Indisputable Link Between Competitive Energy and Export Growth

Shahid Sattar

A reliable and supportive energy environment is a critical component of industrial competitiveness, without which the risks of premature deindustrialization abound. The export momentum achieved in the past two years, particularly through the substantial contribution by the textile sector with supportive government policy, must not be taken for granted. It is unfortunate that the evident results of consistent and supportive energy policies to exporters are being negated and the significance of textile-led export growth for Pakistan’s economy is being undermined.
Providing exporters with the bare minimum requirement of competitive energy is indispensable for sustained economic growth, yet criticism is being levelled that the industry demands subsidies that do not correlate with export growth. What have been criticized as “handouts” are in fact the basic needs for the industry to remain competitive, and the governments of our regional competitors ensure that their industries remain supported with these minimum requirements so that exports and therefore economies can prosper. Furthermore, the independent study that is being touted as evidence against the link between competitive energy and export growth is not based in fact, authored by those with no experience in the field, and using outdated information as it fails to take into consideration the past 3 years.

The cost of regionally competitive energy is less than 2% of the average return that exports bring to Pakistan’s economy. This is valuable foreign exchange that does not have to be repaid or serviced at high interest rates. With textile mills facing closure in Punjab due to the government’s suspension of energy supply over the past month, about 80% of industry operations were in danger of being brought to a complete halt. There remains intense competition among regional textile exporters, so a minor cost difference in relative terms brings an exponential impact on the international market. Furthermore, the recent export momentum has been instrumental in attracting manifold investments, supporting the industry in expansion while it inches closer to the target of $21 billion exports in FY22.
Textile units in Pakistan are incurring power and energy costs 2.4 percentage points more than India and 7.8 percentage points higher than Bangladesh. Research has demonstrated that the ideal, regionally competitive electricity tariff would be around 7.4 cents/kWh.
SNGPL is currently supplying up to 70 mmcfd to non-export processing industry including steel, ceramics and glass. It is inexplicable to not give priority to exporting sectors, given the multiplier effect of supplying them with competitive energy. Furthermore, the extreme economic urgency of supporting the Balance of Payments needs to be catered to rather than supplying RLNG/ Gas to non-export sectors while exporters are disconnected. This is an alarming state of affairs when the Current Account Deficit has been at an all-time high of $ 7.089 during the first five months of FY22.
The total consumption of captive and Co-generation was 180 to 200 mmcfd and 160 mmcfd just prior to 15th December 2021. SNGPL and APTMA agreed that 75 mmcfd gas will be provided for the winter months, which is about 35% of gas load which is absolutely essential to maintain production, without considering viability. Factories which had generated steam from coal or fuel oil prior to 2015 have restarted their boilers in order to keep production going and not default on export orders. This is despite the fact that this method of steam generation is extremely uneconomic, and plants established after 2015 have no such back up facilities and therefore cannot operate.
Scenarios where this gas is necessary to run units include:
1. Factories that do not have full grid load and are awaiting an extension of load.
2. Electronic-sensitive machines that cannot run on grid power.
3. Factories reliant on steam made from generator waste heat recovery boilers (cogeneration) for their dyeing plants/ weaving & knitting machines.
Major electric shutdowns present the industry with a troublesome situation, as witnessed on 15 December when 80% of Punjab industry was shut down. The industry was forced to shift to Grid Supply, from which it had earlier on shifted to gas fired power plants on account of sub-standard supply after expending huge sums / large investments. Immediately following the gas cut, the grid failed in central Punjab and the industry was without any power for 12 to 20 hours at a stretch. The interruptions continue to date.
On the other hand, as the existing sanctioned electricity loads were much less than the requirements, with as many as 129 cases relating to applications for new connections, extensions of load, capacity enhancement were pending, the gas disruption resulted in a significant loss of textile manufacturing capacity, calculated to be over 20-25 % of the total. In many cases, the payments made have been awaiting action for over 2 years. Strangely, the DISCOs have now taken up maintenance work on its lines leading to unwarranted shutdowns – which further add on to the present supply constraints to the textile value chain. As a consequence, the country has lost over 25% of its textile manufacturing capacity – which will manifest as lowered production and exports from January 2022 onwards.
It is important to note that the contribution of LSM to Pakistan’s total manufacturing is 78%, while it contributes 9.5% to the GDP and 12.6% to the labor force. Unfortunately, the sector has been witnessing a decline for the past couple of years. According to a Tribune article titled Slowdown in LSM Growth Persists, growth in large-scale manufacturing (LSM) industries slowed down to 3.6% during the first four months (July-October) of the current fiscal year. Over time, the government’s policies for energy, as well as monetary policy and currency depreciation have contributed to an unsuitable environment for industries and heightened the cost of doing business.
Textiles, of which over 20% of the LSM index is comprised, was among those sectors that posted growth in the first four months of the current fiscal year. Any factor that has a bearing on textile sector operations significantly impacts overall LSM growth, with spillover effects on revenue and job creation. However, the evident link between these factors is denied time and again despite the multiplier effect of supplying regionally competitive energy to industries
For the current fiscal year, the government has set the economic growth target at 4.8%. However, the IMF projected that Pakistan’s economic growth would remain around 4% – about half of what is required to create enough jobs keeping our youth bulge in mind. This is an unavoidable circumstance of the strong anti-export/anti-manufacturing bias in government policies. The trade regime lacks transparency and is one of the most inward oriented in the region. Furthermore, infrastructure investment and allocation have been skewed in favor of consumption rather than manufacturing and exporting industries. It is therefore no surprise that our industrialization has been the lowest among other developing countries over the past 40 years.

The unsuitable environment for businesses in Pakistan has resulted in liquidity crises and reduced overall profitability. Furthermore, tariff and non-tariff barriers discourage import of quality raw materials for better output while also making production regionally noncompetitive. Numerous schemes have been made available over the years to streamline access to imported inputs at world prices, but these are largely ineffective. Only about 2% of textile and apparel exporters in Pakistan can access duty suspension schemes for their imported intermediates, in contrast to 90% in Bangladesh, where export-led economic growth has been exemplary.
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 allowing them to attract investment and steer economic growth while also creating new economic and industrial zones for innovation and entrepreneurial opportunities. Regionally competitive energy, supportive schemes for importing machinery, and a structured technology upgrading framework embedded in industrial policy are the bare minimum for exporters, and a strong, supported industry has proven time and again to be the only force that can bring Pakistan out of its current account deficit and out of the clutches of IMF loans.

Shahid Sattar and Amna Urooj

The role of women in any societal setup has remained a crucial pre-requisite for not only the economic, social, political uplifting of that particular society but also contributes to the general progression globally. However, coupled with this fact is the unfortunate existence of the notion that impedes women from gaining the aforementioned emancipation. This can be encapsulated by the fact that half (49.2%) of Pakistan’s population remains underutilized regardless of a huge stockpiled economic as well as social progression potential in them. This bisected population is a representation of the Pakistani females that practically remain majorly out of the policy equation of the country in all spheres.

In order to acquire a well-informed analysis of the contemporary situation of women empowerment in Pakistan, it is pertinent to highlight some important statistical aspects in this regard. These range from Economic Participation of the women to their health and well-being. According to The Global Gender Gap Report 2020 by The World Economic Forum, the Global Gender Gap Economic Participation and Opportunity reflected a value of only one quarter of Pakistani women participating in the workforce i.e. employed or looking forward to be employed. On the contrary 85% of Pakistani men are involved economically. Likewise, only 18% of the labor income goes to the women in Pakistan (World Bank, 2020). Moreover, the similar statistics for Bangladesh, being the best performer in South Asia, stand at a rate of 38% of women actively participating in the labor force in 2018. Furthermore, it can be noted that the annual GDP per capita growth rate of Bangladesh in 2020 was 1.35% whereas for Pakistan it stood at a rate of -1.44% for the same year (World Bank). This capitulates the stark difference between the economic participation and opportunities available for the women vis à vis the economic growth rate in return of that as can be seen below.

GDP per capita growth (annual %) – Pakistan, Bangladesh

Source: World Bank

One of the crucial policy steps taken to empower women in Bangladesh was the provision of microcredit. Various studies have shown the positive impact of microcredits such as it being a significant instrument for the generation of income, development of human resources, poverty reduction and women empowerment (Kessey 2005). Microcredits in Bangladesh strengthened the rights related to the economic decision making in women along with the establishment of a wider law acumen base (Debnath et al., 2019).

Political Empowerment is another central indicator for women empowerment which comprises of leadership roles taken up by women. The World Bank reported in 2020 that only 5% of senior leadership roles are taken up by women in Pakistan which makes it attain a rank of 146 out of 153 countries analyzed by the World Bank in its report. This score is perilous to start from. The political gender gap has however tapered noticeably over the previous two years but yet remains wide, placing Pakistan on the 93^rd position country wise.

Additionally, Education Attainment, also reflects the level of women empowerment for any country. It is very unfortunate for Pakistan that a large number of countries have already or almost evaded the literary gap based upon gender however Pakistan stands still at a 20% figure. What is more appalling is that less than half of the women are illiterate in comparison to 71% of the Pakistani males. Furthermore, the differences in the enrollment across the primary, secondary as well the tertiary education are also stark (World Bank, 2020).

Literacy rate, adult female (% of females ages 15 and above) – Pakistan

Source: World Bank

The combination of feeling content with national setup and functioning well of any nation goes a long way. This typically is crucial for the women – the birth givers and the care takers. Physical and psychological well-being is directly linked to the successful rates on professional, personal as well as inter-personal levels. The Maternal Mortality Ratio (per 100,000 births) stood at 189 in 2019 (Pakistan Maternal Mortality Survey). Moreover, with a burgeoning population and a growth rate of 1.9%, which is turning into an existential crisis, Pakistan’s contraceptive prevalence rate remained sluggish at 34% for women aged 15-49 in 2019 (Ministry of Finance, Pakistan). This makes it the fifth most populous country in the world. A projecting population with other economic issues such as a low GDP growth rate, increasing food insecurity, unemployment and other factors add layers of inefficiency at a national level, crippling the economic as well as the health structures. On the contrary, the population growth rate of Bangladesh remained 1% in 2019 (World Bank). Not only this, their fertility rate stands at a value of 2.3 in 2011 mainly due to availability to and usage of contraceptives to the Bangladeshi females (The Guttmacher Institute, 2011), taking it a step ahead towards becoming a role model in women’s health improvement.

The aforementioned paragraphs depict the contemporary situation of the women in Pakistan which typically is a sad state of affairs for not only the women but the entire nation. The downward trajectory of the indicators mentioned earlier are directly influencing certain national level indicators such as national success, sanity of the nation and finally the happiness of the Pakistanis. These are directly affected by the economic development, rationality and knowledge diaspora and finally social well-being respectively. A positive economic development ensures a national success in the form of economic uplift of the country. In such an uplifting women play an important part being a significant portion of the population just like Bangladesh whereby the women played a major role as a consequence of a liberation of their economic choices and control. Their labor force participation increased tenfold during the year 2003 to 2016. Moreover, their gender wage gap also reduced with an introduction of positive societal perspectives related to women land ownership. Overall result of this turned out to be an increased financial inclusion of the women which had other trickle down effects. The Human Development Index (HDI) of Bangladesh stands at 133th place in 2019 out of 189 countries and territories. However, for Pakistan the HDI value for 2019 stands at a position of 154/189. Similarly, Pakistan ranked 105 out of 149 countries on the Happiness Index (World Happiness Report 2021 by The UN Sustainable Development Solutions Network) whereas Bangladesh ranked 101.

Women emancipation in Pakistan requires curated policy measures in order to move towards making Pakistan a successful, sane and a happy nation. These policy measures revolve around some basic core efforts to improve the indicators involved. The foremost step would be the providence of targeted access to education attainment of higher education in females. This revolves around the notion of personalized solutions problem wise. An increased literacy rate still faces issues when sustainable job pathways for women are not available in alignment with societal gender roles of the females.

Once on the field, the women come across a glass ceiling which simply means an unacknowledged barrier to progression in the profession faced by the females based upon their gender. For a practical emancipation the glass ceiling has to be shattered. This needs subtle efforts from the top tier of the relevant organizations.

The issue of political empowerment can easily be resolved through a more transparent and accountable political system. Laws and policies to ensure substantive women participation in the political arena are well documented, however, the problem lies in their implementation which is hindered by political motives of certain strata of the society.

Most importantly, the women of Pakistan have awaited the awarding of their reproductive rights since a long time now for better health and well-being. Given that they are the life givers and care takers, it is time for the country to prioritize female reproductive health for the nation under the umbrella of basic human rights including but not limited to right to life, a life free from torture, privacy rights, attainment of dignified health and education and finally an educated consent to choose between healthier reproductive alternatives leading to a toned population count for greater benefit thus giving a multiplier effect to the economy. All we need is sincere efforts from policymakers.

Dr Gohar Ejaz

In recent times, the textile industry has made notable progress and yielded spectacular results, particularly following a sharp rise in investment from industrialists. Further good news is that the industry is well on its way to achieve textile exports of $21 billion for FY22, based on the assumption that government policies will remain supportive of the industry. At this pace, a sustained yearly growth of over 25% is possible. However, the coming year presents a unique set of challenges, particularly in the cotton sector. These challenges are attributed to the uncertainty in the cotton market as well as currency markets. Furthermore, while the global textile market is worth around $800 billion, Pakistan is still a very small player with only about 1.7% market share in 2020, which signifies ample room for expansion and diversification.

The increase in the rate of cotton and resultantly higher prices of cotton yarn may be a cause for concern in the industry. The cotton price in the world market has currently reached over $1 per pound, a high that was last noted way back in 2010-11. When this happened in FY11, downstream industry proposed a quota on exports and regulatory duty on yarn exports, which was not imposed in favor of allowing a free-market mechanism to take precedence.

With raw cotton prices reaching $1 per pound for the second time in the last 100 years, there has again been talk of a regulatory duty to be imposed on yarn exports, but those in favor clearly do not understand the workings and importance of a free market mechanism. The government must continue to abstain from such quotas and regulatory duties as they can have adverse effects and distort market operations. It is not viable to purchase cotton at import substitution from the local market and sell it at 10 percent below export parity price. It is also of critical importance to look after the wellbeing of our farmers, who had been facing massive losses for the last 5 years, and are now finally earning profits. The downstream industry must not be subsidized, as any policy which puts farmers at a disadvantage cannot be supported.

The current environment being conducive to farmers has resulted in an expected 50 percent higher cotton production from last year, amounting to roughly 9 million bales.While Rs. 200 billion was disbursed as crop value to cotton farmers last year, the higher prices and higher expected crop size this year is expected to take the value up to Rs. 600 billion. Farmers will thereby reap the benefits of an additional Rs. 400 billion. Allowing the market to operate freely will leave farmers in an even better position to sow cotton next year, reaping positive results for the first time since the 2010 cycle, and leading to economic growth.

APTMA and all textile industries are to pay international parity prices to domestic farmers, and to stand firmly with them against any segment of the value chain that demands duty as it will negatively impact their profits.The Association is also taking steps to improve the cotton sector’s performance through the APTMA Cotton Foundation (ACF). ACF has taken initiatives to create cotton clusters and centers of excellence, and promote model farming techniques.

The country’s domestic supply of cotton is being fully utilized, with some 84% of our apparel exports coming from cotton. Meanwhile, the rising demand for high-performance apparel such as athletic wear shows that synthetic fiber is a booming market. Competing in this market will require more technological sophistication than producing apparel from traditional fibers. While other textile-led economies in South Asia have diversified their export baskets and increased the proportion of high-value-added products, Pakistan is playing catch-up. It is hoped that new investment continues to come in, which will be instrumental in upgrading the industry’s technology to capture a higher share in the synthetic fiber market.

When it comes to the currency pressure in recent times, we can largely attribute it to the previous unavailability of new investment, which led to deindustrialization. While Pakistan’s Large Scale Manufacturing sector had been witnessing an upturn over the past year, this LSM growth seems to be slowing down once again.

However, when it comes to individual LSM sectors, it is evident that the role of the textile sector is of primary importance, accounting for over 60 percent of all exports. This necessitates consistent support and investment in the sector to achieve economic growth for Pakistan. The textile industry has now invested $5 billion in 100 new units of the value-added sector, gearing up to boost textile exports by a further $5 billion. The industry is on track to achieve the target of $21 billion in textile exports as long as the government continues to ensure the availability of energy at regionally competitive prices, i.e., gas/RLNG at $ 6.5/MMBtu and electricity at 7.5 cents/kwh. A long-term textile policy incorporating regionally competitive energy tariffs would spur investment and take exports to much greater heights.

A large proportion of expansion is already underway, and is considered a direct result of the government’s regionally competitive energy pricing policy. With this evident correlation between energy tariffs and the country’s investments and exports, it cannot be emphasized enough that the continuation of this policy is essential to maintain the momentum gained so far. Pakistan can further improve its competitiveness by upgrading its technology, which is now increasingly possible given the recent growth in the industry and economy. Furthermore, diversification can be enhanced by directing more investment towards technological upgradation, refining the sector’s position in the apparel value chain and redesigning import duty suspension and refund programs for exporters. By maintaining value addition, with a consistent supply of competitive inputs and supportive policy, the textile sector can continue to succeed in its crucial role of spearheading economic growth.

Shahid Sattar and Eman Ahmed

The textile sector of Pakistan has immense significance for the economy, as evidenced by its contribution to the country’s GDP as its largest manufacturing and exporting sector. The sector achieved growth of 27% in the first quarter of FY22 compared to the same period last year, and is undergoing impressive levels of expansion. Following a 13-year period, there has been $5 billion worth of investments across the entire textile value chain including spinning, weaving, finishing, processing and garments. The introduction of pro-export policies by the government in recent times has enabled unprecedented growth in the sector. It is important to note that the energy cost is the sector’s leading component in terms of conversion cost, comprising around 35-40%. Moving forward, it is critical to continuing the provision of energy at regionally competitive tariff rates, for the country’s long-term economic stability and GDP growth.

As Pakistan’s economy progresses towards sustainable growth, it is essential that export-led growth becomes a cornerstone of government policy. An economic growth rate of 7-8 percent has been deemed necessary in the next 30 years to meet the needs of our growing population, and with over 100 new textile units being set up across the country, this goal seems achievable. New investments have a central role in the sector’s expansion and will serve as the ladder to economic growth, generating 500,000 fresh employment opportunities along the way. However, this is all contingent upon the future of energy tariffs. Numerous studies have demonstrated that an electricity tariff above 9 cents/kwh is regionally uncompetitive and the industrial demand of providing electricity at 9 cents/kwh and gas/RLNG at $ 6.5/MMBtu is unassailable.

The major factors of production in textiles apart from capital are raw material (i.e., cotton), energy and labor. In terms of cost of conversion (where the cost of raw material is subtracted from the total cost of production), energy cost is the leading component, particularly in spinning and weaving. Due to intense competition among regional countries, a minor cost difference in relative terms brings an exponential impact on the international market.

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Cross-Country Comparison of Conversion Cost

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Pakistan India Bangladesh

Power Wages Depreciation Power Wages & Depreciation Power Wages & Depreciation

& Fuel & Salaries & Fuel Salaries & Fuel Salaries

=======================================================================================================================================================

Average

(2017-20) 34.6 29.3 10.3 29.8 28.0 16.0 25.5 33.8 18.0

2017 36.1 29.9 10.0 26.9 26.6 16.5 26.9 33.0 17.5

2018 36.4 29.3 10.1 30.6 27.1 14.8 24.4 29.8 15.8

2019 33.6 29.4 9.6 31.2 30.8 16.4 26.0 35.8 18.4

2020 32.8 28.7 11.8 30.4 27.6 16.3 25.0 37.1 20.9

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Source: PIDE

The cross-country comparison in the cost of conversion in the table above shows that the textile units in Pakistan are incurring power and energy costs 2.4 percentage points more than India and 7.8 percentage points higher than Bangladesh. This demonstrates that the ideal, regionally competitive electricity tariff would be around 7.4 cents/kWh. The industry is presently demanding that the tariff must not go over 9 cents/kWh, as anything higher would have disastrous consequences for exports.

The textile sector is currently in expansion, where it requires unwavering support to maintain its growth, so the sustained provision of a supportive energy package will have long-term benefits for the entire economy. In the undesirable case of replacing competitive energy tariffs with DLTL, which has been proposed in the past, 80% of the textile industry would end up needing to pay electricity tariffs at 14 cents/kwh, thereby making all exports uncompetitive. The output price will also be uncompetitive; any downstream unit in the value chain will prefer imported inputs instead of expensive domestic inputs. In this case, local units at the higher end of the value chain will be at risk of closing down, losing countless jobs in the process.

As highlighted in the comprehensive study we carried out on RCET via PIDE in March 2021, the upstream industry (spinning and weaving) would be most affected in the event of any changes to the competitive energy tariffs, rendering these two crucial parts of the textile chain regionally uncompetitive. The spinning sector will not only lose international market share but also leave domestic sales in jeopardy.

The State Bank of Pakistan (SBP) declared that out of loan applications under Temporary Economic Relief Facility (TERF) in 2021, around 60% came from the textile sector alone. Moreover, the textile sector experienced approximately $ 1.60 billion investments during the first half of the previous fiscal year. The overwhelming loan demands for investment from the textile sector are largely due to competitive energy tariff rates. Continued investment is thereby predicated on uninterrupted supply of RLNG/gas for power and steam at regionally competitive energy tariffs, with 9 cents/kWh for electricity and $6.5/MMBtu for gas/RLNG across the entire textile value chain.

Any increase in energy tariffs will undermine the entire industry’s efforts and offset the economic progress made over the past year, as the textile industry will struggle to remain productive under the pressure of unsustainable high energy tariffs. At this stage where Pakistan’s industry is in the midst of impressive expansion and is successfully attracting a healthy level of investments, a rise in costs would directly result in a reduction in market share, once again leaving Pakistan far behind its regional competitors. The promising levels of export growth in the past few months with positive impacts on industrial expansion and job creation are a boon for economic stability in the country, and henceforth must be maintained through the continuation of the critical RCET policy.

In order to achieve debt sustainability, improve living standards and absorb the growing labour force, Pakistan’s economy must grow at a rate greater than 8 percent for a minimum period of 30 years. Given these high expectations and the conundrum of circular debt, Pakistan’s perpetual BoP, fiscal, and debt issues must be catered to with export enhancement rather than more IMF loans. IMF loans are accompanied by countless conditionalities that are not conducive to economic growth.

To finance a current account deficit, policies include:

1. Reducing domestic consumption and expenditure on imports;
2. Supply-side policies that can enhance competitiveness of exports and domestic industry.

Shahid Sattar, Dr Javed Hassan and Eman Ahmed

Cotton, once acknowledged as the lifeline of Pakistan’s farmers and a source of raw material to more than 400 textile companies, hit an all-time low last year in production and is bordering on disaster. Over the last 10 years, cotton production has declined by more than 62 percent from 14.81 million bales to 5.65 million bales (2020/21 season) and as a result Pakistan’s textile sector and economy have suffered considerable losses. This decline in production has forced the entire value chain to rely on imported cotton which is highly unsustainable for the industry. Meeting this shortfall has cost 5.76 billion dollars (from FY16 to FY20) in importing 19.5 million bales to meet the demands of the domestic textile industry. In FY21, $1.5 billion cotton imports were required, thereby putting additional unnecessary stress on the Balance of Payments (BoP).

Fortunately, this year the international prices for cotton have increased from a low of 60 cents to over $1 per pound at present. The crop this season is also estimated to reach over 9 million bales, whereas last year’s production was under 6 million bales. The amount disbursed as crop value to cotton farmers last year was Rs 200 billion, while this year, as a consequence of higher prices and higher expected crop size, the amount will exceed Rs 600 billion. The rural economy, particularly the poorer segments will be beneficiaries of this welcome development. The additional Rs 400 billion to cotton areas augurs well for Pakistan, as it will foster an economic boom in these relatively backward areas and revitalize the future of cotton cropping.

APTMA (All Pakistan Textile Mills Association) is taking steps to improve the cotton sector’s performance through the APTMA Cotton Foundation (ACF). ACF has taken initiative to create cotton clusters and centers of excellence, and promote model farming techniques. The foundation, as part of a comprehensive strategy, will also develop a bank for mechanized tools to be made available to members of each cluster, on a cost-sharing basis, thereby improving the quality and yield of cotton. The foundation is also geared towards providing a platform for collective procurement of quality inputs at lower costs, creating economies of scale. There will be means of further assisting farmers to obtain financial aid. Technological support through digital mapping and drones will provide a targeted approach to fertilizer and pesticide use and take cotton farming into a new, technologically driven era.

There is a pressing need to facilitate research on development of cotton seed, as the current cotton seed available is low yield and with poor characteristics. It is vital to develop high yielding varieties with superior lint characteristics using germplasm with a wide genetic base. The existing germplasm becomes susceptible to many insects/pests and has failed to perform under weather variation. Due to low cotton yield per acre and low international prices, farmers have preferred more profitable crops such as sugarcane, rice, and corn. These alternative crops provided better returns to farmers and are also more resistant to insect attack and diseases than cotton. For crops such as maize and rice, the seed varieties developed by the private sector have high yield potential, which is why over the last decade, cultivated area under Basmati and Maize has doubled and yield has increased significantly. To keep up, the development of research centers of excellence that are geared towards cotton enhancement can help to educate farmers on how cotton can be a more viable option for them. The Cotton Foundation is dedicated to establishing knowledge centers and research labs, particularly biotech labs, while collaborating with international research institutions. The labs will collect data from all over Pakistan to maintain a database, allowing us to devise data-driven solutions to cotton issues. Research centers will educate farmers for post-harvest. Moreover, education and training campaigns will be run throughout the year to keep the farmers up-to-date on every aspect of cotton cultivation.

The growth of value-added exports in FY21 (37% growth in knitwear, 32% in towel, 29% in bed wear, 19% in garments) is evidenced by enhanced cotton yarn supply to the domestic market. Yet, prioritization of the sugar industry has led to the replacement of cotton as Pakistan’s dominant crop, costing Pakistan an additional 10 billion dollars in the last 5 years. The area ‘encroached’ upon by sugar would be far more fruitful with cotton cultivation, adding an additional 0.25 percent to Pakistan’s GDP along with a minimum 1.27 percent of additional wheat contribution to GDP, if a mere half of the sugarcane production area reverts to cotton.

To allow a fair competition among crops, the government must refrain from interfering in the free market. Large subsidies, price support, and high tariffs on sugar imports must be done away with. If the government takes any measures that result in an artificial reduction of yarn prices, imports of cotton will be discouraged and lead to a real shortage of cotton and yarn. It is crucial to raise awareness on the importance of cotton initiatives for the revival of cotton in the country. Modern and mechanized cotton farming, the establishment of fiber testing laboratories, as well as seed testing and biotechnology labs of international standards will determine the future productivity of the textile sector, and resultantly the economic growth of Pakistan. APTMA Cotton Foundation (ACF) presents a model farming concept that aims to revitalize cotton cultivation.

According to Dr. Gohar Ejaz, Chief Executive of Ejaz Group Of Companies, Pakistan’s textile exports seem to have largely recovered from the Covid-19 pandemic shocks and are still growing. Further good news is that the industry is well on its way to achieving textile exports of $21 billion for FY22, based on the assumption that government policies will remain supportive of the industry and can help stabilize the economy as well.

n recent times, the textile industry has made notable progress and yielded spectacular results, particularly following a sharp rise in investment from industrialists. Further good news is that the industry is well on its way to achieving textile exports of $21 billion for FY22, based on the assumption that government policies will remain supportive of the industry. At this pace, sustained yearly growth of over 25% is possible.

However, the coming year presents a unique set of challenges, particularly in the cotton sector. These challenges are attributed to the uncertainty in the cotton market as well as currency markets. Furthermore, while the global textile market is worth around $800 billion, Pakistan is still a very small player with only about 1.7% market share in 2020, which signifies ample room for expansion and diversification.

The increase in the rate of cotton and resultantly higher prices of cotton yarn may be a cause for concern in the industry. The cotton price in the world market has currently reached over $1 per pound, a high that was last noted way back in 2010-11. When this happened in FY11, the downstream industry proposed a quota on exports and regulatory duty on yarn exports, which was not imposed in favor of allowing a free-market mechanism to take precedence.

With raw cotton prices reaching $1 per pound for the second time in the last 100 years, there has again been talking of a regulatory duty to be imposed on yarn exports, but those in favor clearly do not understand the workings and importance of a free market mechanism. The government must continue to abstain from such quotas and regulatory duties as they can have adverse effects and distort market operations.

It is not viable to purchase cotton at import substitution from the local market and sell it at 10 percent below export parity price. It is also of critical importance to look after the wellbeing of our farmers, who had been facing massive losses for the last 5 years and are now finally earning profits. The downstream industry must not be subsidized, as any policy which puts farmers at a disadvantage cannot be supported.

The current environment being conducive to farmers has resulted in an expected 50 percent higher cotton production from last year, amounting to roughly 9 million bales. While Rs. 200 billion was disbursed as crop value to cotton farmers last year, the higher prices and higher expected crop size this year are expected to take the value up to Rs. 600 billion. Farmers will thereby reap the benefits of an additional Rs. 400 billion. Allowing the market to operate freely will leave farmers in an even better position to sow cotton next year, reaping positive results for the first time since the 2010 cycle, and leading to economic growth.

APTMA and all textile industries are to pay international parity prices to domestic farmers and to stand firmly with them against any segment of the value chain that demands duty as it will negatively impact their profits. The Association is also taking steps to improve the cotton sector’s performance through the APTMA Cotton Foundation (ACF). ACF has taken initiative to create cotton clusters and centers of excellence, and promote model farming techniques.

The country’s domestic supply of cotton is being fully utilized, with some 84% of our apparel exports coming from cotton. Meanwhile, the rising demand for high-performance apparel such as athletic wear shows that synthetic fiber is a booming market. Competing in this market will require more technological sophistication than producing apparel from traditional fibers. While other textile-led economies in South Asia have diversified their export baskets and increased the proportion of high-value-added products, Pakistan is playing catch-up. It is hoped that new investment continues to come in, which will be instrumental for upgrading the industry’s technology to capture a higher share in the synthetic fiber market.

When it comes to the currency pressure in recent times, we can largely attribute it to the previous unavailability of new investment, which led to deindustrialization. While Pakistan’sLarge Scale Manufacturing sector had been witnessing an upturn over the past year, this LSM growth seems to be slowing down once again. (Figure 1).

However, when it comes to individual LSM sectors, it is evident that the role of the textile sector is of primary importance, accounting for over 60 percent of all exports. This necessitates consistent support and investment in the sector to achieve economic growth for Pakistan. The textile industry has now invested $5 billion in 100 new units of the value-added sector, gearing up to boost textile exports by a further $5 billion.

Read more: Textile Industry: 100 mills to open as Govt allows subsidy

Achieving the set goals 

The industry is on track to achieve the target of $21 billion in textile exports as long as the government continues to ensure the availability of energy at regionally competitive prices i.e., gas/RLNG at $ 6.5/MMBtu and electricity at 7.5 cents/kWh. A long-term textile policy incorporating regionally competitive energy tariffs would spur investment and take exports to much greater heights.

A large proportion of expansion is already underway and is considered a direct result of the government’s regionally competitive energy pricing policy. With this evident correlation between energy tariffs and the country’s investments and exports, it cannot be emphasized enough that the continuation of this policy is essential to maintain the momentum gained so far. Pakistan can further improve its competitiveness by upgrading its technology, which is now increasingly possible given the recent growth in the industry and economy.

Read more: Non-Textile exports: Pakistani industry coming back to life?

Furthermore, diversification can be enhanced by directing more investment towards technological upgradation, refining the sector’s position in the apparel value chain and redesigning import duty suspension and refund programs for exporters. By maintaining value addition, with a consistent supply of competitive inputs and supportive policy, the textile sector can continue to succeed in its crucial role of spearheading economic growth.

Shahid Sattar and Emaan Ahmed
“Business Recorder”
December 24, 2019
Pakistan is unique in many ways and possesses many attributes which should have made it an economic and political powerhouse. We possess immense potential in terms of natural resources, a budding youth population with potential to form an energetic workforce, high quality educational institutes, a highly venerated and nuclear-armed military and a long-standing bureaucracy.
However, the country has failed to capitalize on these capacities and has thus been left far behind its Asian brethren, who just a decade or so ago were at par with it in terms of development. Samuel Huntington in 1993 alluded to Pakistan’s immense potential to project itself as a “natural leader of the Islamic world.” However, we have yet to take off from the starting block in the economic race.
A serious effort was undertaken by the Planning Commission of Pakistan in 2011 to identify why this is so, and these findings from the crux of Pakistan: Framework for Economic Growth (FEG).
Pakistan is now on the brink of the third decade of the 21st century, along with its 8th decade of existence, so it is reasonable to try to assess its standing with respect to economic challenges of decades past and how they have been countered. The FEG outlines a number of crucial economic challenges, and proposes effective strategies for each of them. Although each policy recommendation warrants individual attention, and each aspect of the economy deserves a detailed appraisal, the purpose of this analysis is to provide a holistic overview of the economy with respect to its standpoint a decade ago.
The first challenge identified was a long drawn-out struggle in terms of macroeconomic stabilization; a result of unsustainable policies. During the year of publication of the report, Pakistan’s real GDP had grown by 3.7 percent, as compared with 3.0 percent in FY11. However, the economy underperformed compared with the growth target of 4.2 percent, given the energy shortages, security concerns, and floods in two consecutive years.
Nevertheless, growth was more broad-based compared to FY11, evenly distributed across agriculture, industry and the services sector. On the other hand, investment remained sluggish.
Fast forward to the dawn of a new decade and a look back at a comprehensive growth strategy formulated for Pakistan. In 2018, Pakistan’s economic growth was accelerating but at the cost of widening macroeconomic imbalances – outlining a structural fault in the means of achieving economic growth. The purpose of the 2011 strategy, reiterated multiple times in the report, was to focus on medium to long-term sustainable growth. Yet the means employed in FY19 have primarily revolved around high interest rates, double digit inflation, deterioration of primary and fiscal deficits, continuous private sector losses, cutbacks in investments, large scale unemployment and losses in consumer purchasing power. These can be considered to fall under the unsustainable policies that the report warned against. The graph below shows a decline in real GDP, with the most recent high being 5.83% and the 2019 figure amounting to 3.34%.
A recent assessment of credit ratings by Moody’s Investors Service deems Pakistan’s economic wellbeing to be on the rise, re-categorized from negative to stable, and thus on the road to recovery. Yet this stability is highly conditional upon certain factors, such as a high interest rate, which implies a compromise on long-term economic growth and a drop in investments. Textiles account for the bulk of the country’s exports, and low investment levels are likely to hinder the march towards much needed
rapid growth in exports. With the resulting lack of upgraded technology, our exports and trade deficit will remain bleak in comparison with regional players. There also remains unutilized capacity for immediate expansion in the textile industry, and a policy of rapid growth in exports for economic stabilization can only be applied once the interest rate is suitably set with an aim to facilitate investment.
Apart from high interest rates, there is the issue of double digit inflation which policies aim to target. The hampered process of job creation, low investments, low exports and high imports all are causes as well as outcomes of economic instability.
As pointed out in the FEG, we have historically under-traded with our neighbours and not adopted an appropriate geopolitical approach given our strategic location in South-East Asia. Economic progress has been further hampered by a low level of productive diversification and a weak value-added industry. The country’s position in world trade has barely changed over the past four decades, and has in fact declined recently, despite numerous opportunities to expand exports, particularly manufactured goods, in developed countries.
It’s almost as if the roadmap to economic growth has been read upside down. If the level of trade as a percentage of GDP seemed alarmingly low in 2011, it is lower now, having fallen from about 33% in 2011 to 28% in 2018, following a period of being largely stagnant with and then declining post-2015.
The trajectory of economic policymaking and the ways in which it tends to be unsustainable brings us to another challenge outlined in the FEG, in the form of a legacy of economic distortions. The FEG defines competitive markets as the “starting point towards increasing efficiency and sustained economic growth.” However, Pakistan has faced economic distortions hindering market competition, with the added pressure of high government intervention in business. The role played by the public sector has thus been considered too great, to the extent where it impedes market development. This was the case in 2011, and it is very much still the case today. Government intervention can be quantified by expressing public spending as a proportion of total GDP (Gross Domestic Product). In 2011, this was around 9% and it now stands at roughly 12%. (World Bank).
One effective means of stimulating economic stability and growth is an industrial policy which provides support to exports. Pakistan’s textile exports are currently valued at USD 13.5 billion out of the total exports (23.5 billion), but still account for a very minimal share of 1.7% in the world market for textiles. If we achieve the figure of USD 30 billion in textile exports, we will only have captured only 3% of the market for textiles. For reference, the total trade in textiles as of last year was worth USD 800 billion, so this is not an unrealistic target.
Another factor stifling our intended increase in market share is the illogical level of anti-dumping as well as other duties, rendering the local MMF-based apparel uncompetitive in the world market. Pakistan’s exports should be able to compete in world trade, which is now 70% MMF-dominated. Restricting exports to 30% of the cotton trade is a completely irrational model.
Private sector proliferation can be instrumental in achieving economic growth, as has been the case with Vietnam, a formidable regional competitor which has achieved milestone levels of growth in a short time by giving its textile sector space to flourish through private sector growth and investment. A 2017 resolution in Vietnam allowed for the private sector to be the driving force of Vietnam’s market economy. Given that private businesses experienced volatile growth in Vietnam in the past, this has been a highly effective strategy. Pakistan can achieve similar levels of rapid expansion by following a model of private sector growth and reduced government intervention, so that the textile sector not only attracts higher investments, but is also better equipped to take on the international market. This calls for international market-based pricing for all inputs, notably cotton and energy, in the textile chain.
The FEG also emphasizes pressures of demography. We have a rapidly growing population as well as a youth bulge to address. A large youth component is a very positive aspect, as younger populations have the most potential in terms of innovation, fresh ideas, productivity and entrepreneurship.
With increasing youth comes a greater need to develop our education system, create valuable opportunities for employment, encourage social cohesion and collaboration, and effectively train the youth so that we can unlock their full potential in leading the way to sustainable human development.
Recent developments in the form of the Kamyab Jawaan programme address the youth entrepreneurship factor appropriately. It has reserved a 25% quota for women and also accommodates the transgender community, ensuring the involvement of marginalized and deprived societal groups, and showing progressive thinking in the field of sustainable development.
However, factors which are yet to be structurally addressed include education and industrial employment for youth. Pakistan’s expenditure on education was merely 2.4 percent of the GDP in the fiscal year 2018-2019, whereas neighbouring India allocated 4.6 percent, particularly announcing a 10% increase in the education budget for the year.
Globalization, technological advancements and the development of key industries have created new job opportunities for young people across the globe, while our growing population is continually met with scant opportunities and hampered living conditions. Gone are the days when the state could even think of providing lifelong careers, given the changing economic dynamics of the world. The resulting phenomenon of “brain drain” is defined in the FEG as a loss of high skilled human capital, which is better off migrating to the developed world as there is a dearth of opportunities in Pakistan. We urgently need a policy to retain our educated and skilled youth, with a focus on encouraging entrepreneurial initiatives by fresh graduates.
A majority of the human capital that remains in Pakistan comprises low to medium skilled labor. The largest employer of the country is the textile sector, which accounts for countless jobs at every stage of the textile production process. There exists an array of opportunities where small units of garmenting factories can spring up and capture market share while creating much needed jobs for youth. A small increase in garmenting units can result in an exponential increase in employment, particularly for the unskilled youth that makes up a large proportion of our demography.
Furthermore, skilled workers can be of immense value in ensuring that Pakistan’s textile sector captures the maximum market share globally and achieves a competitive edge. Human resource development must be prioritized, with a specific focus on textile specialization and targeted programs by institutes such as the National Textile University, which can appropriately equip graduates with the initiative to start up their own businesses. Small firms take up minimal capacity and result in higher returns for the economy at large in the form of substantial job creation. These startups can possibly be state-sponsored in order to target rapid employment generation and rapid growth in exports.
There is no other industry or service sector with existing immense potential that the textile sector has to benefit the economy, with a direct impact on foreign currency earnings and new job creation. If synergy is developed amongst different sub sectors and a particular focus is lent to the garmenting industry, economic growth can achieve record heights, as has been the case in the flourishing industries of Vietnam and Bangladesh.
As shown below, Pakistan will have almost 200 million additional people to contend with in 80 years. With a focus on education and creation of job opportunities for youth, these statistics can possibly translate into high productivity and a competitive advantage, rather than a deteriorating standard of living due to scant opportunities and resources.
The FEG sheds light on impacts of external events, including terrorism, political instability and conflicts up until 2011.
It is comforting to see that the wave of terrorism has declined since 2009, as result of military operations conducted by the Pakistan Army. According to South Asian Terrorism Portal Index (SATP), terrorism in Pakistan has declined by 89% in 2017 since its peak years in 2009. Furthermore, action against corruption has been on the rise, and accountability is being given the crucial importance it deserves.
External events and conflicts since the publication of the FEG have included sectarian violence, and clashes with India, particularly in 2019 following unrest in Indian-controlled Kashmir. Such events have a tendency to disrupt economic progress, as priorities need to be reassessed in such cases. An overview of these factors shows that the constraints to economic growth outlined a decade ago still hold true today. The FEG emphasized that the problems in Pakistan related more to software than hardware i.e. there is more hindrance in terms of management and productivity than physical infrastructure. While progress in economic stability and youth engagement is laudable, there remains a need to tackle economic distortions and to formulate effective policies for economic sustainability. This requires a specific focus on supplementing the textile sector’s role in maximizing exports, 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.
(https://www.brecorder.com/2019/12/24/555974/framework-for-a-sustainable-economic-future/)

Exports: key to sustainable economy
Shahid Sattar, Asad Abbas and Emaan Ahmed
“”
December 17, 2019
It is encouraging to see evidence that Pakistan is on the road to recovery in terms of economic stability and growth. With a26% quantitative increase in textile exports, the first current account surplus in decades amounting to $20 million, and a place among the best performing stock markets in the world, Pakistan seems to be doing surprisingly well. A recent assessment of credit ratings by Moody’s Investors Service reforms these statistics, deeming Pakistan’s economy to be stable and on the road to recovery.
This news is reassuring, given that the incumbent government was met with the task of reviving an economy in tatters, with an unsustainable balance of payments and complications in financing of external obligations.
How did the economy landed in these dire straits in the first place? The faulty consumption-led growth policies, irrational tariff structures, imposition of duties on import of raw materials and artificially set exchange rates are to blame. In addition to all this, the unsustainable mechanism of borrowing beyond our means precipitated an inevitable day of reckoning.
This reckoning revealed itself in the form of a high interest rate, double digit inflation, deterioration of primary and fiscal deficits, continuous private sector losses, cutbacks in investments, large-scale unemployment, losses in consumer purchasing power and a subsequently lower standard of living.
Taking the worrisome state of affairs into account, the strategies employed to revive the economy included floating the exchange rate to a more realistic level, providing regionally competitive energy to major exporting sectors and issuing pending refunds accumulated under previous governments. These initiatives all played a significant role in spearheading the stability we see today.
This stability has not been attained without a price, and given that we are now at a much better vantage point, there is a need to steer towards a sustainable growth strategy primarily based on exports. This is a crucial step in quelling future dependency on loans.
Progress, particularly in terms of necessary expansion and development, is likely to be difficult if the aftershocks of the recent imbalances in our economy are not systematically addressed. The oft-repeated mantra that the export sector has not shown the desired growth despite the reduced cost of doing business blatantly disregards the root cause.
The aftershocks are broadly two-fold: quantitative and qualitative.
An assessment of quantitative impediments to the textile sector becoming regionally competitive highlights certain urgent causes for concern, along the lines of inhibitory energy tariffs, a renewed set of zero-rating woes, avoidance of crucial refunding and forced duties on cotton imports – all of which inhibit the urgent need to restore a sustainable Balance of Payments and to curtail the dependence on external funding.
Although the Ministry of Energy’s efforts to aid industrialists should not be dismissed, the elephant in the room is yet to be addressed: a sustainable energy tariff for industries. The 25 percent increase in electricity tariffs as a quarterly adjustment coupled with further add-ons is likely to be debilitating. Despite notifications clearly stating that an all-inclusive tariff will be implemented, these developments
will not only shatter confidence in government policies but will also seriously hamper viability. Furthermore, the energy rates have to be fixed for a minimum period of 5 years so that investments in expansion and modernization can be planned and executed.
The withdrawal of zero rating has resulted in the constriction of investible capital in the market, while the cost of borrowing to meet such capital demands has also significantly risen, giving investors little to no incentive to carry on their business activities. Profit margins in the industry are currently around 5-6 percent at most, whereas the funds blocked in GST are of the order of 12 percent of sales, leading to the current liquidity crisis.
As a consequence, there is a dire need to sensitize the FBR regarding its delayed provision of refunds on income and sales tax over the last couple of years. A sum of Rs.100 billion has been collected over a period of five months as sales tax from the textile sector and is yet to be refunded, while the payments for the technological upgradation scheme 2009-14 is also pending. The majority of these refund applications are rejected by the system due to Form-H and unannounced boundaries for acceptance in the FASTER system. Moreover, those applicants whose sales tax returns and forms have been accepted are not being refunded within the stipulated time of 72 hours.
Collectively, these factors give way to lowered market confidence among the industry and a reluctance to subscribe to these subsidized loan schemes in the future. Meanwhile, there are factors such as fully utilized capacities of textile mills, and order books that are overflowing with unmet requirements. Many of our exporters have decided to close their production lines due to a lack of sufficient funds to run these lines feasibly, rendering the opportunities created for an increase in market share unattainable.
Another quantitative impediment to the thriving of our textile sector is the much decreased volume of cotton crop. The current cotton arrival estimates fall far short of what is needed to fulfil domestic requirements of the textile industry, and these shortages force the entire value chain to rely on imported cotton, resulting in further inefficiencies in the manufacturing process. This year alone, the import of a record 6 million cotton bales is required to maintain the previous year’s production and export levels.
This has caused losses worth over Rs 1 trillion to the economy and resulted in the need to import cotton, which is further tainted by a 3 percent customs duty, 2 percent additional customs duty and 5 percent sales tax on its import.
With the increased burden of paying these duties on cotton imports, sustaining competition with giants like China, India, Bangladesh, Vietnam and Sri Lanka becomes an impossible task. It is therefore crucial that these duties be removed if the objective of increasing exports is to be achieved.
This brings us to a qualitative assessment of the inhibiting factors. The cotton crisis is not only stiffing our growth when it comes to numbers, but also due to the deteriorating quality of locally produced cotton. This deterioration can be attributed to seed quality and ginning practices, which are far behind those adopted by other regional players. Most industries have institutionalized advanced scientific methods such as genetically modified seeds and modern ginning practices that have a far higher potential.
Additionally, regional players have acquired more advanced machinery that is cutting edge and has immense potential to maximize productivity at lower costs, while Pakistan’s investment in technical machinery has dropped to the dismal level of 44 percent of what it was in 2005-2006. Investment in technology showed only a 1 percent improvement, whereas regional competitors achieved impressive increases from 2006 to 2015.
================================================================= Investment in Technology (2006-15) ================================================================= Countries Spindles % Change Shuttle Less % Change (Mins) Looms (000) ================================================================= China 55.7 63% 465 78% India 25 28% 78.6 13% Bangladesh 4.29 5% 42.9 7% Pakistan 2.95 3% 7.3 1% ================================================================= Total 88 100% 594 100% =================================================================
Technology upgradation programmes that boost capacity and modernization are essential if we wish to globally competitive. The government support in the form of tax incentives is to be a crucial factor in attracting investments in this regard. Such incentives are widely available to our competitors like Vietnam, China, India and Bangladesh.
Other qualitative factors which need to be considered include a global shift in consumer preferences, from cotton-based apparel to synthetic manmade fibers. In the world market, the consumption of MMF against cotton has tilted to a ratio of 70:30, whereas a decade ago it was quite the opposite. Presently, the most dominantly consumed man-made fabric is polyester. Meanwhile, polyester is heavily taxed at the input stage in efforts to protect the Lotte Purified Terephthalic Acid (PTA) plant. This plant is still running on outdated technology which is no longer used in the manufacture of PTA anywhere in the world, bringing us back to the crucial matter of technological upgradation and how the lack thereof can prove to be disastrous.
Given the importance of considering consumer preferences in an industry like textiles, the protection given to Lotte needs to be reduced to an appropriate level, and the duty on MMF yarn needs to be adjusted to provide incentive for the domestic MMF industry to thrive and fulfill industry requirements. A flourishing MMF industry has the potential to play a crucial role in enabling Pakistan to compete internationally, and would prevent job losses for over 100,000 people.
The amalgam of these unresolved issues is resulting in immense pressure for the textile industry to remain competitive, and this by default will have grave consequences for our economy. There is an undeniable need for a broader long-term policy that ensures investors’ confidence and provides them with a business and investment friendly environment, in order to actualize the goal of export-led growth in the foreseeable future.

High interest rates, low investments
Shahid Sattar and Emaan Ahmed
“”
December 12, 2019
Sustainable technology and Industry 4.0-enabled technologies, most recently presented at the ITMA 2019 in Barcelona, Spain, are taking the global textile industry by storm. The tech world is rapidly moving forward and R&D in textile machinery continues to make remarkable leaps which, once availed, would prove to be instrumental for Pakistan, given the large share of exports associated with its textile sector. Yet somehow our textile machinery continues to be stagnant at the level of primary level equipment and outdated looms, coupled with the alarming decline in machinery imports.
To textile industrialists’ dismay, the crucial need for machinery upgradation remains unmet, and the fruitful benefits associated with recent technology sadly continue to be a remote prospect for the industry. The Pakistan Bureau of Statistics shows textile machinery imports to have fallen by around $60 million during the fiscal year 2019. The data below depicts a consecutive decline in textile machinery imports since April 2018, and this trend has spilled over into the current year with an 8% drop from the previous period. (Source: Business Recorder, 2019).
It is clear that factors impacting the textile industry have a direct bearing on Pakistan’s economic health, turning textile machinery into an issue of national importance which requires urgent attention. Therefore, the urgent requirement of technological upgradation in the textile industry cannot be emphasized enough, given that textile outputs account for the vast majority of Pakistan’s exports. These outputsare valued at about $13.5 billion, making up for 61% of the country’s total share of exports.
It is essential to consider the structural impediments to textile sector growth if there is any hope of restoring Pakistan’s economic health in the foreseeable future.
The most crucial aspect hindering our textile sector from achieving its true potential is the imbalance in the economy: a direct result of the high level of interest rates. The consecutive hike in interest rates in recent times can be attributed to desperate attempts to counter high inflation, which is yet another matter of contention.
The bar chart below depicts the rising inflation over the last few months.
The strategy of countering high inflation with high interest rates brings to mind the idiom fighting fire with fire, and it is none other than the path to a healthy economy that burns as a result.
An economic formula whereby interest rates are raised for a certain period in order to stabilize the economy can possibly be deemed 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.
Furthermore, 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 13.25%.
The high interest rate and resulting influx of “hot money” into the Pakistan economy has several negative implications for Pakistani industry, and the textile sector is bearing the brunt of the pressure given the expectation to contribute largely to the country’s exports.
Presently, the textile sector has its order books at full capacity, and has managed to identify gaps where there is potential for additional capacity and upgradation, yet filling these gaps is proving to be an elusive task, given the high interest rate. Investments of $3-4 billion have been planned but no endgame is in sight when it comes to their implementation.
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.
Subsequently, the low level of investment has worsened the state of affairs, particularly for productive sectors which are now struggling to maintain productivity. The abrupt rise in factory shutdowns and closing of textile businesses are causes for concern.
Furthermore, 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 rates make these options volatile and high-risk.
All these factors result into 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 vicious cycle emerged where policymakers begin to scramble for shortterm solutions to dig their way out of their present misery – only to find themselves in a bigger conundrum in the long run.
Below is a comparison of two graphs depicting interest rates over the last 20 or so years, those in highly developed economies as well as those in Pakistan:
Through a comparative assessment, the Pakistan economy appears to be trapped in the preliminary stages of a crisis not unlike the one faced by East Asian countries in the late 90s, and more recently by Egypt. If history is any indication, there is no easy way out of this grave Pakistan has dug itself into.
The natural tendency for policymakers at this stage seems to be advocating for the maintenance of the prevailing interest rate. This is because lowering it will undoubtedly lead to an abrupt withdrawal of “hot money” funds by investors, who will instantly seek out higher rates of return via other economies. This will translate into short term chaos, owing to the collapse of what appears to be holding up our economy at the surface level.
However, what is truly required is an analysis of the grassroots level implications of lowering the interest rate, and the long term factors which make it essential to do so.
Although the withdrawal of hot money financing will result into a massive short term burden that may appear difficult to fall back from, given the increased pressure on the Rupee and on the foreign exchange reserves that will remain, this reduction is crucial for restoring Pakistan’s economic health.
Due to the resulting decrease in the overall import bill, a lowered interest rate will allow for greater capital investments, eventual job creation and improvements in technology, research and development.
This will have particular advantages for the textile industry, and will be a welcome shift from the prevalent method of concessional financing and the challenges it presents. Given that around 90% of the textile industry consists of indirect exporters, the textile industry operates in a largely fragmented chain structure wherein separate entities exist for each function, be it printing, dyeing, weaving etc. The concessional financing that is set aside for the textile sector can thus not be availed by each of these separate fragments in the textile industry again, and therefore, it is not producing the desired impact.
A more suitable policy needs to be adopted that caters to this issue at the grassroots level. If certain funds are being allocated to the textile industry, it should be in a manner that allows for them to be availed by the entire chain.
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. As we have often heard, good things come to those who wait, and desperate shortcuts towards stability make for long delays.
Therefore, the need for a long-term policy featuring lower interest rates cannot be underestimated. Its implications for a brighter economic future which generates foreign currency, employment and the economic betterment for the people of Pakistan cannot be denied.