By Shahid Sattar | Amna Urooj

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

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

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

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

 

 

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

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

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

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

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

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

 

 

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

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

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

 

 

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

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Shahid Sattar | Absar Ali

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

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

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

 

 

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

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

The economy is deindustrialising at an unprecedented pace.

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

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

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

 

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

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

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

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

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

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

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

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

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

By Shahid Sattar | Muhammad Mubasal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Shahid Sattar | Noreen Akhtar

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

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

Characteristics and Opportunities of rPSF

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

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

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

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

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

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

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

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

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

Challenges

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

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

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

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

What needs to be done

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

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

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

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

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

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

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

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

By Shahid Sattar | Absar Ali

Unless power tariffs for industrial consumers are rationalized immediately, economic catastrophe is imminent.

Pakistan faces a situation akin to the “boiling frog” metaphor, where the gradual increase in energy tariffs is slowly but steadily undermining the economic viability of its manufacturing sectors, especially textile and apparel that are the backbone of the economy, contributing over 50% of export earnings and employing around 40% of the industrial workforce.

Much like a frog placed in cold water that is slowly heated, policymakers remain indifferent to the creeping danger of rising energy costs. Incremental hikes in energy prices have accumulated over the past year, placing an ever-growing financial strain on manufacturers, and leading to severe consequences for the industry and the broader economy.

Since the withdrawal of the regionally competitive energy tariffs regime last March, power tariffs for industrial consumers have spiralled upwards from around 9 cents/kWh for export-oriented firms and 12 cents/kWh for domestically oriented sectors to 17.5 cents/kWh at present—over twice that in regional economies like India, Bangladesh, and Vietnam whom Pakistani firms directly compete with in the international market.

 

In November 2023, domestic gas prices were also increased from Rs 1,100/MMBtu to 2,400/MMBtu for export sector captive, and from Rs 1,200/MMBtu to Rs 2,500/MMBtu for non-export captive. Then, in February 2024, gas prices were once again hiked to Rs 2,750/MMBtu—an increase of 223% since January 2023—and the separate tariff category for export sectors abolished.

Simultaneously, the proportion of RLNG in the gas blend supplied to industries has been gradually increased, for example, from 50% in January 2024 to 75% in March for those on the SNGPL network. Now, word on the street is the government is planning to completely cut off gas supply to captive industrial consumers by the end of the current fiscal year, with the supposed goal of shifting industrial power consumption to the national grid to bring down the power sector’s fixed cost per consumer.

As power tariffs have deviated above the regionally competitive level of 9 cents/kWh, one part of the industry—already equipped with gas-based generation owing to policy incentives over past decades—has shifted to captive generation.

The other part, with no financially viable source of energy available to them, has abandoned their businesses entirely. This is reflected in the power consumption of APTMA’s members in the North region—whose data is available to us—that has been down by over 70 percent YoY since November 2023 (Figure 1) and is further evidenced by the largest decline in textile sector output in over 20 years (Figure 2). Similarly, textile and apparel exports in March 2024 stood at only $1.3 billion against an installed capacity of over $2 billion.

As high energy costs have pushed prices of domestically produced inputs such as yarn and cloth above international prices (Figure 3), exporters are readily utilizing duty-free import for export schemes to import cheaper inputs from abroad, thus, leading to a decline in the share of domestic value addition in exports and deterioration of the trade balance.

Producers of domestic inputs are further disadvantaged by the sales tax regime, where exporters must pay 18 percent sales tax on locally purchased inputs and wait several months for it to be refunded, which incentivizes them to choose duty-free imported inputs to avoid red-tape procedures.

For a country with only around $13 billion in reserves compared to a projected forex shortfall of over $25 billion annually for the next 5 years, this represents a dire situation. And, if the government proceeds with its plan to cut off industrial consumers from the gas network without a simultaneous reduction in grid electricity tariffs to regionally competitive levels, it is only going to get worse.

 

To elaborate on this, we must dissect the government’s problematic assumption that cutting industry off from the gas network will automatically shift it to the power grid. This is not the case. If economic theory is to be believed, a firm’s decision to export is based on a cost function which comprises costs of fixed capital, raw material, wages, and various factory over-heads, including the energy required to power production equipment. It decides to export if and only if its total cost of production is less than the international price of the goods it produces. If the cost of an input increases beyond a threshold that pushes total cost of production above international prices, it is unable to compete in the international market and exits the business.

Our estimates suggest that this threshold value is around 12.5 cents/kWh for the textile and apparel sector. With current power tariffs at 17.5 cents/kWh and captive gas-based generation at around Rs 33/kWh or 11.8 cents/kWh with a 75% RLNG:25% gas blend, any move to cut off gas supply to industrial consumers will not push them to the grid but rather force them to shut down their factories and exit the sector as was the case with those who did not have captive generation capacity.

There are also various indirect implications. One such example is the RLNG diversion costs. Pakistan has signed long-term LNG SPAs of 6.5 MTPA (900 MMCF/d) with Qatar Gas and Qatar Petroleum. Diversion of indigenous gas from captive industrial consumers to government power plants (RLNG-N GPPs) results in surplus RLNG in the system. Surplus RLNG is then diverted to low-revenue consumers at subsidised rates, the financial impact of which is traditionally passed on to industrial consumers, in the absence of whom it will simply add to the gas sector circular debt.

 

The sequencing of these reforms must therefore be carefully considered by policy makers. Shutting off one source of energy without opening up of another, financially viable source will drastically accelerate the pace of deindustrialization that has been ongoing since early last year and cause an immediate and sizable reduction in exports and employment.

It will jeopardise the semblance of economic stability we have struggled to achieve over the past year, send a negative signal to investors the country is desperately trying to woo to stimulate capital inflows, and throw the economy into an abyss.

In light of this precarious situation, it is imperative that immediate action is taken to rationalize power tariffs for industrial to a regionally competitive level of 9 cents/kWh that will sustain industrial viability and competitiveness.

According to our estimates, power tariffs of 9 cents/kWh could increase power consumption in just the textile sector by up to 1,530 MW/annum to bring in an additional $1.06 billion in power sector revenue, around $9 billion/annum in additional exports, and an addition of over $513 million to government revenue through various channels.

Additionally, these lower power tariffs will also prompt an automatic shift from captive gas-based generation, that currently costs 11.8 cents/kWh, to grid electricity, freeing up domestic gas-based resources as well as reducing the LNG import bill.

“However, if left unchecked, the continued escalation of energy costs will not only deepen the crisis in key sectors such as textile but also imperil the broader economic stability of Pakistan. To prevent a complete industrial collapse, a swift and thoughtful intervention is necessary to align energy pricing with regional benchmarks and ensure the survival of Pakistan’s critical manufacturing base.”

The time to act is now; failure to do so would be akin to watching the economy slowly succumb, much like the proverbial frog in boiling water.

 

By Shahid Sattar | Amna Urooj

The new government faces the daunting challenge of navigating its complex economic landscape. The country’s foreign debt, while seemingly modest at US$124.5 billion or 42 percent of its GDP as reported by the State Bank of Pakistan in mid-2023, belies an undercurrent of fiscal strain.

The crux of the dilemma lies in the country’s foreign exchange earnings, which fall short of bridging the gap between export revenue and import costs. The previous fiscal year saw a current account deficit of US$30.5 billion, a gap only narrowly closed by the remittances from the Pakistani diaspora and further borrowing on the international front.

On the domestic front, internal economic challenges have thwarted efforts to boost export earnings in 2024. The textile industry, a cornerstone of Pakistan’s exports, has been particularly hit, with surging electricity costs leading to widespread mills closures and a dip in export production throughout 2023. Regulatory measures aimed at stabilizing the currency have had the unintended consequence of dissuading overseas Pakistanis from utilizing official remittance channels.

 

In the face of static export earnings, the government’s most pressing priority is to catalyze exports through economic stability and growth. This is where the country’s energy consumption patterns emerge as both a challenge and an opportunity.

The sectors of industry, transport, and residential living have experienced notable shifts in their energy demands over the past two decades.

A discernible rise in energy consumption within residential areas, a sector that traditionally does not feed directly into economic productivity, calls for a strategic reallocation of energy resources. The following graph illustrates the need for an energy paradigm shift towards sectors that promise to revitalize the national economy.

The confluence of findings from academic literature on global energy consumption offers a robust framework for Pakistan’s energy policy.

The examination of OECD countries’ energy use illustrates the impact of economic activities on energy demands and highlights the potential for energy efficiency to mitigate these demands. The study on developing countries’ energy growth factors emphasizes the significance of balancing economic development with efficient energy use, pointing to a sustainable path forward.

 

Additionally, the investigation into major energy-consuming countries offers a blueprint for Pakistan, indicating that comprehensive energy efficiency and the transition to renewable sources are key to achieving a more sustainable energy footprint.

Lastly, the comparative analysis of energy consumption patterns across different regions spotlights the need for developing countries, including Pakistan, to stimulate growth in the industrial sector for socioeconomic development, shifting away from a reliance on the residential energy use which characterizes less developed economies.

Comparatively, the case of Vietnam stands out. Once marred by similar challenges, Vietnam has dramatically shifted its energy utilization towards manufacturing and technology sectors, resulting in an impressive average annual GDP growth rate of over 6% in the last decade.

This rechanneling of energy has been fundamental to its emergence as a manufacturing hub in Southeast Asia. The spotlight was on the industrial sector, which grabbed more than half of the country’s energy use, showing its key role in driving economic growth.

On the other hand, in 2020, its energy use in transportation dipped, likely because the pandemic kept people from traveling, hinting at a chance to move energy use towards more productive activities. Also, the slight rise in energy used by households suggests an opportunity to shift some energy use to boost the economy.

 

Vietnam made impressive progress in industrial, agricultural, and services sectors. It was the result of broad-based economic transformation, which opened the Vietnamese economy to international markets and foreign trade. Global exports of Vietnam have surpassed $370 billion, while its global imports have crossed $358 billion.

We have a lot to learn from the Vietnamese economic model, which underscores the importance of integrating into the global economy and leveraging sectors that can drive substantial economic growth.

Bangladesh’s journey towards greater energy efficiency is evident through strategic investments in energy-intensive industries, such as the textile sector, which now remarkably accounts for around 80% of the country’s export earnings. This deliberate push has seen the industrial sector’s energy consumption rise, catalyzing a boost in economic activity and job creation.

The shift in energy use reflects a broader economic transformation, where energy previously utilized for less productive means is now powering sectors that directly enhance the country’s GDP and export capabilities.

Furthermore, an analysis of Bangladesh’s gas consumption paints a clear picture of prioritized resource allocation: about 40% is directed to the power sector, with industry and captive power following closely. This judicious distribution of energy resources, favoring industrial over non-productive use, contributes to a higher energy to GDP conversion rate, setting a commendable example in the region. Such deployment of energy should serve as a blueprint for Pakistan.

The energy intensity graph, which measures primary energy consumption per unit of gross domestic product (GDP) in kilowatt-hours per dollar, illustrates the economic efficiency in Vietnam, Pakistan, and Bangladesh. Vietnam exhibits an ascending line, indicating rapid industrialization and economic growth accompanied by increased energy usage per unit of GDP. This suggests a phase of development characterized by heavy industry expansion.

Conversely, Pakistan and Bangladesh maintain lower energy intensities. Bangladesh’s prioritized resource allocation strategy contributes to its superior energy efficiency compared to regional counterparts. The declining energy demand within Bangladesh’s industrial sector reflects greater energy efficiency in industrial processes, bolstering the country’s overall energy performance.

While Vietnam’s model of industrial growth is enviable, it argues for a strategic approach in Pakistan: emulating Vietnam’s aggressive economic development while concurrently investing in energy efficiency technologies and practices. This dual focus would ensure that Pakistan’s economic growth, powered by increased energy use in productive sectors, does not come at the cost of environmental sustainability or long-term economic viability. It’s about finding a balance between the necessary energy consumption for growth and the efficient use of energy to ensure that every kilowatt-hour contributes as much as possible to Pakistan’s GDP.

Tailored energy policies are imperative, with Pakistan’s current trajectory pointing towards a higher proportion of renewable energy in its power mix and the adoption of energy-efficient practices. Measures such as implementing minimum energy performance standards (MEPS) for appliances and promoting renewable energy alternatives are crucial steps towards enhancing energy efficiency in the residential sector and thereby lowering household costs and making valuable energy for industrial use.

Similarly, attention to the transport sector, through the adoption of electric vehicles and improvement in public transport infrastructure, can bolster energy productivity while mitigating environmental impacts.

However, realizing this vision necessitates policy synchronization, requiring coordinated efforts across ministries and sectors. Revamping outdated policies, incentivizing renewable energy adoption, and implementing stringent energy efficiency standards are vital steps towards achieving energy resilience and economic prosperity.

Pakistan’s journey towards economic revival through productive energy use is both a challenge and an opportunity. By drawing lessons from Vietnam and Bangladesh, Pakistan can navigate towards a brighter economic future, where energy is not merely consumed but harnessed as a catalyst for growth and development. The path forward is clear: strategic energy reallocation, coupled with a focus on efficiency and sustainability, will energize Pakistan’s economy, driving it towards prosperity and resilience.

By Shahid Sattar | Muhammad Mubasal

Pakistan’s innovation landscape presents a grim picture. Pakistan ranked 88th globally and 7th regionally in the Global Innovation Index 2023. While India ranked 40th globally and 1st in the region, this stark contrast underscores the urgent need for transformative strategies and concerted efforts to propel Pakistan’s innovation ecosystem into a new era of growth and competitiveness.

The primacy of innovation in development cannot be denied. Innovation and technological change are fundamental causes of growth. They increase productivity and efficiency, evolve products to capture new markets, and can lead to advances in sustainability by decreasing negative externalities. Technological advancement also tends to have spillover effects, as advancements in production processes, knowledge, and capital are adaptable across industries.

So, how does innovation occur?

In developing countries, innovation is predominantly driven by exports due to two major factors. Firstly, because exporters have access to larger markets which drives economies of scale. In order to fulfill the demands of both domestic and international consumers, exporting firms must increase their productivity through both increased inputs but more so through gains in efficiency. The selection pressure between firms to fulfill demand allows resources to be allocated to efficient firms as less efficient ones become uncompetitive and leave the market.

 

However, this does not happen in Pakistan as the inefficient, unproductive, and uncompetitive firms are subsidized and protected by the government. For instance, a plant owing to heavy protection in the form of import duties and anti-dumping duties on purified terephthalic acid (PTA) and polyester staple fiber (PSF), is purportedly still using 30-year-old outdated technology and it neither innovates nor exits the market. This situation forces exporters to purchase PTA and PSF at inflated prices, disincentivizing the production of Man-Made Fiber (MMF). Consequently, MMF-based exports struggle to expand and remain uncompetitive in international markets.

Secondly, trade creates knowledge spillovers both directly and indirectly. Direct benefits occur from the learning of new technologies and methods, while indirect benefits arise from reverse engineering advanced imports. There is also a process of ‘learning by exporting,’ which states that export behavior has a direct and positive impact on firm-level innovation and productivity. Firms engaging in trade develop minute innovations, learn the dynamics of new markets, and expand networks in the global value chain, which all lead to faster and greater knowledge spillovers.

According to trade statistics provided by the International Trade Centre, Pakistan exported goods worth $11 billion in 2003 while Vietnam and Chile had exports of $20 billion. In 2022, Vietnam exported goods worth $370 billion, Chile exported $102 billion while Pakistan exported a meagre $31 billion. In 2022, Pakistan’s exports accounted for only 10.5% of GDP, whereas the South Asian average stood at 20.5%. One of the major reasons for Pakistan’s low exports is its closed economy.

 

This correlation between international market exposure and innovation is particularly evident in Pakistan’s textile sector, the country’s largest exporting sector. According to Wadho & Chaudhry 2016, firms whose main market is the Middle East, has an innovation rate of 100%, followed by the USA (91%) and Europe (80%). On the other hand, firms whose main market is the local market has an innovation rate of 41%. This further highlights the structural weaknesses in the economy that impedes the growth of domestic industry which is vital for economic growth.

Furthermore, Pakistan’s Global Innovation Index 2023 rankings show room for improvement when compared to regional leaders India and Vietnam, highlighting opportunities for enhancing the innovation ecosystem to boost investments and sustainable growth (Figure 1).

In assessing innovation, various indicators are used, such as patent applications, R&D expenditure, scientific and journal article publications, and gross fixed capital formation. A comparative analysis of patent applications illustrates the gap between Pakistan and India. In 2022, for instance, Indian residents filed 26,267 patent applications, while Pakistan saw only 426. Despite Pakistan’s high rate of change in patent applications over the last decade, with a 273% increase (surpassing Vietnam’s 248% and India’s 196%), the country has yet to leverage potential effectively. This underscores the need for Pakistan to foster a more conducive environment for innovation, aligning with global standards and practices to realise its full potential.

“This need for a conducive environment is further illustrated by the decline in non-resident patent applications in Pakistan, which dropped by 42% over the past decade. In stark contrast, India, Bangladesh, and Vietnam witnessed increases of 14%, 35%, and 128%, respectively. This divergence indicates that Pakistan’s innovation landscape might be perceived less favourably by foreign investors and innovators, potentially due to inadequate regulatory and legal frameworks that impede innovation and investment.”

Regarding research and development (R&D) spending, Pakistan allocated only 0.16% of its GDP to R&D in 2021, a decrease from the 0.32% spent a decade earlier in 2011. This reduction contrasts with the broader trend in South Asia; as per the World Bank’s Enterprise Surveys, only 2.3% of firms in Pakistan invest in R&D, which is significantly lower than the South Asian average of 12.5% (Figure 3). This low investment level in R&D starkly limits the country’s innovative capabilities and growth prospects in the competitive global market.

 

These challenges in investment and innovation translate into credit crunch for the domestic industry. This situation is particularly complex when considering the state of Pakistani SMEs, which constitute 90% of all businesses and employ 30% of the labor force. Despite their significant presence, these SMEs face substantial growth barriers, primarily due to limited access to credit. The World Bank’s Enterprise Surveys reveal that 40.9% of firms in Pakistan are fully credit constrained, and 15.2% are partially constrained. These figures are alarmingly higher than the South Asian averages of 17.1% and 17.7%, respectively. Furthermore, only a mere 2.1% of local businesses in Pakistan had a bank loan or line of credit, compared to 23.7% in the region. The lack of financial support for Pakistani SMEs hampers their ability to innovate and expand, hindering the country’s economic development.

In conclusion, Pakistan’s potential for growth and innovation is substantial yet underutilized. Addressing the challenges of regulatory hurdles, limited investment in R&D, and the constraints faced by SMEs are crucial steps towards unleashing this potential. By focusing on strengthening domestic industries, improving the business environment, and investing in innovation, Pakistan can not only enhance its global competitiveness but also create a robust foundation for sustainable economic growth.

Moreover, removing barriers hindering the export sector is vital to remedying the current innovation dearth. This underscores the importance of adopting an export-led paradigm to drive economic growth. An export-led paradigm shift coupled with a focus on domestic industry development will not only boost exports but also enhance innovation capacity, driving sustainable economic growth in the long term.

The overarching message is clear: export-led growth is not just a solution for Pakistan’s balance of payments crisis and economic expansion but also a catalyst for amplifying innovation. To achieve this, exporters must be insulated from

distortionary interventions, unfavorable tax regimes, and other inefficiencies that impede sectoral growth and divert resources via transaction costs.

By Shahid Sattar | Amna Urooj

As Pakistan steps into critical discussions with the International Monetary Fund (IMF), it’s confronting immense financial pressures while simultaneously holding strategies that could fundamentally change its fortunes: the promise of export-led growth as well as an immense potential in much enhanced agricultural produce.

With a debt-to-GDP ratio that has breached the 70% threshold, Pakistan’s economic journey is overshadowed by the enormity of its debt—60% of it being domestic, bearing the brunt of 85% of the interest payments. This situation paints a vivid picture of the fiscal tightrope the country walks on.**

Yet, why turn to the IMF when an untapped potential lies within? Pakistan’s industrial, agriculture and tech sectors are a beacon of hope, resilience and demonstrate vast capabilities. This scenario presents a compelling case: while Pakistan seeks the IMF’s support, its flourishing textile exports, agriculture sector that can produce surplus and a growing tech sector signify an inherent strength and capacity for economic self-reliance.

 

This juxtaposition of external financial assistance and the potential for home-grown economic revival underscores a critical question — why rely on the IMF when there’s a path to harnessing export-driven growth towards financial independence?

While Pakistan has got other ways to bring in cash, like remittances from abroad or foreign investments, they’re not going to be the game-changer we need anytime soon. Various studies such as the study by Perez-Saiz, H., Dridi, J., Gursoy, T., & Bari, M. (2019) suggests that remittances do not automatically boost a country’s overall economy as much as we might think. While families receiving this money do end up spending more, this spending doesn’t lead to economic growth. The researchers found that whether these remittances help the economy depends a lot on how different parts of the economy are connected. This means that just getting more remittances doesn’t necessarily make the economy stronger. Moreover, the consensus in academic research is that remittances lead to inflation as they increase aggregate demand via higher household income, resulting in increased consumption.

So, we’re left facing some tough choices. From July to February, Pakistan’s exports are consistently trailing behind imports, painting a picture of a trade imbalance. In February alone, the figures are quite telling: exports stand at a modest $2.57 billion, while imports loom at a hefty $4.28 billion (Source: SBP). This substantial gap signals an urgent call to action for enhancing export capabilities to match or even overtake the towering import figures. Remittances, though stable, do not compensate for this disparity, highlighting the critical need for bolstering Pakistan’s export sector to improve the trade scenario.

 

But, there’s a silver lining. With the right push and a bit of creativity, exports can be our ticket to turning things around. It’s not just about selling more, but selling smarter, tapping into a world that wants what we have to offer. For example, Pakistan’s high agricultural import bill could be significantly reduced by revamping the agri-sector to produce self-sufficiency and a sizeable exportable surplus, leveraging initiatives like Special Investment Facilitation Council (SIFC) for corporate farming and agro-industry investments.

All is not lost, we’ve got a world of opportunities right at our fingertips. Pakistan needs to align its textile sector with global trends, shifting towards a 70-30% mix of man-made fibers (MMF) and cotton products. Currently, dominated by cotton exports, diversifying into MMF and high-performance apparel—where global trade is focused—could significantly enhance Pakistan’s export basket. Such a move will contribute to economic stability by meeting international market demands more effectively.

The real challenge isn’t finding new things to sell but getting better at selling what we’re already good at, for example textiles, agricultural and tech products. We’ve got to think bigger, reach further, and make sure we’re not just participants but winners in the global market.

For example, there’s been a remarkable upswing in Pakistan Apparel Exports, particularly in 2021, where we see substantial growth across all markets. The EU and the USA stand out with pronounced spikes, suggesting that efforts to broaden the export base are bearing fruit. This robust performance supports the narrative that Pakistan is moving in the right direction by diversifying its textile exports, leaning into products with higher global demand. With the right policies and continued focus on quality and market expansion, Pakistan can not only secure its position in the global market but also further the goals of economic stability and growth.

And here’s the kicker: we can do it. The agriculture sector also has immense scope for improvement through enhanced yields, corporate farming and getting areas such as the Cholistan Desert into productive use. Israel’s successful transformation of the Negev Desert into a flourishing agricultural area provides a blueprint to Pakistan to potentially replicate it in the Cholistan Desert. Adopting similar innovative farming techniques could spur agricultural development, increase food production, boost employment rate and reduce Pakistan’s reliance on foreign debt by boosting the economy through homegrown resources.

 

Addressing the agricultural productivity gap in Pakistan could be a significant leap toward economic self-sufficiency. The country’s current agricultural yield lags behind that of leading global producers. For instance, Pakistan’s wheat yield is significantly lower than China’s maximum yield, as is the case with rice, maize, sugarcane, and cotton. By closing this yield gap through the adoption of modern farming techniques, better irrigation systems, and superior seeds, Pakistan can substantially increase its economic output which in the ultimate analysis will allow Pakistan to maintain its potential and economic sovereignty while providing employment to its very large workforce.

Consider the wheat production: if Pakistan’s yield per hectare reaches the level of China’s, the output increase could translate to an additional $5.9675 billion. Similar increases across other major crops like rice, maize, sugarcane, and cotton could collectively add up to over $17 billion to the economy. This additional revenue could create an exportable surplus, ensuring food security, and simultaneously addressing the country’s employment issues.

The SIFC and LIMS (Land Information & Management System) are also united on the principle that by utilizing additional lands for such optimized agricultural practices, Pakistan can further boost its economy. An added benefit of $10 billion, in addition to the $17 billion enumerated above, is foreseeable by doing so, enhancing the nation’s export profile.

This kind of agricultural overhaul not only promises to fill existing productivity gaps but also to set a foundation for a more stable and prosperous Pakistan, one where dependency on external debt is greatly reduced, and local resources are fully harnessed for national growth.

Furthermore, one of the initiatives, which is the “1000 Garment Plants” initiative, also aims to double Pakistan’s textile and apparel export capacity from $25 billion to $50 billion by adding 200 garment plants each year for five years. This strategic expansion is expected to revolutionize exports, cater to global market demands, and creating over 1 million jobs, and significantly enhancing Pakistan’s economic landscape and reducing its dependency on foreign aid.

The recent downturn in Pakistan’s textile output, which has hit its lowest point in two decades, illustrates a significant challenge, with the industry experiencing a sharp 35% drop in Large-Scale Manufacturing (LSM) output two years ago.

Despite this setback, the textile sector demonstrated remarkable resilience by subsequently expanding its capacity by 33%. This recovery and unused capacity offer a glimmer of hope amidst the data, pointing to the industry’s ability to rebound.

Although there was a slight decline in textile and apparel exports in the eight months of FY24 compared to FY23, the existence of this unused capacity suggests that the industry is poised for a potential upswing. This capacity to bounce back reinforces the belief that nurturing domestic industries like textiles is crucial for Pakistan’s economic health, potentially more so than relying on unpredictable foreign aid. Harnessing this latent potential to amplify textile production, the nation could enhance its export volume, shrink its trade deficits, and stride towards an economically autonomous future, cutting down its reliance on international financial aid and loans.

One thing to note is that the escalating energy prices have had a significant knock-on effect on Pakistan’s textile industry. As costs rise, local producers find it increasingly difficult to compete on price, leading to a greater reliance on international imports to meet domestic demand. This shift has been detrimental to the foundational sectors of the textile industry such as spinning and weaving, which are struggling to stay afloat. Consequently, many of these essential back-end industries are being forced to shut down, directly impacting Pakistan’s net exports. This decrease in production capacity undermines the country’s ability to export, exacerbating the trade deficit and challenging the nation’s goal of economic self-sufficiency.

Pakistan’s textile sector is not just keeping pace—it’s moving ahead, particularly in the apparel export arena. This industry is undergoing a remarkable transformation, one that is gearing up for substantial export growth and is set to enhance its position in the international market. This positive shift was recently highlighted at a US International Trade Commission public hearing, where Pakistan’s growing competitiveness in the apparel sector was discussed.

The sector’s transformation is marked by the adoption of cutting-edge technologies and a commitment to transparency, aligning with global demands for traceable and sustainable production practices. The recent move towards the establishment of the National Compliance Center (NCC) is the right step in achieving these objectives. The ambitious Net Zero Pakistan Initiative underscores the country’s commitment to sustainability, with leading apparel companies aiming for a carbon-neutral footprint by 2050.

Gains in productivity within Pakistan’s textile sector remain largely untapped but hold significant potential for boosting the economy. Through modernization, such as upgrading technology and processes, the industry could achieve these gains, enhancing efficiency and output quality. Additionally, by shifting focus towards producing higher value-added textile products, Pakistan can elevate its export profile.

To revitalize its economy swiftly and substantially, Pakistan must focus on bolstering sectors like textile, agriculture, and technology exports. The tech sector, in particular, offers a lower-investment, high-return avenue for economic growth. However, its potential is severely hampered by the government’s frequent shutdowns of the internet and social media platforms, crucial for the IT and IT-enabled services (ITeS) industries.

Such disruptions not only hinder the productivity of software exporters and freelancers but also damage the trust of international clients, who prioritize reliability and timely delivery over cost. This mistrust discourages investment and partnership opportunities, pushing potential clients to seek services elsewhere, even at higher costs. As Pakistan houses the world’s second-largest online freelance workforce, ensuring uninterrupted internet access is paramount for not just the IT sector but for the entire economy.

The failure to provide stable connectivity undermines Pakistan’s capacity to reduce its dependency on foreign aid by leveraging its potential for self-sufficiency through IT sector exports, which are currently projected to reach USD 3.5 billion this year.

Pakistan’s history is a testament to its potential for growth, spanning diverse sectors from textiles to technology. Despite challenges such as energy costs, the nation has consistently demonstrated its capacity to rise above obstacles, fueled by its competitive edge in labour costs. The vision for economic resurgence now hinges on a cohesive, export-focused strategy that enjoys unwavering support from the highest echelons of leadership in the new government.

At this pivotal moment, with the complexities of IMF negotiations ahead and the economic landscape in flux, Pakistan’s recent strides in the textile and the recent initiatives being taken in the agriculture sector illuminate the path to sustainable development.

By capitalising on this success, expanding its economic horizons, and enacting meaningful reforms, Pakistan is charting its course towards a prosperous future. It’s a future where economic self-sufficiency is not just an aspiration but a reality, with exports serving as the cornerstone of Pakistan’s economic sovereignty.

By Shahid Sattar | Absar Ali

One of Pakistan’s most pressing economic issues is the chronic shortage of foreign exchange underscored by an import-based-consumption-driven economy with an abysmal industrial base that cannot compete on the international stage and is shrinking with every passing day.

Exports are the need of the hour; while everyone including the government and SIFC (Special Investment Facilitation Council) are cognizant of this fact, unfortunately, the policy measures that have been doled out, especially in the energy domain, reflect an opposite reality.

According to a recent report, the Bangladesh Commerce Ministry, in its draft Export Policy 2024-27, has proposed a 5 to 10 percent rebate on electricity bills for major export-oriented industries. In Pakistan, the government has abolished the preferential gas tariff for export-oriented sectors and hiked gas prices yet again—an increase of 223% since January 2023.

As a consequence, the end-use price of gas-based captive generation has skyrocketed. At the same time, grid electricity tariffs are at around 17.5 cents/kWh—over twice that faced by competing firms in regional economies like Bangladesh, India, and Vietnam.

Is it any wonder then that Bangladesh exported around $47 billion worth of just textiles and garments in FY23, while Pakistan’s total exports across all sectors of the economy stood at a meagre$28 billion during the same period? While Bangladesh and Vietnam have made significant gains in the global market for textile and apparel over the past decade, Pakistan’s share remains marginal (figure 1).

“What is important to understand for our policymakers is that neither the economy nor the industrial sectors operate in a vacuum. Whether or not we can export a product depends on our cost of production relative to that of firms in other countries. If the government continues to push its inefficiencies and social obligations on to the private sector in the form of prohibitive taxes, cross subsidies, inflation, exchange rate depreciation and high interest rates, it translates into higher cost of production that render our products uncompetitive in international markets.”

And this is the reality that the textile and apparel sector—Pakistan’s single largest and perhaps most important manufacturing sector—has been facing every day for well over a year now.

After growing by 54% in only two years and peaking around $19.3 billion in FY22, textile and apparel exports slumped to $16.5 billion in FY23 owing to the withdrawal of regionally competitive energy tariffs amid a larger macroeconomic crisis.

From a peak of $1.74 billion in April 2022, monthly exports declined to a low of $1.18 billion in February 2023 and have now become stagnant at around $1.4 billion/month—$600 million below the installed production capacity of approximately $2 billion/month (figure 2, above).

Following the most recent hike in energy prices, there is no financially viable source of energy available for industrial sectors to manufacture with and compete in international markets. Domestic production of yarn and cloth is at a 20-year (figure 3) low while a drastic increase has been observed in imports of the same (figure 4).

It is therefore safe to assume that the economy is going through premature deindustrialization and over the coming months we will observe a further decline in textile and apparel exports as most spinners and weavers are closing their doors and more and more yarn and cloth are being imported for export manufacturing, resulting in a decline in the share of domestic value-added in exports and deterioration in net exports or trade balance.

At the same time, the economy’s gross external financing requirements stand well over $25 billion per year for the next 5 years and plans for meeting these requirements are limited to squeezing more and more credit out of increasingly unwilling creditors.

To catalyze a resurgence in Pakistan’s textile and apparel sector, a multi-faceted approach targeting key barriers to export growth is imperative. This includes addressing the prohibitively high energy tariffs, persistent delays in tax refunds, high costs and shortage of financing, low product diversification, restrictive import and anti-dumping duties on raw materials, and attracting investment to upgrade and expand the limited manufacturing capacity. Addressing these challenges holistically can not only revive the sector but also position Pakistan as a competitive player on the global stage.

As discussed above, there is currently no financially viable source of energy available to industrial sectors. The cross subsidy from industrial power tariffs must be removed and they must be brought down to a regionally competitive 9 cents/kWh.

Moreover, considering that Pakistan must begin an immediate transition towards net-zero emissions in export production to maintain competitiveness under the EU’s Carbon Border Adjustment Mechanism and similar regulations in other key markets, the CTBCM must be operationalized to allow B2B power contracts with a wheeling charge of 1-1.5 cents/kWh and the cap on solar net-metering for industrial consumers must be increased from 1MW up to 5MW.

Equally vital is the expansion of the export basket beyond cotton-based products to include man-made fibers (MMF), leveraging global market trends and demand. This requires a reassessment of import and anti-dumping duties imposed on MMF raw materials like purified terephthalic acid and polyester staple fiber that afford high levels of protection to domestic manufacturers who use it to extract rents from the domestic market and hinder the development of an MMF-based apparel manufacturing culture in the country.

The limited manufacturing capacity must also be upgraded and expanded. Doing so requires attracting investment by, at the very least, matching the incentives being offered in the region. To name a few, Bangladesh is offering preferential income tax rates, duty-free import of raw material, reduced withholding tax rates, and long-term financing facilities with preferential rates for exporters, while India is setting up seven mega industrial zones for textile and apparel manufacturing with developed factory sites, plug and play facilities and rebates of up to 3% of annual turnover, whereas Vietnam is offering preferential corporate tax rates, duty exemptions and various rebated modes of financing.

By prioritizing competitive industrial and energy policies and fostering an environment conducive to export-led growth, the country can navigate its current predicament and emerge stronger. However, if the status quo is maintained, a point of no return is not very far off in the future.

The consequences will be disastrous not just for the economy but also for Pakistan’s already weak social fabric as a large and young population that otherwise provides a demographic dividend at this stage of development will be further disenfranchised with no opportunities for gainful employment and no hope for a better future.

By Shahid Sattar | Amna Urooj

Against the backdrop of unaffordable energy tariffs, the government is taking a significant step by proposing to lower the electricity tariff to 9 cents. This reduction is expected to naturally encourage people to switch to grid electricity for commercial reasons as the captive power electricity at current gas pricing costs more than 10 cents. This is crucial for Pakistan, where gas is a scarce resource.

For context, Pakistan’s energy tariffs are notably higher than those of regional counterparts, potentially undermining its industrial competitiveness. With electricity tariffs at 17.5 US cents/kWh, Pakistan exceeds Vietnam’s 7.2, Bangladesh’s 8.6, and India’s 10.3 cents/kWh. The disparity is even starker in gas tariffs, where Pakistan’s blended rate is 12.4 US dollars/MMBtu, compared to lower rates in Vietnam, India, and Bangladesh. These high energy costs, particularly for sectors like textiles and apparel, put Pakistan at a significant disadvantage, threatening the viability of its industries in the global market and calling for policy recalibration to ensure competitive parity.

Millions of jobs are at stake as Pakistan’s industrial sector confronts a looming deindustrialization crisis, driven by the dual challenges of skyrocketing energy costs and the global trend of industrial growth sustainability being severely tested by energy policy decisions. Essential for the country’s economic growth and development, the sector is navigating through turbulent waters, grappling with escalating energy costs that exacerbate the threat of deindustrialization.

The economic backdrop in Pakistan

Over the past decade, Pakistan’s economy has shown alarming signs of distress, with Pakistan’s debt per capita escalating from USD 823 in 2011 to USD 1,122 in 2023, marking a significant increase of approximately 36%. Concurrently, GDP per capita has seen a reduction from USD 1,295 to USD 1,223 during the same period, indicating a 6% decrease. This economic strain underscores the urgency for targeted reforms aimed at revitalizing the industrial sector, which could serve as a catalyst for growth and stability.

Deindustrialization: a closer look

Deindustrialization, a process characterized by a decline in the industrial sector’s contribution to the GDP and the employment it generates, poses a significant threat to economic stability and growth. In Pakistan, this trend is exacerbated by rising energy costs, which have become a critical concern for industries, especially in the textile sector. This sector, pivotal to Pakistan’s economy, faces severe challenges due to high energy tariffs, which undermine its competitiveness on the global stage.

Recent statistics from October 2022 to January 2024 highlight the striking impact of rising energy tariffs on industrial energy consumption. Notably, LESCO and MEPCO saw a substantial decrease in electricity usage, with reductions of -73% and -76%, respectively, in January. Such stark declines are indicative of broader industrial contractions and a significant move towards deindustrialization.

Furthermore, the total load of textile industries on all Discos showcased a -69% decrease, a testament to the acute challenges faced by the industrial sector due to escalating energy costs. This trend not only affects the competitiveness of Pakistani industries but also has profound implications for employment and economic growth.

On the other hand, the recent announcement from the Oil & Gas Regulatory Authority regarding the revision of natural gas sale pricing for the fiscal year 2023-24 also underscores a critical juncture for Pakistan’s industrial sector. The restructured gas tariffs aim to streamline categories and adjust costs, potentially impacting the operational expenses of industries across the board. This decision, while intended to address fiscal imbalances and ensure the equitable distribution of energy resources, places additional pressure on an already strained industrial landscape grappling with high energy costs.

The revision introduces new tariffs for general industry processes and captive usage, signaling a significant shift in the government’s approach to managing industrial energy consumption. Such changes are poised to directly affect the cost structure of various industries, from textiles to manufacturing, at a time when the sector is already facing the challenges of deindustrialization and job losses. The move reflects a broader pattern of energy policy adjustments globally, where nations are reassessing energy tariffs to balance economic growth with sustainability concerns. However, for Pakistan, the delicate balance between fostering industrial growth and managing energy costs becomes even more precarious, highlighting the urgency for strategic planning and support mechanisms to mitigate the adverse effects of these policy decisions on the industrial sector’s competitiveness and employment rates.

A path forward

In the face of deindustrialization and escalating energy costs, Pakistan stands at a critical juncture requiring a strategic and multifaceted approach to steer its industrial sector towards sustainability and growth. This approach encompasses several key initiatives aimed at creating a conducive environment for industrial development and economic stability.

Streamlining regulatory frameworks

The complexity and bureaucracy of regulatory procedures can significantly hinder business operations, discouraging both domestic and foreign investments. Simplifying these administrative processes is crucial for enhancing Pakistan’s attractiveness as an investment destination. This involves eliminating redundant regulations, digitizing administrative procedures, and establishing a one-stop shop for business registrations and clearances. By improving the ease of doing business, Pakistan can create a more dynamic and responsive industrial sector capable of adapting to global market demands.

Investing in renewable energy

Pakistan needs to steer its economy toward sustainability by promoting renewable energy, reducing reliance on imported fuels, and addressing price volatility in the international energy market. To this end, industrial units may be incentivized to develop their own renewable energy sources, with on-site projects being allowed an increased solar net-metering cap from 1MW to 5MW. The implementation of the Competitive Trading Bilateral Contracts Market (CTBCM) may facilitate off-site renewable setups, enabling industries to secure green energy at competitive rates through special arrangements like reduced wheeling charges, without the burden of cross subsidies.

The urgency of this transition is amplified by the impending EU’s Carbon Border Adjustment Mechanism (C-BAM), set to be introduced in 2026, which will tax exports based on carbon emissions. Pakistan’s move towards green energy will not be just a response to C-BAM but a strategic imperative to keep its exports competitive alongside regional players like India and Bangladesh, who are rapidly advancing in reducing energy emissions. This shift is vital for Pakistan’s industrial sector to remain viable in the face of stringent global environmental regulations and to participate actively in the international market.

Enhancing export competitiveness

The textile industry, among others with high export potential, is a cornerstone of Pakistan’s economy. Strengthening this sector requires targeted policies that provide incentives for quality enhancement, innovation, and access to new markets. Establishing special economic zones, offering tax breaks for high-value-added products, and facilitating trade agreements can enhance export competitiveness. Additionally, investing in technology and skills development can ensure that Pakistani industries meet international standards and capitalize on global market opportunities.

Learning from global best practices

Numerous countries have successfully navigated the challenges of deindustrialization and high energy costs through innovative policies and strategic investments. Studying these success stories can offer valuable lessons for Pakistan. For instance, Germany’s transition to renewable energy and its focus on high-tech manufacturing, or Bangladesh’s remarkable growth in the textile sector through policy support and market access, provide models that Pakistan can adapt to its context.

Toward a Sustainable Industrial Future

Pakistan’s industrial landscape stands at a crossroads, with deindustrialization looming on one side and the potential for a brighter, more sustainable future on the other. The government’s proposal to lower electricity tariffs to 9 cents is a positive step, but it is only a part of a much-needed broader reform. To truly revitalize the industrial sector and protect it from the global shift toward sustainable development, a multifaceted approach is imperative. This includes simplifying regulatory frameworks, incentivizing the adoption of renewable energy, enhancing export competitiveness, and learning from global best practices. Such reforms are not just about survival; they are about positioning Pakistan one step ahead in industrial innovation and sustainability.

“As the world braces for the impact of measures like the EU’s Carbon Border Adjustment Mechanism, Pakistan must act swiftly to transform its industrial sector into a resilient force capable of thriving in an environmentally-conscious global economy. The time for a decisive action is now; the path Pakistan chooses will determine its place in the global industrial narrative and its economic destiny for generations to come.”