exports hit an all-time high amounting to $37.81 billion in December 2021 which is more than 10 times the monthly amount at the turn of the epoch. However, the latest threat of Omicron has affected the currency and stock markets indicating a probable disturbance of exports in the future through soared raw material prices and costs of logistics. Voices are being elevated for the government to tackle this issue.

The reason for this confidence is that it has loosened its fiscal and monetary policy so that it can power through the pandemic-induced slump. Not only this, but it has also loosened up both its monetary and fiscal policies to power through the pandemic-induced slump. It vows to keep this stance as it is for as long as it will be required to support growth. On the other hand, it is expected that the Reserve Bank of the country will also not update its interest rate in the upcoming monetary policy which will consequently drive growth and extend support despite Omicron. The afore mentioned economic policies along with a more rapid pace of vaccinations, decrease in cases, has ensured growth and consistent, robust exports.

Finally, Pakistan, for whom the International Monetary Fund (IMF) has just approved $1bn loan tranche and has projected a real GDP growth rate at 4 percent for 2022, is toiling hard to rectify its economic conditions. The country has gone to great lengths to stabilize its already debilitating economic growth, already hit by the pandemic, by implementing smart lock downs since the start. This measure has not only supported the exports in the country through pandemic but has also contributed positively to the national economy by diverting the export order from the closed industries of the neighboring countries especially for the textile sector such as from India and Bangladesh. The sector is all set to witness a surge in export orders again through movement from rivals, as reported by Bloomberg. The government is also planning to roll out incentives for exports to capture new markets.

The textile sector exports, which is one of the country’s bright spots economically, are poised to increase by 36 percent from previous year, making a record of $21 billion for a period of 12 months ending June. The country’s Commerce Adviser, Mr. Razak Dawood has also predicted a whooping expansion to $26 billion in the upcoming calendar year. Owing to current statistics, the country is also becoming competitive with Bangladesh.

A proposal is lined up for the upcoming month to provide incentives to Pakistani export sectors amidst the surge of the new wave of Coronavirus. This includes measures such as tax breaks, cheap loans and provision of electricity at competitive regional rates and trade agreements with Central Asian nations are also intensifying for free logistics. This will further dampen the effect of the Omicron on the economy of Pakistan while getting out of its repeated boom-bust cycles. On the other hand, it is feared that if oil hits $100 barrel, Pakistani exports will come under pressure.

To conclude, although a broad based development in fundamental economic activities with reference to trade exists but the Omicron blow-out still “remains a risk” for global nations. Overall, Pakistan is doing better than its regional competitors which can largely be attributed to the Government Coronavirus Policy, the Temporary Economic Relief Facility (TERF) loans and the Regionally Competitive Energy Tariff (RCET) Policy for the exporting sectors of the country. Omicron is a blessing in disguise for Pakistan as it has allowed a time barred opportunity to capture greater market share. Pakistan’s Policy direction should be focused on capturing maximum market share through increased competitiveness, as a result of continued RCET’s, which will consolidate the increasing export trend while reducing dependence on foreign loans.

 

Shahid Sattar and Zainab Malik

According to Nadeem Akhtar, a political analyst, “Double-digit growth in India and China were unimaginable 40 years back. It was only when they finally embraced the market economy and opened up for international trade the pace of development gained momentum. Pakistani economy has to break free of the political shackles for the sake of the future of the teeming millions.”

The economy of Pakistan has been hovering at a growth rate of about 4%, which is well below the rate required for meaningful economic growth. The country is experiencing rapidly increasing population, which, unfortunately, has not been exploited to its true potential. In order to create employment opportunities for this growing population, there is need for growth to be sustained at approximately 7-8% for at least another decade. Therefore, issues that have kept the growth rate in the country undesirably low need to be actively addressed and solutions must be sought.

GDP growth rate of Pakistan from the period 2012-2021

Economic performance in the country can be characterized by structural bottlenecks, low savings and investment and persistently high circular debt. Additionally, political challenges, bureaucratic procedures, lack of security and the undesirable situation of the domestic industry, due to lack of effective government policy and reforms have constrained ease of doing business in the country and have led to high costs and lack of productivity and innovation in the domestic industry.

There is government intervention in the marketplace which has strained businesses and has sabotaged their capacity to work at their full potential. It exercises control through various state-owned enterprises, direct market interventions and mass ownership of land and capital. Industries in Pakistan experience lengthy and time-consuming government regulatory frameworks which result in excessive paperwork, rent-seeking, high transaction costs, trade barriers and overall strain the business environment in the country, ranking Pakistan low on the ‘Quality of Regulation’ Index. Furthermore, excessive protectionist policies by the government have inhibited the growth of competitive markets, leading to deep-rooted inefficiencies.

An evolving and perhaps the most pressing issue prevalent in the country is that of persistently high energy related accumulated costs, better known as circular debt. The last 4-5 governments have failed to resolve this issue and it has been continuously mushrooming so much so that it has now reached an alarming atomic catastrophe level. There is an extremely high circular debt of Rs 2.5 trillion in the power sector and that of Rs 1.2 trillion in the gas sector. Fundamentally, this has arisen because of a skewed energy pricing structure in the country which makes recovery difficult from consumers cross-subsidizing uneconomic supplies. These discrepancies strongly signal towards the inefficiencies, mismanagement, corruption and inadequate planning exhibited by the government owned distribution companies and agencies in the country.

The recent Competitive Trading Bilateral Contracts Market (CTBCM) power sector initiative, aimed at creating wholesale competition in the power sector, is a classic case study on how to not develop a framework of reforms. The initiative severely lags on practical grounds. With long-term generation contracts in the power sector, there is no place for free suppliers; therefore, generation competition is not likely to be achieved in the near future. Renegotiation of all Power Purchase Amending agreements of existing Independent Power Plants is one way to free up some power generation and guarantee 50% of capacity, with the balance traded through wheeling or sold directly from a power exchange on B2B basis. Wheeling or third-party access in gas and power sector is the first step towards development. However, NEPRA has long been unable to implement wheeling, despite repeated directives to Discos to implement. Obstructions such as unreasonable and irrational costs in wheeling charges under CPPA’s proposal have hindered the formation of a free and competitive power market.

In Pakistan, the government is immersed in almost all major sectors such as agriculture, power and gas sector, banking, construction, as well as daily market activities. Additionally, government regulations carried out by the FBR (Federal Board of Revenue) in the form of Statutory Regulatory Orders are a regular source of government intervention and hinder the competitiveness of markets in the economy.

A paper published by Raja Rafiullah and Dr Nadeemul Haque reveals that the government’s total footprint is as high as 67% of the total economy. This confirms the un-ignorable, dominant presence of the government and the consequent crowding out of private investment. Pakistan has long been caught in a low saving-investment trap. Factors such as low income, high double-digit inflation, persistent macroeconomic instability and a low growth rate in Pakistan have all led to historically low savings rate in the country. A low income denotes that there is not enough money to save and generally, a lower propensity to save, especially in the presence of increasing costs and heightening inflation. Moreover, the country’s growing population and a large degree of unemployment have resulted in a high dependency ratio, which has further put pressure on savings. Other important determinants of saving behavior include culture and preferences which reveal that in Pakistan people have a higher tendency to spend than save. A low savings rate in turn degenerates the volume of funds available for investment, resulting in lack of capital accumulation, which is an important prerequisite for much needed industrialization and economic growth in the country.

Another major reason for low investment rates in the country is the inordinate government regulations in the country which deter the ease of doing business. “Although a range of factors amalgamate together to cause low investment rates, one reason that hinders private investment is the heavy footprint of the government on the economy”, according to a paper published by Raja Rafiullah and Dr Nadeemul Haque. All of these factors, along with the political and economic instability in the country, have led to exorbitantly low savings and investment in the country.

To set foot on the path of sustainable economic growth, it is vital to increase investments in the country by way of enhanced savings which can be brought by encouraging a saving culture within the country through financial schemes and better incentives for saving. Provision of employment opportunities for the large bulk of unemployed population will reduce the dependency ratio in the country and people will have enough income left to be able to save. Enhanced savings will lead to higher investment and capital accumulation in the country, both of which are significant facets of economic growth and prosperity. Furthermore, ameliorating the overall business environment in the country is of utmost importance. There is a need to put an end to the inefficient practices of the government in order to ensure productivity, efficiency, innovation and competitiveness, which would only be possible by way of deregulation, decentralization and privatization in the marketplace and eventually adopting a free market economy.

In a market economy, there is free interplay of supply and demand which is driven by businesses and consumers, each of whom work towards their best interest, inducing lower cost of goods and innovation, in the absence of disruptions caused by government regulations that artificially inflate costs. Sellers have an incentive to reap the benefits of innovation, in the form of increased profits, by selling creative new products that have an edge above their competitors. Hence, free markets give rise to competition and thereby, induceefficiency, improving the overall state of businesses in the country. This is evident from the enlightening performance of the textile industry in the country, which is a reflection of a true market,with a large share of goods sold internationally. Bulk of textile products are exported, fostering high innovation,technological advancement and value addition, higher than any other sector in the country.

Innovation can further be attained through better management, which can be ensured through investment in human capital in the form of training programs for employees. Looking at China as an example, the number of workers in the textile industry manning 100,000 spindles is 1/10th that of Pakistan. This reveals a huge gap in the labor force efficiency of the two countries. Therefore, learning from Chinese workers, under the CPEC (China Pakistan Economic Corridor) umbrella, will be especially beneficial for the country’s workers. Pakistan’s foremen need to be trained in order to adopt Chinese work practices and methodology. In Pakistan, the textile sector provides employment to approximately 40% of the total labor force. In light of proper training by Chinese workers in the country, employed under the China Pakistan Economic Corridor, the textile workers can further enhance productivity and ensure resourceful outcomes at a faster pace, leading to an even larger share of the country’s textile exports.

Provision of such conducive environment to all sectors in the country is vital for their growth and prosperity, enabling them to increase their export capacity and thereby, rescuing Pakistan’s economy from persistent trade imbalances due to significantly lower exports than imports. Without undue government intervention, firms will move towards open competition and will strive to stay in business. Free markets precipitate lower costs, innovation, rapid advancement, increased competitiveness, improved productivity, improved brand recognition, new partnerships, increased turnover and through this channel, enhanced profitability. Businesses and industries need to be provided with a growth enhancing environment that would allow them to flourish and expand capacity, thereby, creating a larger market share of Pakistan’s products across the globe.

Shahid Sattar and Amna Urooj

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.

Paul Krugman, The Age of Diminishing Expectations (1994)

Productivity is frequently demarcated as a ratio between the output volume and the volume of inputs. More specifically put, it revolves around the notion of measuring the efficiency of production inputs including but not limited to labor, capital inter alia in order to generate a certain degree of output in a given economy. It is considered a pertinent source of economic growth and thereby enhances competitiveness in the market. Moreover, it is an important indicator when cross country comparison is being done in terms of economic performance. This can be elucidated by the fact that productivity data sets of any country are majorly used to explore the influence of product coupled with the market regulations on the economic performance of the country, as stated by the Organization for Economic Co-operation and Development (OECD). Using such data sets, a projection of future productive capacity of different economies is made possible. Likewise, analysts and policy makers are in a vibrant position to effectively determine and regulate how to utilize this capacity while appraising the locus of economies in the business cycle, consequently, forecasting the economic growth. It is also used to evaluate demand and inflationary compressions.

Considering the aforementioned background information, the importance of productivity is crisp and clear. Unfortunately, for a developing country like Pakistan, productivity is an issue that it has been facing since decades now, even after its inception seventy-four years ago in 1947. The current situation of productivity in Pakistan is catastrophic in nature whereby the country is running low on productivity. This can be reinforced through the fact that according to Global Economic Data, Indicators, Charts & Forecasts by CEIC most recently Pakistan Labor Productivity dropped by 2.54% YoY in June 2019, compared with a growth of 3.09% in the previous year as can be seen below. On the contrary, Bangladesh’s Labor Productivity improved by 6.05% YoY in Dec 2019, compared with a growth of 5.61% in the previous year. The stark difference can be reinforced through the Global Competitive Report 2019 whereby the per worker labor productivity in Pakistan grew 1.4% annually between 2000-2017. On the contrary, Bangladesh grew by 3.9% and other regional competitors such as India (5.8%) and China (8.5%) also reflected greater growth within the same period as compared to Pakistan. Additionally, Pakistan ranked 107 out of 141 countries with reference to competitiveness and a ranking of 120 in Labor Market Efficiency. The scores are debilitating and require attention from the policy makers to make any meaningful response.

A quick glance at the solutions to uplift the productivity of the country revolve around an in-depth analysis of the productivity indicators across the value chains of its key industrial sectors in order to attain sustainable productivity as well as a high economic growth (Asian Productivity Organization – APO). The industrial sector of Pakistan is largely comprised of the manufacturing sector with few players such as the textiles whereby its production grew by almost 6% in the nine months through March 2021 and the sector accounted for 60% of total exports according to Finance Division, Pakistan. Moreover, the sector displayed double digit growth in December 2021 (17%) in comparison to the same month of 2020 amounting up to 1.64 billion dollars.

Source: PBS/PRAL

The overall performance of the manufacturing sub-sector i.e. Large Scale Manufacturing (LSM) was influenced by the textile sector majorly with the highest weight of 20.91 in Quantum Index of Manufacturing (QIM) recently. The woolen segment contributed largely to the production hike. On the other hand, COVID-19 brought many American and European importers at the helm of Pakistani textile exporters due to turbulence in trade of regional countries.

According to Pakistan Bureau of Statistics (PBS) data, total yarn production in the year 2020-21 was 3.44 million tonnes, on the contrary, 0.39 million tonnes of cotton yarn was exported in the same period that accounted for only 11.33% of total production for that year. Therefore, roughly 89% of cotton yarn produced in the country is available for the domestic market which has been converted into higher value “productivity exports”.

Subsequently, in quantitative terms, cotton yarn exports have lessened by 25%, from 0.522 million tonnes in FY18 to 0.390 million tonnes in FY21, which accounts for 26% in terms of value. The textile industry of Pakistan’s exports comprises of synthetic blended and specialized cotton yarn, fabrics, and finished fabrics to international market, which results in economies of scale and subsequently makes Pakistani textile products competitive in global markets. The drop in yarn and cloth exports is obvious from the fact that value-added exports have remarkably augmented and revealed extraordinary growth during FY21, cataloguing 37% in knitwear, 29% in bed wares, 32% in towels, and 19% in garments. This is a result of better utilization of resources, in other words “productivity.”

Productivity and exports are profoundly and directly proportional as the latter not only brings foreign exchange into the economy but is also indispensable for financing the desired imports and additionally reducing macroeconomic risks such as exchange rates, unemployment rates and interest rates etc., thereby creating quality employment avenues while pulling labor out of informal economic activities pertaining to low productive gains. Most importantly, exports lead towards productivity gains via an increase in scale and exposure to new sophisticated global clients/consumers (Varela, 2021).

Another area in the textiles that requires attention is the diversification of products. Since the sector comprises of the longest production chain, it is also inherently blessed with a potential of value addition at almost each stage of the chain. Immense potential lies in the cotton production stages ranging from ginning to finishing and everything in between. Product diversification has dynamic effects as reinforced by many countries as well as various studies. One case is that of Japan specifically in the 1990’s whereby its textile firms adopted technological modernizations along with product diversification which favored profitability and led to an increase in productivity. This leads to a long-term growth path that yields sustainable productivity (Colpan, 2006).

The COVID-19 pandemic has brought an ever expansive market growth of Non-Woven Fabrics, primarily used in the making of masks, PPE and many other medical-grade products. Such fabrics are arranged in patterns and fused using chemicals, heat and pressure. The global market of Non-Woven fabrics is projected to reach $26 billion by 2026 which promises a bright future for the Pakistani textile industry as can be seen below. Pakistan just needs to tap into the Non-Woven Fabric Market.

The global markets are more skewed towards textile trades (almost 60%) in Man Made Materials (MMF) now. The reason for this expansionary alteration in the demand is the advantages of MMF such as elasticity, strength and resilience etc. Unfortunately, Pakistan is being denied an opportunity to prosper in this flourishing market of MMF, both internationally as well as domestically, because of the duty protection given to obsolete plants. Likewise, the MMF tariff regimes in Pakistan also avert it from coming at par with global MMF markets. This can be elucidated by the fact that global textile trade comprises of 30% cotton and 70% MMF, whereas in Pakistan it’s the opposite i.e. 70% cotton and only 30% MMF which needs to be reversed. We are still stuck with producing short-staple fiber raw cotton majorly rather than moving forward with MMF according to global demands.

This highlights another issue that is of polyester staple fiber which dominates the global synthetic fibers industry. It is irrational to apply any duties upon it. Yet, startlingly, there is a 7% customs duty on the import of polyester staple fiber right now, racking up the total import duties. This subsequently falls in the range of 20% meanwhile including antidumping duty as well. This aspect alone is accountable for the dearth of diversification into new synthetic materials and hence productivity.

The effective and efficient management of the supply chain of the textile industry is an important factor that promises a bright spot for productivity. The long supply chain consists of production of raw materials and clothing production, inter alia. Stricter supply chain management (SCM) lead towards manufacturers striving hard to amplify their product quality, decrease the product and service costs and shorten the product delivery plus response time in an ever evolving, globalized world with a highly competitive market. The Bangladeshi textile industries have successfully managed through lower inventories leading to improved productivity, lowering costs and shortening lead times, gaining greater customer loyalty and witnessing higher profits adopting effective SCM (Ali M. & Habib Md., 2012). SCM should be the primary focus of Pakistani textile industry to augment competitiveness and productivity.

Finally, various studies have revealed that improvements which target labor productivity in factory conditions and services to workers by increasing incomes of workers, their welfare and skillsets consequently have a multiplier effect on the productivity (Ahmed, N. 2009). Working on this model, APTMA proposed a 20% increase in the minimum labor wage in March 2021, which was positively implemented by the government. The remaining thing to be done, however, is chalking out a comprehensive and rigorous technical and non-technical training module for the textile sector labor according to professional suitability to improve their skillset and hence productivity. This would require a close liaison with a public-private partnership of training institutes such as Technical Education and Vocational Training Authority (TEVTA), National Vocational and Technical Training Commission (NAVTTC), Institute of Professional & Technical Training Private Limited (IPTTPL) etc.

A multidimensional policy approach to restructure the textile sector of Pakistan is sine qua non for any meaningful change in terms of national productivity. The sector is trailing its competitiveness in the international market because of the impediments discussed in this article. Therefore, it is absolutely necessary to improve productivity for a sustainable future.

Shahid Sattar

Any increase in exports is always a function of the elasticity of the inputs that make up the goods exported. These inputs are multifaceted, subject to factors including but not limited to technological advancement, research and development, education and skill level, economies of scale, law and order situation, political stability, and most importantly, competitive advantage in the production of goods. In a recent analysis published on Twitter, it was posited that a “favorable exchange rate” explains the increase in export quantity in recent years.

However, this analysis fails at many levels; firstly, as it is outdated, neglecting to account for the monumental export growth achieved in the past year alone, only considering values up until a certain date in 2020; and secondly, by making a false attribution between exports and exchange rate where no clear link is present. Above all, considering a sole factor such as exchange rate results in a unidimensional and therefore fallacious analysis, contrary to which there is extensive literature revealing that the relationship between the indicators of exports and exchange rate is statistically insignificant.

Numerous studies cover the theoretical as well as empirical aspects in order to demonstrate the complex relationship that exists between currency level in a country and its trade, making it near to impossible to chalk out a clear causal effect. In one study, Hooper and Kohlhagen (1978) established a trivial and negative association between exchange rate of a country and its trade. Furthermore, all inputs of Pakistan’s exporting sectors are dollar based, including but not limited to raw materials, energy, dyes & chemicals, machinery and spare parts etc, and it has been ensured that they are measured in dollars in order to reduce risks posed by currency volatility, thereby providing an unwavering and secure economic and investment climate. Being a developing country with a high inflation rate, Pakistan implements full dollarization for its industrial imports. This itself refutes the concept of debilitating exchange rates affecting the trade of the country.

In FY21, Pakistan’s goods and services exports amounted to nearly $31 billion. This growth was shown to be aided mainly by three factors: lower interest rate, regionally competitive energy prices, and a lower cost of doing business. While there have been, to a certain degree, supportive policies for the export industry over the past 3 years, this support has given back to the economy manifold, due to the multiplier effect of export growth. As an example, Bangladesh’s export-oriented industry benefits from unwavering government support, competitive energy and exemplary DLTL system which strengthens its exporting industry as the mainstay of the economy. This is why the economy of Bangladesh is now ranked the fastest growing in the world, in stark contrast to Pakistan’s case where government support for industry is deemed to be a “subsidy.” To the contrary, a subsidy is defined as financial aid or support in order to bring costs below the market rate, while the exporting sector in Pakistan flounders to obtain the very basic market rate and nothing below that.

Competitive energy rates are not subsidies; they are the minimum requirement for the industry to remain at par with regional competitors. Supportive policies that included competitive energy enabled the industry to attract sufficient investment to begin expansion in capacity and technological upgradation. However, recent policy instability threatens to reverse the industry’s progress. It is critical to prevent this from happening, by continuing the provision of energy at regionally competitive tariff rates, for the country’s long-term economic stability and GDP growth. Even with these minimum requirements, Pakistan’s export based industry is far from achieving the necessary upgradation and innovation. Systemic inefficiencies, administrative delays, and ever increasing cost of doing business all have contributed to an unsustainable business environment, and each of these factors must be considered each time there is talk of export numbers.

Pakistan relies on very limited items for its exports, rendering its export base very narrow with a focus on low value-added products. These include products related to textiles, agriculture, pharma sector etc. These prominent categories of exports contribute to more than 70% of total exports with textile exports solely contributing more than 60%. Pakistan has not increased its export base as it lags behind in terms of product diversification, with narrow market capture and a low-tech based production competing against constantly evolving global players. This signifies that a factor like exchange rate has no significant effect on a narrow base export economy like Pakistan, a point emphasized previously in a study by the National Tariff Commission of Pakistan titled “Impact of Exchange Rate on Pakistan’s Exports”.

It is important to note that prior to any assessment of the

impact of exchange rate depreciation on exports, imports and employment, one must consider the overall state of the country’s economy and policies. The rupee plunged over 58 percent against dollar in 2021 as compared to 2015 on average (from Rs 103 to Rs 163). Following this currency devaluation, the cost of doing business rose due to increasing prices of energy, raw materials and freight. This devaluation served as beneficial for one group in particular: domestic producers such as cotton farmers, who benefited from both the devaluation of currency and the rise in international prices of cotton. In the last season, cotton farmers were paid Rs 400 billion additional payments on account of higher international cotton prices.

The export sector experienced a period of stagnancy up until recently, as the costs of doing business far outweighed government support, leading to an unsustainable environment for export-led growth. The costs of doing business were racked up by persistent issues in pending refunds of exporters (some of which still remain pending), load shedding, high energy costs, high interest rates, all of which reversed any supposed positive impact of rupee devaluation.

Three primary factors influence the impact of depreciation on external trade and related sectors. Domestic pricing, inflation in other countries and macroeconomic conditions and policies during the devaluation phase. The first two components determine the real effective exchange rate and external competitiveness. The nature of exports and imports, as well as export capability, determines the benefits. The amount of depreciation that contributes to greater economic activity and hence increased export capacity is determined by macroeconomic conditions and policy. The profits from depreciation would be compromised if any of these aspects were lacking.

There was no rupee depreciation during the PML-N’s tenure when inflation was low. Even a small depreciation of rupee then could have effectively lowered the exchange rate. The damage in terms of lower exports had been set in motion when the rupee began to fall in 2018 with the change in government. Similarly, the problem with the Balance of Payments started to get out of hand and the state of the economy began to deteriorate. Following that, the country implemented contractionary policies. To combat inflation and attract foreign money to manage FX holdings, the interest rate was increased from 6.5 percent (in May 2018) to 13.25 percent (from July 2019 to March 2020), followed by a Covid-19 reversal. After July 2019, the government began implementing the IMF’s expanded strategy, which includes lowering subsidies, hiking energy and petroleum costs, and raising interest rates, etc.

Slow economic growth, high inflation, a decade-high interest rate, and rising energy prices have all contributed to higher production costs, lowering any supposed gains from impulsive devaluation. The private sector’s ability to simulate economic development and increase investment has been limited as a result of the high interest rate. Any benefits of depreciation in recent years were outweighed by the economic downturn and rising production costs. Overall goods and services exports in FY20 were $ 28 billion, down from $ 30.62 billion in FY18 and $ 30.22 billion in FY19, according to data from the State Bank of Pakistan. Despite the depreciation of the rupee, Pakistan’s exports fell in 2020, which is testament to the fact that there is no link between the two.

Debunking the Relationship Between Exports and Currency Devaluation

Shahid Sattar

Any increase in exports is always a function of the elasticity of the inputs that make up the goods exported. These inputs are multifaceted, subject to factors including but not limited to technological advancement, research and development, education and skill level, economies of scale, law and order situation, political stability, and most importantly, competitive advantage in the production of goods. In a recent analysis published on twitter, it was posited that a “favorable exchange rate” explains the increase in export quantity in recent years. However, this analysis fails at many levels, firstly as it is outdated, neglecting to account for the monumental export growth achieved in the past year alone, only considering values up until a certain date in 2020, and secondly by making a false attribution between exports and exchange rate where no clear link is present. Above all, considering a sole factor such as exchange rate results in a unidimensional and therefore fallacious analysis, contrary to which there is extensive literature revealing that the relationship between the indicators of exports and exchange rate is statistically insignificant.

Tweet implying link between exports and exchange rate

Numerous studies cover the theoretical as well as empirical aspects in order to demonstrate the complex relationship that exists between currency level in a country and its trade, making it near to impossible to chalk out a clear causal effect. In one study, Hooper and Kohlhagen (1978) established a trivial and negative association between exchange rate of a country and its trade. Furthermore, all inputs of Pakistan’s exporting sectors are dollar based, including but not limited to raw materials, energy, dyes & chemicals, machinery and spare parts etc, and it has been ensured that they are measured in dollars in order to reduce risks posed by currency volatility, thereby providing an unwavering and secure economic and investment climate. Being a developing country with a high inflation rate, Pakistan implements full dollarization for its industrial imports. This itself refutes the concept of debilitating exchange rates affecting the trade of the country.

In FY21, Pakistan’s goods and services exports amounted to nearly $31 billion. This growth was shown to be aided mainly by three factors: lower interest rate, regionally competitive energy prices, and a lower cost of doing business. While there have been, to a certain degree, supportive policies for the export industry over the past 3 years, this support has given back to the economy manifold, due to the multiplier effect of export growth. As an example, Bangladesh’s export-oriented industry benefits from unwavering government support, competitive energy and exemplary DLTL system which strengthens its exporting industry as the mainstay of the economy. This is why the economy of Bangladesh is now ranked the fastest growing in the world, in stark contrast to Pakistan’s case where government support for industry is deemed to be a “subsidy.” To the contrary, a subsidy is defined as financial aid or support in order to bring costs below the market rate, while the exporting sector in Pakistan flounders to obtain the very basic market rate and nothing below that.

The tweet author questions “subsidies” to exporters and falsely attributes growth to exchange rate.

Competitive energy rates are not subsidies; they are the minimum requirement for the industry to remain at par with regional competitors. Supportive policies that included competitive energy enabled the industry to attract sufficient investment to begin expansion in capacity and technological upgradation. However, recent policy instability threatens to reverse the industry’s progress. It is critical to prevent this from happening, by continuing the provision of energy at regionally competitive tariff rates, for the country’s long-term economic stability and GDP growth. Even with these minimum requirements, Pakistan’s export based industry is far from achieving the necessary upgradation and innovation. Systemic inefficiencies, administrative delays, and ever increasing cost of doing business all have contributed to an unsustainable business environment, and each of these factors must be considered each time there is talk of export numbers.

Pakistan relies on very limited items for its exports, rendering its export base very narrow with a focus on low value-added products. These include products related to textiles, agriculture, pharma sector etc. These prominent categories of exports contribute to more than 70% of total exports with textile exports solely contributing more than 60%. Pakistan has not increased its export base as it lags behind in terms of product diversification, with narrow market capture and a low-tech based production competing against constantly evolving global players. This signifies that a factor like exchange rate has no significant effect on a narrow base export economy like Pakistan, a point emphasized previously in a study by the National Tariff Commission of Pakistan, titled Impact of Exchange Rate on Pakistan’s Exports.

It is important to note that prior to any assessment of the impact of exchange rate depreciation on exports, imports and employment, one must consider the overall state of the country’s economy and policies. The rupee plunged over 58 percent against dollar in 2021 as compared to 2015 on average (from Rs 103 to Rs 163). Following this currency devaluation, the cost of doing business rose due to increasing prices of energy, raw materials and freight. This devaluation served as beneficial for one group in particular: domestic producers such as cotton farmers, who benefited from both the devaluation of currency and the rise in international prices of cotton. In the last season, cotton farmers were paid Rs 400 billion additional payments on account of higher international cotton prices.

The export sector experienced a period of stagnancy up until recently, as the costs of doing business far outweighed government support, leading to an unsustainable environment for export-led growth. The costs of doing business were racked up by persistent issues in pending refunds of exporters (some of which still remain pending), load shedding, high energy costs, high interest rates, all of which reversed any supposed positive impact of rupee devaluation.

Three primary factors influence the impact of depreciation on external trade and related sectors. Domestic pricing, inflation in other countries and macroeconomic conditions and policies during the devaluation phase. The first two components determine the real effective exchange rate and external competitiveness. The nature of exports and imports, as well as export capability, determine the benefits. The amount of depreciation that contributes to greater economic activity and hence increased export capacity is determined by macroeconomic conditions and policy. The profits from depreciation would be compromised if any of these aspects were lacking.

There was no rupee depreciation during the PMLN’s tenure when inflation was low. Even a small depreciation of rupee then could have effectively lowered the exchange rate. The damage in terms of low exports had been set in motion when the rupee began to fall in 2018 with the change in government. Similarly, the problem with the Balance of Payments started to get out of hand and the state of the economy began to deteriorate. Following that, the country implemented contractionary policies. To combat inflation and attract foreign money to manage FX holdings, the interest rate was increased from 6.5 percent (in May 2018) to 13.25 percent (from July 2019 to March 2020), followed by a COVID-19 reversal. After July 2019, the government began implementing the IMF’s expanded strategy, which includes lowering subsidies, hiking energy and petroleum costs, and raising interest rates, inter alia.

Slow economic growth, high inflation, a decade-high interest rate, and rising energy prices have all contributed to higher production costs, lowering any supposed gains from impulsive devaluation. The private sector’s ability to simulate economic development and increase investment has been limited as a result of the high interest rate. Any benefits of depreciation in recent years were outweighed by the economic downturn and rising production costs. Overall goods and services exports in FY20 were $ 28 billion, down from $ 30.62 billion in FY18 and $ 30.22 billion in FY19, according to data from the State Bank of Pakistan. Despite the depreciation of the rupee, Pakistan’s exports fell in 2020, which is testament to the fact that there is no link between the two.