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June 21, 2022

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June 1, 2022

 

The world is witnessing an unprecedented and multifaceted environmental crisis which will impact the lives of all who live on this planet. This can be elucidated by the fact that the world temperatures are rising, droughts are occurring frequently and lasting longer, tropical storms are getting severe, glaciers are melting faster, permafrost is melting, rising sea levels are threatening estuarine ecosystems and coastal communities.  Industrialization is one of the primary causes of this change in climate. As a result, amongst many other initiatives taken by various national and international organizations, the Quality Management System (ISO 9000), issued by International Organization for Standardization (ISO) in 1987, compelled manufacturers to consider the environment by reducing the use of carbon based raw materials, rationalizing the use of energy in processes or seeking out clean energy sources, and using non-harmful packaging materials that are bio-degradable.

Environmental Impact Assessment (EIA) is another tool for planning and guaranteeing sustainable development. EIA is used in order to ensure that the environment and natural resources are protected and conserved during the development of industrial and infrastructure projects. Therefore, the end goal is to promote cleaner manufacturing practices and long-term sustainability as remedies to emerging environmental issues.

Textile and garment industries play an important role in developing countries’ economies such as that of Pakistan and Bangladesh. This sector was amongst the first few sectors to go through the industrialization process, and today it is one of Pakistan’s and Bangladesh’s most important economic sectors.  In April 2022 alone, Bangladesh’s textile export reached $3.93 billion. Pakistan, on the other hand, experienced the highest-ever monthly textile exports of $1.739 billion in April 2022.

However, pursuing such exports with time has increased waste generation leading to harmful environmental impacts. The major environmental effects include the discharge of large amounts of chemical loads as a result of the high consumption of water and harmful chemicals used in this industry, as well as the associated water pollution, high energy consumption in manufacturing processes and related air emissions, packaging and solid waste production issues, and the formation of unpleasant odors caused by bleaching, dyeing, and printing processes. To summarize, textile manufacturing consumes a significant amount of water and chemicals. The garment industry worldwide uses an estimated 79 billion cubic meters of fresh water per year across its whole value chain.

Table 1: Textile wastewater pollution causes and characteristics

                                                 Source: Patagonia, Inc.

EIA of Textile Sector in Bangladesh at a Glance:

In Bangladesh, the sector’s environmental repercussions are becoming increasingly costly. In the delta-based country, water pollution is extremely acute. The Bangladeshi government has classified three rivers biologically “dead” due to untreated wastewater entering them in the capital, Dhaka. Other rivers are categorized as polluted and devoid of dissolved oxygen (IamRenew News 2020). Garment industries are the second-largest source of pollution in the Dhaka watershed, accounting for over 60% of pollutants (NRDC 2012).

Bangladesh established EIA guidelines in 1992 and passed EIA legislation in 1995 and 1997. The Environmental Conservation Act of 1995 and the Environmental Conservation Rules provide the legal framework for EIA in Bangladesh (1997). EIA assumes that businesses will build waste/pollution treatment plants, follow environmental regulations, report occurrences, and have plans in place for corrective action if necessary. However, a critical weakness in environmental management is the lack of monitoring methods and procedures for their implementation, which is linked to the country’s severe environmental degradation (Bahauddin 2013).

The efficiency of Bangladesh’s EIA system has been examined through an independent study and the results reflected that although the bulk of the statements were determined to be satisfactory (65%), most were rated as “just satisfactory,” and 35% were rated as low to extremely poor, according to the independent evaluation of the quality of 40 EISs. Other investigations of the quality and effectiveness of EIA processes in Asia and Africa have shown similar outcomes (Kabir and Momtaz 2013). Quality, on the other hand, varied greatly depending on the industry. Infrastructure (roads, bridges, and urban projects); energy (electricity, gas, and mineral resources); water resource management; and industrial (cement factory, textile, and leather industries) were all included in the study.

The overall lower level of Environmental Impact Statements (EIS) quality in the industrial sector was attributed to three factors:

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

EIA of Textile Sector in Pakistan at a Glance:

Since Pakistan has significant, vertically integrated garment industry, the full textile and garment manufacturing process can be sourced internally (Angeulov, 2016). Table 2 depicts Pakistan’s rankings in the global Environmental Performance Index (EPI) in 2016 by the Yale Centre for Environmental Law and Policy. The EPI grades countries based on how well they perform on two high-priority environmental issues: protecting human health from environmental harm and protecting ecosystems. EPI scores for waste water treatment are also reported in Table 2. The indicator weights the proportion of treated wastewater from households, municipalities, and industry by the population served by the sewage system.

Table 2: EPI Scores of Different Countries

 Source: Hsu et al (2016) Environmental Performance Index

When it comes to regulating water use and wastewater treatment in Pakistan, the textile industry is frequently overlooked. However, in light of an acute water crisis for sectors and mounting pressure from regulatory authorities and worldwide clients, large textile players have begun to focus on increasing water efficiency and developing wastewater treatment and reuse technologies. However, this is not the case for the Small and Medium-Sized Enterprises (SMEs). These SME’s have been confronting various issues that are causing them to only partially adhere to the local environmental laws and regulations. Lack of management engagement, financial resources, technology constraints, lack of employee involvement, lack of government incentives, uncertainty about environmental regulation changes, and lack of capacity of industry owners and staff are only a few of the significant problems. Furthermore, the current scarcity demands for water conservation at each step of textile manufacturing such as reusing wash water, opting for concurrent washing methods and many more. However, the SME’s in the sector are unable to afford such techniques thereby increasing the environmental impacts in negative connotations.

Table 3: Status of Environmental Compliance in Textile Industries of Pakistan

Source: World Wide Fund (WWF) Asia

Only 15% of Pakistan’s municipal and industrial wastewater is treated before being disposed away (Murtaza et al., 2012). The majority of wet textile manufacturers do not treat or only treat a small portion of their effluent before dumping it into the Arabian Sea.

The effluent treatment plant installation problems are generally connected to building costs and space requirements. Because they require expensive capital, complicated technology, specialized people for operation and maintenance, mechanical replacement parts, high energy, and a sludge disposal location, Effluent Treatment Plants (ETPs) can be costly to develop and maintain. However, as the quantity/quality of waste produced increases, so does the capital cost, operational cost, land area, and complexity of effluent treatment technology. The other major factor is that both the public and commercial sectors have failed to realize the necessity of wastewater treatment and the availability of safe drinking water.

Moreover, one of the key causes for the inadequate implementation of current environmental legislation is that Pakistan did not spend adequately in strengthening the ability of environmental managers, lawyers, specialists, and experts to administer and implement these laws and regulations. Budgetary allocations for trainings were ignored, and no Environmental Laboratories with advanced technology to monitor and analyze data were established.

Figure 1: Comparison of the Number of Conviction Cases in Environmental Tribunals in Textile with Other Industries

Source: Punjab Environmental Tribunal, Lahore

Another important point is that environmental restrictions are not the driving force behind industrial wastewater treatment programmes in Pakistan; rather, foreign clients such as IKEA, Walmart, H&M, Levis, and others are pressuring companies to invest in cleaner manufacturing processes and wastewater treatment. International consumers have imposed stringent requirements on textile exporters in Pakistan and around the world, including zero discharge of hazardous chemicals (ZDHC) in discharged effluent and a focus on water conservation and reuse following thorough treatment. Furthermore, considering the impending acute water shortage and high water costs are additional driving factors to emphasise the necessity of industrial wastewater recovery and reuse, especially textile (UNEP, 2013; Yukseler et al., 2017).

Conclusion:

To improve the effectiveness of the legal and institutional arrangements, a credible monitoring and enforcement system should be put in place, as well as state-of-the-art technologies and modern approaches. It is estimated that around 80% of industrial units are medium and small-sized businesses with limited understanding of environmental difficulties and other factors, as well as technical ability and financial means to address these challenges. To address these concerns, it is necessary to offer textile industries with ongoing technical assistance for self-monitoring of pollution levels, which they can then report to regulatory agencies such as EPAs for a climate resilient, sustainable Pakistan.

Recommendations for the Industrialists:

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

Recommendations for the Government:

The continuity of the textile export to the West in the future is subject to Pakistan meeting all environmental protection criteria otherwise it will steadily lose market share as more and more sourcing companies insist on compliances and import regulations are tightened with regard to environment and social compliance.

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

To wrap up, environmental compliance has to be ensured through an amalgam of cooperation of both the industrialists and the government. The cooperation is just not something that needs to be done for the sake of it but rather something that ‘has’ to be done in true letter and spirit since contemporary trade scenarios and business culture for the lower-middle income countries like Pakistan revolves around incentive structures for sustainable development through duty free access such as those covered under Pakistan’s Generalized Scheme of Preferences (GSP+). Compliance of environmental rules and regulations is quite esoteric in nature and hence curated policy measures need to be taken by both the textile industrialists and the government to ensure a forward progression of the country’s economy and environmental protection for the greater good.

References:

Abbas, S., & Halog, A. (2022). Analysis of Pakistani Textile Industry: Recommendations Towards Circular and Sustainable Production. Retrieved 28 May 2022

Gadhi, T.A., Mahar, R.B., and Bukhari, S.A. (2019). Wastewater treatment and reuse to approach zero water discharge in Al-Rahim textile industries: Substantial increase in water use efficiency in textile processing. U.S.-Pakistan Center for Advanced Studies in Water (USPCAS-W), MUET, Jamshoro, Pakistan

International Labour Organisation (ILO). (2017). Environmental Scoping Study: Decent Work in the Garment Sector Supply Chains in Asia. Retrieved from

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

International Labour Organization (ILO). (2021). Effective regulations? Environmental impact assessment in the textile and garment sector in Bangladesh, Cambodia, Indonesia and Viet Nam. Retrieved from

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

Naqvi, S., Arshad, D., & Nadeem, F. (2018). Water Footprint of Cotton Textile Processing Industries; a Case Study of Punjab, Pakistan. Retrieved 30 May 2022, from https://wwfint.awsassets.panda.org/downloads/wf_textile_in_pakistan_2018.pdf

Toprak, T., & Anis, P. (2017). Textile Industry’s Environmental Effects and Approaching Cleaner Production and Sustainability: an Overview. Journal Of Textile Engineering &Amp; Fashion Technology, 2(4). doi: 10.15406/jteft.2017.02.00066

Water efficiency in textile processes. (2022). Retrieved 30 May 2022, from

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

World Wide Fund for Nature (WWF). (2018). Review of Existing Environmental Laws and Regulations in Pakistan. Retrieved from https://wwfasia.awsassets.panda.org/downloads/review_of_existing_environmental_laws.pdf


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May 31, 2022

 

Political instability is a serious impediment to economic progress. Not only does it shorten policymakers’ horizons leading to suboptimal short term macroeconomic policies, but it is also the cause of frequent policy U-turns and leads to non-completion of ongoing projects. This scenario paired with mounting debt and a continued reliance on foreign loans leaves Pakistan with a weak economy and a lack of direction.

Socio-political instability results in a high-risk, low-investment environment. Vietnam provides us with an example eerily similar to Pakistan’s case, as during the early 1980s, the country was heavily reliant on foreign and domestic loans due to a lack of foreign direct investment and inefficient state-owned enterprises, paired with high debt accumulation, poor international relations and balance of payment deficit. Much like the state of affairs in Pakistan, which has escalated recently, Vietnam suffered from an unstable political environment. Countless reforms were attempted but Vietnamese insist that these were unsuccessful until existing political dynamics and elite capture within the country were effectively addressed, after which the country made an impressive economic recovery with a particular focus on investing in human and social capital.

The political environment in Pakistan has been unstable over the long-term, leading to an uncertain business environment, reduced investments and slow pace of economic development. However, the effects of escalating instability over the past few weeks have been immediately evident. Exporters have started facing losses as a result of the government’s move of impounding containers to counter protests.

In an effort to offset the balance of payments deficit, the government instituted a ban on intermediate inputs and textile imports but unintentionally endangered the livelihoods of millions of people. Traders have emphasized that foreign cloth caters to most of the local requirements as it is cheaper than locally made cloth. “A good quality foreign cloth was available at Rs300 per yard while Pakistani cloth was Rs800 per yard.” (Press Reader) The people will be forced to use expensive locally made cloth which will increase their budget, while the price of school uniforms will also increase.

The country is struggling to find its footing amidst mounting foreign debt and policy inconsistency born out of frequent changes, emphasized by the IMF as “the number of times in a year in which a new premier is named and/or 50 percent of the cabinet posts are occupied by new ministers” in the paper How Does Political Instability Affect Economic Growth?

With its high income disparity and limited resources, Pakistan relies largely on foreign debt for its functioning and development, and while also suffering a major trade deficit. This, along with recurrent rupee devaluation and increased consumer price inflation, has further deteriorated the economic outlook.

Pakistan’s largest industry share continues to be occupied by textiles, and the sector provides an opportunity for unprecedented GDP growth. With consistent policy and appropriate measures to give Pakistan’s export sectors the necessary facilitation they require, it is possible to change the negative projections into positives. This is an opportunity to set a precedent for the coming years, and to streamline the way trade is managed in the country.

Modern Monetary Theory (MMT) research shows that a high government deficit, a trade surplus via imports and/or exports, and to some extent, foreign remittances, have been the most pertinent factors in boosting a country’s growth rate and GDP. Pakistan has a high fiscal multiplier, so even nominal investment in the country provides substantial returns in the form of employment and exports etc. The fiscal multiplier explains the expected total increase in GDP resulting from additional spending or a reduction in tax. Thus, a higher fiscal multiplier exponentially impacts the overall domestic output (GDP). Slight increases in government deficit are major drivers of growth.

According to the World Bank, 1% growth in garment production is associated with 0.3% to 0.4% increase in employment for both men and women. Investment in human capital is the most essential component of the revised policies and programs to facilitate Pakistan’s economic growth in the coming years.

Foreign remittances boost short-term growth but carry the underlying implication of brain drain and loss of high-skilled labor to other countries. The returns for Pakistan that would have been realized by retaining this skilled labor go untapped, although cash inflows from their foreign jobs do provide a certain degree of support locally. Thus the MMT strategy provides useful indicators for where the focus must lie in moving forward with Pakistan’s export-led sectors, but a narrowed down approach with identification of individual areas for development is necessary.

This brings us to the textile policy, set for implementation in 2022 with a view towards realizing the potential of value addition in each segment of the textile value chain, utilizing the potential of home-grown cotton augmented by Manmade Fibre/Filament to boost value added exports, and the efforts required to become a major player in global textiles. Great emphasis has been placed upon investment in human capital, as if history and competition are to be good indicators, there is a need to build a strong and motivated workforce before other goals can be actualized.

The policy posits that improving worker skills and literacy will allow for increased productivity of workers, wage increases, and a reduced level of waste. This will enable, among other things, the production of higher-quality products, garments and non-garments. It will require a comprehensive vision for skill development, reskilling the current labor force through greater access to informal training and skill-building, and improving the quality of foundational education.

With a holistic approach to spearheading economic growth and institutionalizing certain international standards, Pakistan can achieve sustained long-term economic growth that makes use of opportunities that were previously neglected. The realization that increased trade and government deficits have played a key role in economic growth all along has broader implications for the way in which future policies ought to be formulated. Furthermore, acknowledging the human factor at every stage of the process, in terms of worker welfare, skill development, investment in youth and retention of top graduates is bound to ensure great returns and an improved standard of living in Pakistan. Lastly and most importantly, stability and consistent policy implementation are crucial for economic growth and for the export sector to thrive and contribute dollar earnings to stabilize the Balance of Payments for a sustainable economic outlook.

 


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May 14, 2022

 

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

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

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

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

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

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

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

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

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

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


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April 21, 2022

 

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

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

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

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

Stronger headwinds

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

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

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

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

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

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

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

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

The path to a new normal needs to be charted

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

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

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

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

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

Altering gender social norms

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

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

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

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

Conclusion

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

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

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April 14, 2022

 

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

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

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

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

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

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

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

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

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

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


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March 17, 2022

The Electricity Landscape in Pakistan: An Overview

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

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

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

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

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

Demand Creation Measures

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

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

National Electric Vehicle Policy (NEVP)

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

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

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

Competitive Trading Bilateral Contract Market (CTBCM)

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

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

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

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

Cross-Tariff Subsidization and Fixed Costs

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

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

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

Capacity Payments

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

Efficient and Liquid Market

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

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

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

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

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

Competitiveness

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

Technological Revolution

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

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

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

Grid Reliability

A major obstacle that has pushed industries away from the national grid and toward captive units is the lack of grid reliability, with a non-standard supply to the industrial sector that has resulted in huge losses. Furthermore, unwarranted interruptions in supply are endemic, along with constant, inordinate breakdowns, fluctuating voltage and flicker which result in huge financial and performance losses, and consequently lower production. Issues of shutdowns, breakdowns and tripping may be mitigated through up-to-date maintenance etc., but the issue of non-standard supply requires concerted technical efforts that can only be made at the DISCOs level.

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

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

Merger of Authorities

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

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

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

Stock Market

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

Conclusion

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

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


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March 4, 2022

Shahid Sattar and Eman Ahmed

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

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

While these are positive indicators for the future of the industrial sector, the growth of exports and industrial competitiveness is largely dependent on regionally competitive energy tariffs. With $21 billion textile exports expected in FY22 (a 36% increase), the industry has set a target of $26 billion for the following fiscal year. The cost of RCET is equivalent to 2.5% of export value and exponential economic growth can be achieved once industry is provided with a stable and secure energy environment. At present, RCET is applicable till June ’22, while the industry requires a 5-year predictable supply and competitive tariffs across the entire value chain to sustain growth.

Policymakers in Pakistan must also remain cognizant of new and emerging textile exporting countries, such as Uzbekistan which has full market access to the Eastern bloc and has now been granted GSP+ status by the EU. With energy costs lower and cotton quality better than that of Pakistan, Uzbekistan is a promising new entrant, set to capture high market shares.

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

Meanwhile, Pakistan’s Balance of Payments crisis is spiraling out of control, with the country heading towards a historic $20 billion deficit mark. Without ensuring that exports are supported to reach their maximum potential, the economy is at risk of sinking deeper into the debt trap. For decades, we have sought loans to achieve economic stability, which come with countless conditions. We must not neglect the local business community – particularly the export-oriented industry – which surely has the potential to steer sustainable economic growth as long as it is provided with basic policy support, and in particular, competitively priced energy.

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

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

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

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

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

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

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

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

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

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

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

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


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