Pakistan’s energy sector stands ensnared in inefficiencies, financial instability, and a chronic inability to implement meaningful reform.

With the combined gas and power sector circular debt now exceeding Rs 5 trillion, and electricity tariffs among the highest in the world, Pakistan’s energy sector is in despair and has severely eroded industrial sectors’ competitiveness.

Despite decades of promises, reform initiatives like the Competitive Trading Bilateral Contracts Market (CTBCM) have exposed rather than addressed the sector’s systemic dysfunctions. Central to this failure is the absence of competitive and feasible wheeling charges for business-to-business (B2B) power contracts, a key enabler without which CTBCM or any other free-market model is bound to fail.

Indeed, the CTBCM risks being stillborn—ambitiously conceived but fatally undermined by structural flaws and poor implementation.

The CTBCM, intended as a solution to inefficiencies in Pakistan’s electricity sector, is a prime example of these challenges. Despite its promise of introducing wholesale competition, the initiative is hampered by significant obstacles that call its viability into question.

One of the CTBCM’s greatest hurdles is systemic inertia. Much of Pakistan’s power generation remains tied up in long-term contracts with excessive guaranteed returns, stifling market-driven dynamics. Without renegotiating these agreements, competition becomes an illusion.

Meanwhile, the country’s energy infrastructure is riddled with inefficiencies, theft, and excessive transmission losses. These failings inflate costs and burden the system with unsustainable circular debt. Instead of addressing these foundational issues, policymakers appear content to layer new initiatives over old problems, exacerbating rather than solving the crisis.

Currently, Pakistan operates under a single-buyer model where electricity procurement is centralized, a setup that fosters inefficiency by passing costs directly onto consumers through inflated tariffs.

The CTBCM aims to shift this model by introducing competition in the electricity market through bilateral contracts and dynamic pricing. Yet, the framework has been burdened with structural flaws, including the contentious inclusion of stranded costs and cross-subsidies in wheeling charges.

Stranded costs, the legacy financial liabilities tied to underutilized capacity, and cross-subsidies, aimed at protecting vulnerable consumers, are critical elements of the dysfunction. Their inclusion in wheeling charges has turned bulk power consumers (BPCs) into the scapegoats of a broken system. Instead of addressing the root causes of these costs through renegotiations or targeted reductions, the government has chosen to pass

them on, inflating wheeling charges to unsustainable levels.

The Discos’ and CPPA-G’s proposed Use of System Charges (UoSC), averaging Rs 27.16/kWh, are far removed from what is economically viable for industries or competitive in global markets. At 9.7 cents/kWh, the wheeling charge alone in Pakistan would be as much as twice the full power tariffs in countries like China, India, Bangladesh and Vietnam.

When challenged on the inclusion of stranded costs and cross-subsidies in wheeling charges, the Power Division entities frequently lean on the argument that these provisions are mandated by the Power Policy.

However, this justification is as unconvincing as it is shortsighted. Policies are not immutable doctrines; they are practical tools designed to evolve with shifting realities. Insisting on treating the Power Policy as a rigid, unchangeable mandate reflects a lack of political will to confront rooted interests and rethink outdated frameworks.

What’s more troubling is that the CPPA-G’s exorbitant figure raises serious questions about the bureaucracy’s commitment to reform. The proposal appears designed to perpetuate the status quo, and discourage reform rather than enable it. If the true goal were to incentivize competition and pave the way for a functional electricity market, a proposal with such prohibitive charges would never have been advanced.

Adding to these bureaucratic hurdles, bulk power consumers (BPCs) opting for wheeling arrangements would face the requirement of a one-year advance notice. This stipulation creates further disincentives for industries already grappling with high energy costs, as it forces them to bear the financial burdens of an inefficient grid for an extended period even after committing to shift. Worse still, even after exiting the grid, these consumers would be charged for recovery of stranded costs for up to five years. This extended financial obligation unfairly penalizes industries pursuing competitive alternatives.

Moreover, CTBCM must include the option of a hybrid setup—allowing consumers to draw power from both private suppliers and the grid. This would preserve grid reliability while prioritizing competitive wheeling arrangements. Such a policy can foster a more balanced energy market and help mitigate the rigidity and inefficiency currently plaguing Pakistan’s energy governance.

Another critical issue is that Pakistan’s regulatory framework lacks the resources and expertise to oversee a reform like the CTBCM.

Regulatory bodies in lower-income countries often operate with significantly fewer resources than their developed counterparts, leaving gaps in enforcement, oversight, and transparency. Poor regulation enables monopoly abuse and cartel-like behaviour among power producers, as seen in California and Turkey, where distorted markets led to inflated prices and financial losses. A stable, transparent, and fair regulatory framework is necessary to attract investment and maintain confidence in the energy sector.

Implementing the CTBCM without first strengthening regulatory institutions risks compounding existing problems. The plan calls for the creation of multiple new organizations, which could easily devolve into avenues for patronage and waste, with leadership positions awarded based on connections rather than competence. Instead of fostering competition, such a setup would exacerbate existing inefficiencies and deepen the financial strain on the energy sector.

The consequences of these policies are dire. By inflating grid tariffs and wheeling charges with stranded costs and cross-subsidies, the government has accelerated the exodus of industries from the grid to captive sources like solar power and gas/FO/coal-fired captive generation.

While this shift benefits individual enterprises, it undermines the stability and sustainability of the grid and power sector. As the pool of contributors shrinks, per-unit prices increase, pushing remaining consumers—industrial and otherwise—further into financial strain and towards more competitive alternatives.

Amid this grim outlook, recent negotiations and the termination of contracts with Independent Power Producers (IPPs) offer a glimmer of progress. These renegotiations signal a long-overdue move to rationalize the burdensome long-term agreements that have hamstrung the energy sector for decades.

Similarly, the reduction of the cross-subsidy from Rs 240 billion to an estimated Rs 75-100 billion is a notably welcome step toward alleviating the financial burden on industrial consumers. However, even at reduced levels, the cross-subsidy remains economically unviable, continuing to distort energy prices and erode the competitiveness of critical economic sectors.

To address these challenges holistically, the power sector bureaucracy must fundamentally reassess its pricing strategies. Stranded costs and cross subsidies must not be included in the wheeling charge if it is to be made financially viable for B2B power contracts.

Additionally, the one-year notice requirement for transitioning to wheeling must be revisited to foster greater flexibility and encourage broader participation in competitive energy markets, and the concept of hybrid BPCs must be allowed.

Finally, implementing a robust regulatory framework is crucial to ensuring transparency, equity, and efficiency across the energy sector, laying the groundwork for sustainable reform.

It should be crystal clear to all stakeholders involved that without market-driven and financially viable wheeling charges, the CTBCM is doomed to fail. These charges are the backbone of any functional electricity market, and their absence renders the promise of competition a hollow illusion, ensuring that the CTBCM will remain an exercise in futility rather than a pathway to meaningful reform.

By Shahid Sattar | Sarah Javaid
Six years after their imposition, the Section 301 tariffs under the U.S. Trade Act of 1974 continue to significantly impact Chinese imports, especially in the textiles and apparel sectors. Initially implemented in 2018, these tariffs targeted 5,745 products, with rates increasing to 25% and an additional 10% tariff. The tariffs were aimed at addressing intellectual property theft and other unfair trade practices, as outlined by the U.S.

In addition to the strain on the Chinese textile and apparel industries through these tariffs, the world has witnessed a shift in global textile supply chains, with U.S. GSP textile beneficiaries and alternative sourcing destinations stepping in to fill the void.

A 15% tariff was applied to imports of apparel, on top of the WTO’s Most Favored Nation (MFN) tariffs, which in 2018 averaged 14.4% for knitted apparel (HS Chapter 61) and 10.4% for woven apparel (HS Chapter 62). These tariffs were compounded by additional duties and anti-dumping measures aimed at specific Chinese companies and apparel products.

This evolving scenario prompted discussions on which countries were poised to benefit from China’s declining apparel exports to the U.S. While several contenders were expected, Pakistan emerged as one of the potential South Asian players that could benefit.

Trade War’s Toll on China’s Textile Exports to the U.S.

Later in 2019, the U.S. enacted the Uyghur Forced Labor Prevention Act (UFLPA) to counter forced labor practices in China. Combined with tariffs and legislative measures, Chinese exports to the U.S. have suffered significant losses: USD 5.4 billion in knitted garments (Figure 1a), USD 5.6 billion in woven garments (Figure 1b), and USD 425 million in home textiles (Figure 1c). Despite extremely high tariffs, China continued to export its low-cost articles, such as blankets, bed linen, toilet linen, kitchen linen, and other made-up articles under the home textiles category, with a noticeable shift towards tariff lines with comparatively lower duties.

 

China Plus One

Simultaneously, China’s manufacturing landscape underwent a significant transformation, driven by rising wages, stricter environmental regulations, and the adoption of digital technologies. Many Chinese companies began relocating operations to overseas destinations or shifting production to China’s western inland regions as part of the “China Plus One” strategy, aimed at diversifying supply chains and reducing dependence on China.

This shift spurred discussions about alternative manufacturing hubs for labor-intensive Chinese textile businesses, with Pakistan emerging as a potential candidate. However, the relocation of Chinese manufacturing to Pakistan was impeded by security concerns, a challenge that still remains unresolved.

One Country’s Loss Is Another Country’s Gain

Trade wars inevitably create distortions for some players while offering opportunities to others. For countries in South Asia, the US-China trade war was a significant opportunity.

As the largest single buyer of textiles and apparel, the U.S. remains a lucrative market for countries like Pakistan and Bangladesh, which rely heavily on textile and apparel exports.

However, much of the opportunity was seized by Vietnam, Cambodia, and Mexico. Between 2018 and 2023, China’s value-added textile exports to the U.S. declined by USD 11.5 billion, but South Asia collectively exported only USD 3.6 billion to the U.S., missing an estimated USD 8 billion potential (Figure 2). Southeast Asian countries, particularly Vietnam and Cambodia, increased exports to the U.S. by USD 3.1 billion, while Mexico benefitted significantly from the shift, aided by zero tariffs under the United States-Mexico-Canada Agreement (USMCA) effective from 2020.

However, during this period, Pakistan achieved a notable Average Annual Growth Rate (AAGR) in U.S. imports of value-added textiles. The country led in AAGR for woven garments, with Bangladesh closely competing in knitted garments and India in the market for made-up articles (Figure 3a). A deeper analysis of South Asia’s potential to seize these opportunities lies in examining its share of the U.S. import basket. While China’s share sharply declined, South Asian economies saw minimal or stagnant growth in their share of U.S. imports of value-added textiles, highlighting a missed opportunity to capitalize on China’s diminishing export footprint (Figure 3b).

Although the USD 8 billion gap is substantial, reclaiming the lost share of China’s textile exports to the US demands a more strategic approach from countries like Pakistan.

The Role of the US GSP in Capturing China’s Lost Exports to the U.S.

All these economies, including Pakistan, once benefited from the U.S. GSP program before losing their statuses: Pakistan’s expired in 2020, Bangladesh’s was terminated in 2013 following the Rana Plaza incident, and India’s was revoked in 2019 due to insufficient market access. However, the benefits for Pakistan were minimal, with only 1.5% of its value-added textile exports to the U.S. (USD 42 million out of USD 2.9 billion in 2020) qualifying for GSP preferences.

India and Bangladesh similarly experienced limited gains, with just 0.46% and 0.7% of their value-added textile exports benefiting under GSP before their statuses were revoked. In contrast, ASEAN countries effectively took advantage of U.S. trade realignments. In 2023, ASEAN exports worth USD 11.7 billion benefited from GSP status, solidifying their position as key suppliers to the U.S. market.

South Asia’s minimal reliance on the U.S. GSP program is one of the many reasons for not fully leveraging the U.S.-China trade war. Facing tariffs of up to 16%, Pakistan’s value-added textile exports could have greatly benefited from improved access to the U.S. market, potentially capturing a larger share of U.S. imports.

Potential versus Capacity

Two major developments have reshaped global trade in value-added textiles: China’s shift away from textiles to focus on other value chains and the relocation of its textile industries due to U.S. tariffs.

Viet Nam, with its competitive labor costs, extensive trade agreements, and growing manufacturing capabilities, has long attracted Chinese investments in sectors like furniture and textiles. However, it has yet to emerge as a global manufacturing hub capable of replacing China.

When it comes to Pakistan, in 2023, the U.S. imported USD 144.4 million worth of knitted garments from Pakistan under China’s top tariff lines in the U.S. import basket, compared to USD 3 billion from China for the same tariff lines. Similarly, U.S. imports of woven garments from Pakistan totaled USD 315.5 million, significantly lower than the USD 2.6 billion sourced from China. For made-up articles, Pakistan exported USD 473.5 million to the U.S., significantly less than the USD 6.3 billion supplied by China on the same tariff lines (see Figures 1a, 1b, and 1c).

Pakistan struggles to export textiles exceeding USD 100 million per tariff line in categories where China’s exports run into billions. A major challenge is the inadequate pricing of inputs within Pakistan, which undermines the competitiveness of its exports, making them even less competitive in the face of high duties.

While these figures demonstrate Pakistan’s ability to export and compete in international markets to some extent, they also reveal the structural barriers hindering its full potential. With an estimated annual textile manufacturing capacity of USD 25 billion, Pakistan’s textile exports peaked at USD 19 billion in 2022, the best year for Pakistan’s trade economy. The USD 6 billion gap from its capacity remains, which Pakistan can unlock by addressing structural inefficiencies and embracing market-driven pricing across the value chain.

A Trump Card for Pakistan’s Exports?

Structural inefficiencies and the absence of market-driven pricing present challenges, while a downturn in global demand could worsen the situation. With Donald Trump’s return to the U.S. presidency, tariffs are set to become a key component of his economic agenda. Trump argues these tariffs will not burden the U.S. economy but shift costs to other countries, particularly China and those closely associated with it. While China has endured much of the impact, such tariffs could severely affect economies like Pakistan, where exports are already under pressure. Meanwhile, Trump’s administration is considering a flat 20% tariff on all imports as part of its broader trade strategy.

The U.S. remains Pakistan’s largest trading partner, contributing a significant trade surplus. In 2024, Pakistan exported USD 5.4 billion to the U.S., approximately 20% of its total exports, with textiles and apparel making up more than 70% of that figure. A 20% tariff could disrupt Pakistan’s manufacturing sector, especially its textile and apparel industries, which are central to its export economy. The timing is particularly challenging as Pakistani businesses are also grappling with high taxes and an energy crisis.

However, there is a potential silver lining. Trump’s tariff policy primarily targets economies benefiting from China’s relocated production, so countries like Vietnam, Cambodia, Mexico, and Canada are at greater risk. Pakistan, which does not fall into this category, may avoid these tariffs. Bangladesh’s new government, focused on strengthening trade ties with both China and the U.S., may face foreign policy dilemmas. Alternatively, Trump’s plans to renegotiate the USMCA could completely shift attention away from South Asia.

For Pakistan, effective economic diplomacy is essential to expanding its export footprint in the U.S. market. The pressing question remains: how should Pakistan strategize its diplomacy to strengthen its trade position amid these global shifts?

Charting a way forward

To secure its position in the U.S. market, Pakistan must actively pursue the revival of GSP status by negotiating its renewal and advocating for revised tariff lines to secure duty-free or reduced-duty access. Such access is essential in the ongoing tariff war.

Pakistan’s products in the U.S. market primarily cater to low- to middle-income groups. Additional tariffs would make Pakistani products less competitive, ultimately reducing demand for Pakistani apparel in the U.S.

With that, Pakistan is the second-largest destination for U.S. long-staple raw cotton after China. In 2023, Pakistan imported over USD 379 million worth of U.S. cotton, primarily for clothing and blanket manufacturing. Cotton imports were even higher in 2022, reaching USD 615 million. As domestic cotton production fails to meet demand, the U.S. remains a crucial supplier, with its raw cotton entering Pakistan duty-free. This contrasts sharply with the high tariffs, up to 16% imposed on Pakistan’s value-added textiles exported to the U.S.

With declining domestic crop production, Pakistan’s reliance on imported cotton is expected to grow. Under the Caribbean Basin Trade Partnership Act (CBTPA), apparel assembled in the Caribbean and Central America using U.S.-origin fabrics, yarns, and threads enters the U.S. duty-free. However, raw cotton falls outside the CBTPA’s scope and is governed by general trade agreements.

The window of opportunity created by the U.S.-China trade war may be closing, and it is uncertain whether the U.S. will continue favoring South Asian textile and apparel industries. However, Pakistan still has room to maneuver. Economic diplomacy will be critical in advocating for Pakistan’s interests in the U.S. market. The real challenge lies in addressing internal structural issues that hinder export growth, which deserves immediate attention from the decision-makers.

To begin with, it is extremely urgent for Pakistani authorities to negotiate a trade agreement with the U.S. to secure duty-free or reduced-duty access for value-added textiles assembled in Pakistan using U.S.-origin cotton, before the opportunity slips through the cracks again.

 

 

Smog choking Pakistan’s major urban hubs is a tragedy that has been decades in the making, rooted in poor policy implementation and systemic negligence.

The single largest contributor to this crisis is transportation. In Lahore, for instance, transport emissions accounted for 83.15% of total emissions in 2022 (Figure 1). The problem is not confined to Lahore; across Punjab, transportation has consistently been the largest contributor of emissions. Between 1990 and 2020, it accounted for 39% of all emissions in the province, far outstripping industries, energy, agriculture, and other sources (Figure 2).

Underlying this grim reality is the failure of oil refineries to upgrade their facilities through the deemed duty—a 12.5% tax on both petrol and High-Speed Diesel (HSD) introduced in 2002 to finance refinery upgrades, improve fuel quality and reduce emissions. The policy was subsequently modified by successive governments and today, the deemed duty remains in place only on HSD at a rate of 7.5% per litre. It is important to note that the policy was problematic by design, because as per the law all duties collected must first be deposited in the consolidated fund from where disbursement is regulated by the government through approvals from the Ministry of Finance and Planning commission with oversight by the AGPR; however, all these checks were neatly bypassed.

Despite being operational for over two decades and generating an estimated $9 billion in funds, the deemed duty has failed to deliver on its promise. The escrow accounts mandated to safeguard these funds and ensure their use for refinery modernization were never opened. Instead, the funds were diverted elsewhere, leaving Pakistan dependent on outdated refineries that continue to produce sub-standard fuels. This mismanagement has not only prevented the adoption of cleaner fuel standards but has also entrenched the reliance on polluting fuels, exacerbating emissions and air pollution, as the number of registered vehicles in just Punjab has increased by 60% over the last decade.

As shutting down its largest cities during winter month has become a norm across Punjab, the country must confront this crisis with honesty. The problem is a failure of governance, compounded by outdated urban planning, weak regulatory enforcement, and vested interests that have consistently prioritized profit over public health. If meaningful progress is to be made, the government must shift its focus to attacking the core problem by enforcing stricter fuel quality standards, curbing the unchecked growth of private vehicle use, and increasing access to modern public transit.

Deemed duty was designed as a financial mechanism to facilitate cleaner fuel production. Using these funds, refiners were expected to upgrade their infrastructure to produce high-quality, low-emission fuels. However, the system was abused. Refiners collected the levy but failed to undertake any upgrades. Pakistan continues to rely on sub-standard fuels, which are not only harmful to the environment but also to public health.

For comparison, India implemented Bharat Stage VI fuel standards (equivalent to Euro VI) in 2020, achieving a sulfur content of 10 parts per million (ppm) in diesel. Pakistan, in contrast, lags significantly behind, with diesel containing up to 500 ppm of sulfur—50 times higher than global best practices. Developed countries like Germany phased out such high-sulfur fuels over two decades ago, while even emerging economies like Brazil and Mexico have adopted stricter standards.

This reliance on outdated, polluting fuels exacerbates smog and represents a massive missed opportunity. Cleaner fuels could have drastically reduced vehicular emissions, which contribute to more than 80% of urban air pollution. Instead, the failure to implement deemed duty objectives as intended has locked the country into a downward spiral of worsening air quality and higher health costs.

The World Bank estimates that air pollution costs Pakistan nearly 6% of its GDP annually. This includes healthcare expenses, productivity losses, and premature deaths caused by respiratory and cardiovascular diseases linked to poor air quality. For perspective, Fair Finance Pakistan estimates that air pollution causes over 128,000 deaths annually in Pakistan; the real number is likely much higher.

As smog levels now regularly cross hazardous thresholds across Punjab, lockdowns and school closures have become routine during the winter months. These measures bring commercial activity to a halt, affecting livelihoods, especially for daily wage earners. The impact on education is profound as children miss weeks of school each year, causing huge learning losses and widening the educational deficit.

While deemed duty mismanagement is a central failure, it is not the only contributor to Pakistan’s smog crisis. Urban sprawl and transport emissions have created a perfect storm for pollution.

The number of registered vehicles in Pakistan has grown from approximately 4 million in 2000 to over 20 million by 2020. This fivefold increase is directly tied to the absence of affordable and efficient public transportation. Across the country, private cars and motorcycles dominate the roads, leading to endless traffic congestion and idling—a major source of nitrogen oxides (NOx) and particulate matter (PM2.5), both key components of smog. Instead of investing in accessible and rapid public transit systems to address this growing crisis, successive governments have wasted billions on constructing flyover after flyover and underpass after underpass. Rather than resolving traffic congestion, this myopic approach has only shifted traffic bottlenecks to the next choke point, worsening the problem.

The rapid, unchecked spread of housing societies on the outskirts of major cities has further compounded the problem. This horizontal growth has led to longer commute times, increased fuel consumption, and a sprawling network of dusty construction sites. The resulting layer of dust mixes with industrial and vehicular emissions, forming the dense, toxic haze now characteristic of Punjab’s winters.

Countries facing similar challenges have demonstrated that tackling smog requires bold, consistent action. In 2013, for instance, China launched an aggressive campaign to combat air pollution. The government implemented strict emissions standards, shut down polluting factories, and invested heavily in public transportation and renewable energy. Beijing’s AQI levels dropped by nearly 40% within five years. Key to this success was political will and strong enforcement of regulations.

Once considered one of the most polluted cities in the world, Mexico City turned its air quality around by investing in clean public transport, including a network of electric buses and a metro system. The city also introduced vehicle emissions testing and restricted the use of older, high-emission vehicles.

Singapore’s model of vertical urban development, combined with an extensive public transport network, minimizes reliance on private vehicles. The city-state also imposes high taxes on car ownership and prioritizes green spaces, significantly improving air quality despite its dense population. These examples highlight the importance of integrated strategies that combine policy enforcement, urban planning, and public investment.

To tackle smog, Pakistan must adopt a comprehensive approach that addresses both immediate and systemic issues. First and foremost, the government must audit and recover the billions collected under the deemed duty levy over the past two decades. These funds should be ring-fenced and strictly allocated for mandatory refinery upgrades to produce Euro VI-compliant fuels, ensuring a significant reduction in vehicular emissions. Alongside this, Pakistan must immediately enforce stricter fuel standards, such as transitioning to low-sulfur diesel (10 ppm), and implement an annual mandatory emissions test of each vehicle to align with international benchmarks and drastically cut emissions from the transport sector.

Investing in affordable and efficient public transportation is equally critical. Expanding metro systems, bus rapid transit (BRT) networks, and electric bus fleets can reduce reliance on private vehicles, as evidenced by cities across the world where mass transit has significantly lowered pollution levels and improved mobility. This must be complemented by urban planning reforms that promote vertical expansion and mixed-use developments, reducing the need for long commutes. Simultaneously, unregulated construction must be curtailed, and green spaces preserved, to mitigate dust pollution and improve urban air quality.

To directly curb the impact of high-emission vehicles, the government should introduce a hefty road tax on fuel-intensive and oversized vehicles, such as large pickup trucks and land cruisers, especially in urban areas where their use is both unnecessary and environmentally damaging. This tax should be steep enough to actively discourage their presence on city roads, ensuring it cannot simply be paid off as a convenience fee. By targeting these vehicles, the government can not only reduce pollution but also address the nuisance they pose to urban mobility and public safety.

To complement efforts in curbing vehicle emissions, the government must designate car-free zones in urban centres, particularly in commercial hubs. These zones, supported by efficient public transport systems, would significantly reduce vehicular emissions without resorting to economically disruptive measures like commercial lockdowns or early shop closures. By limiting private vehicle access in high-traffic areas, such policies would not only improve air quality but also create safer, more pedestrian-friendly spaces. Moreover, the establishment of such zones would incentivize the public to rely on mass transit options, gradually fostering a culture of public transport use. Over time, this shift can help reduce dependency on private vehicles and align urban transportation systems with global best practices, ensuring cleaner, more liveable cities.

Simultaneously, additional measures must target other, secondary sources of pollution. Subsidizing modern farming equipment can help eliminate crop-burning practices, while stricter emissions controls on industrial facilities can address another major contributor to poor air quality. Finally, accountability and transparency are paramount. Independent oversight mechanisms must be established to ensure policies are implemented as designed, and penalties for non-compliance by refineries and other polluters must be enforced.

With this multifaceted strategy, Pakistan can begin to reclaim its cities from the grip of smog and ensure a healthier, more sustainable future.

The basic rule of economics is clear: global demand drives global production, and countries with a comparative advantage naturally dominate supply.

For many years, five countries—India, China, the US, Brazil, and Pakistan—have contributed nearly 75% of the world’s cotton supply. In 2024, these countries produced approximately 87 million bales, making up 76.4% of total production. With global production reaching 114 million bales in 2024, cotton remains one of the most in-demand commodities.

For decades, cotton has remained one of Pakistan’s most traded crops and a vital income source for millions, including female cotton pickers and small-scale farmers. In FY 2012, Pakistan produced nearly 15 million bales of cotton.

However, estimates for the 2024-25 season indicate a staggering 65% decline, according to the Pakistan Cotton Ginners Association’s report from September 15, 2024, with production expected to reach only 5 million bales. This falls far short of the textile industry’s annual demand of 13-15 million bales.

The sharp decline is rippling through the economy, particularly affecting rural communities reliant on this critical cash crop. The impact is severe for vulnerable groups such as female workers and local farmers, with significant economic and social consequences.

Is import dependency a new normal? A macro view:

Let’s not overlook the sector that has long been the cornerstone of Pakistan’s economic growth. Pakistan, along with India and China, once had a fully integrated textile value chain. However, with the cotton crop in decline, this seems like a distant memory. With production now estimated at just 5-6 million bales, the country is expected to import over 7 million bales in FY 2025.

The domestic shortage is driving up local cotton prices, while the projected import bill of around USD 2 billion for raw cotton and another USD 2 billion textile intermediates, that are increasingly substituting local supplies, threatens to further strain Pakistan’s already precarious balance of payment (BoP) position.

The cotton yarn imports surged by a staggering 257% during July–August FY 2025 compared to the same period of last year (Figure 1b). This spike is driven by the spinning sector’s ongoing struggles with energy tariffs, which have made local yarn extremely uncompetitive. Resultantly, the domestic yarn production was down 40% YoY in June 2024.

 

The situation worsened following the removal of the sales tax exemption on local supplies under the Export Facilitation Scheme (EFS), forcing exporters to pay an 18% sales tax on locally sourced inputs, along with significant delays in refunds—which have an opportunity cost of at least 20% per annum. Consequently, cotton yarn imports have soared within just the first two months of the ongoing fiscal year.

At this stage, one might ask: How can a country allow duty-free imports of raw materials and intermediate inputs while heavily taxing domestic ones?

The overlooked role of women in agriculture:

While discussions about women’s empowerment in the National Assembly sessions are commendable, it is important not to overlook the daily wage-earning women who rely on their income for their survival. Where do we find these women? The answer lies in the cotton fields of Punjab and Sindh.

According to the Labor Force Survey of Pakistan (2021), 48.12% of women are illiterate, 22.8% are employed in various sectors of the economy, and 15.5% work in the agriculture.

The decline in the cotton crop is now affecting 15.5% of the female labour force employed in the agricultural sector. While discussing the challenges faced by this lower quintile may seem less engaging, it is just as crucial as the IMF bailout as these women are the nurturers of our next generations.

In Punjab and Sindh, a substantial segment of Pakistan’s rural workforce is composed of female cotton pickers who depend on seasonal earnings to sustain their households. Cotton picking is predominantly a female-led activity across all cropping regions in Pakistan.

However, with cotton production plummeting, these women face dire consequences. Fewer cotton crops mean fewer workdays and lower wages, worsening their already precarious financial situation. Many are primary bread winners, and the lack of alternative jobs leave them trapped in a poverty cycle. This significant downturn has severely curtailed not only their income but also their families’ nutrition, health, and educational access.

Impact on local farmers:

It is also critical to recognize that cotton serves as a primary income source for approximately1.5 million farmers in Pakistan. These farmers, primarily in Punjab and Sindh, often rely on loans and credit from middlemen and ginners, which they typically repay with income from their cotton crop. Due to the shortfall, many farmers are struggling to repay their debts, pushing them further into a cycle of rural indebtedness.

The situation for farmers is even worse than it appears. Data from SBP shows that small loans to cotton farmers have dropped by almost 55% in the past year, with the share of these loans in total pool falling from 18% to just 8.7%. This decline in credit access limits farmers’ resources for essential inputs like seeds, fertilizers, and pesticides, worsening their financial vulnerability.

Rising costs, declining yields, and reduced loan availability have created a perfect storm of hardship, forcing many to cut essential investments or rely on informal lending, which ultimately reduces productivity and incomes.

Referring to Figure 3, cotton production, yield, and area under cultivation are all declining simultaneously. According to APTMA’s calculations, the decline in cotton production has resulted in a loss of PKR 2.7 trillion, or USD 15.5 billion, to the economy of Pakistan from FY 2013 to FY 2023 (Table 1). This amount is twice the size of the IMF bailout package.

Repeated failures in the prices of key crops, such as wheat, rice, and sesame have further weakened the outlook for the agriculture sector. The contribution of major crops to GDP has already decreased significantly, from 6.5% in FY 2012 (a year marked by a bumper cotton and wheat harvest) to just 1.9% in FY 2024.

It should now be clear how serious Pakistan’s cotton crisis is and how important it is to revive the industry. We’re discussing millions—millions of livelihoods at stake, millions of bales lost, and millions of dollars slipping away.

Problem in a nutshell:

To increase productive, wealth-generating employment and maintain a healthy balance of payments, there is a pressing need to support and develop export-oriented industries. However, contractionary and distorted fiscal policies, particularly those introduced following the current budget, have impacted export-led industries in unprecedented ways.

It is important to recognize that the balance of trade in goods has further deteriorated compared to the same period of last year. Imports have increased by 14%, while exports have risen by 7.2% (during July-August FY 2024 and 2025).

The anticipated worsening of the balance of payments in the upcoming months, with an expected import bill of USD 4 billion for cotton and textile intermediates—especially after securing USD 7 billion in IMF support—does not align with an ideal and sustainable economic plan.

The only sustainable solution for the economy’s recovery is a substantial increase in exports, which the textile sector is well-positioned to achieve if provided with conducive economic policies.

A fundamental requirement for the smooth operation of the export-led textile industry is a consistent supply from the cotton industry, which is struggling to ensure access to certified seeds. The lack of proper crop advisory has made it difficult for farmers to adopt efficient practices, such as timely sowing (impeded by seed unavailability and climate change) and harvesting methods that guarantee a reliable cotton supply. This supply not only sustains the livelihoods of rural communities but also supports the upstream textile industry.

What needs to be done?

The textile industry, which generates over 55% of the country’s exports and employs close to 40% of the industrial workforce, has encountered considerable difficulties in maintaining international competitiveness over the past two years; as a result, exports from this sector have decreased by 14% during FY 2022 and 2024.

To revitalize the economy through exports, it is essential to preserve the domestic cotton industry and strengthen the textile industry in general. Reforms are needed at both the agricultural level and the manufacturing stages. To achieve these reforms, two key areas must be addressed:

i) Enhancing average cotton yield: This can be achieved by ensuring access to certified cotton seeds and developing heat-tolerant, pest-resistant varieties. Organizations such as the Pakistan Central Cotton Committee (PCCC), the National Agricultural Research Centre (NARC), and the Pakistan Agricultural Research Council (PARC) must adopt a modern approach to research and development, shifting away from outdated practices to save the cotton industry of Pakistan.

ii) Providing regionally competitive inputs: Manufacturers currently face an 18% sales tax on sourcing net inputs, which puts them at a disadvantage compared to internationally sourced duty-free inputs, such as cotton and cotton yarn, that benefit from the EFS. This 18% sales tax disproportionately affects the SMEs that are already struggling. Therefore, making domestic inputs more cost-effective is crucial for a fair competition.

Additionally, the industrial power tariffs in Pakistan, which have increased by 60%-70% in dollar terms over the past five years, have made domestic manufacturing uncompetitive, while the country continues to import cheaper electricity in the form of raw materials and intermediate inputs.

Pakistan’s industry is teetering on the brink of collapse, with policies that are actively dismantling it.

Chief among the culprits is the prohibitive cost of energy, driven by a deeply dysfunctional energy sector. Without urgent reforms to rationalize and reduce energy costs to globally competitive levels, Pakistan will remain trapped in a cycle of stagnation, incapable of exploiting its industrial potential to stimulate exports and generate sustainable income growth and development.

Instead of enabling growth, current policies are accelerating deindustrialization, decimating well-established sectors of the economy. The textile value chain, particularly the spinning and weaving sectors, are glaring examples. These sectors are integral not only for export earnings but also for sustaining employment and supporting ecosystems of livelihoods. Yet, they are now in existential peril due to energy costs that are nearly double those of competitor countries, coupled with counterproductive fiscal policies.

With grid tariffs in Pakistan between 13-16 cents/kWh compared to 5-9 cents in competing countries and energy accounting for up to 54% of conversion costs across the textile value chain, another major blow came with the withdrawal of the zero-rating and sales tax exemption on local supplies for export manufacturing. This policy subjected domestic inputs to an 18% sales tax while imports of the same goods remain duty- and tax-free under the Export Facilitation Scheme. Such a policy defies economic logic and international trade norms, including those under the WTO framework, which emphasize creating a level playing field between local industries and imports. Countries worldwide often tilt the playing field to protect their domestic industries. Pakistan, conversely, has done the opposite—effectively subsidizing foreign manufacturers while taxing its own. The result has been devastating for local production, creating distortions that undermine the competitiveness of Pakistani products in both domestic and global markets.

However, even if this fiscal imbalance were rectified, Pakistan’s textile sectors would still face insurmountable challenges. Energy costs remain the principal bottleneck. Yarn and cloth produced domestically are uncompetitive against imports even after paying customs duties, regulatory duties, and sales tax on imports. Energy is the primary driver of this disparity, eroding the global competitiveness of Pakistan’s exports and dismantling energy-intensive upstream segments of the textile value chain.

Pakistan is uniquely positioned as one of only three countries in the world with a complete textile and apparel value chain—from cotton growing, spinning, and weaving to apparel manufacturing. This integrated ecosystem is a key advantage in an era where global buyers prioritize supply chain resilience. Geopolitical tensions and increasing risks in global value chains (GVCs) have made it imperative for brands to diversify sourcing towards destinations with full value chain capabilities. Pakistan could be a viable alternative to countries like China, but its potential is severely undermined by domestic policies that systematically dismantle its textile value chain.

Some argue that Pakistan’s recent uptick in textile exports suggests resilience. This claim is misguided. The uptick merely reflects partial recovery following the disruption of Bangladesh’s textile industry, which diverted temporary orders to Pakistan. With Bangladesh’s operations now restored, this artificial boost is unlikely to be sustained. Moreover, textile exports peaked at $19.3 billion in FY22, and the country is still struggling to reach that level. Even if growth resumes, the potential for export expansion is capped at approximately $25 billion due to limited production capacity—an unachievable target under the prevailing energy prices and punitive business environment.

Industrial policy is also about more than export earnings; it is equally about employment generation and sustaining economic ecosystems. The textile industry in Pakistan drives job creation across the value chain, from farming communities in the cotton economy to skilled and semi-skilled workers in textile production hubs. Policies that drive deindustrialization have devastating consequences for millions of livelihoods, increasing unemployment and exacerbating social inequality. With negligible investment in productive sectors, these displaced jobs are not being replaced, compounding the country’s economic woes.

Furthermore, the reliance on imports to replace domestic inputs undermines net foreign exchange earnings. While a few large exporters may sustain themselves by adding value to increasingly imported inputs, this model results in lower overall domestic value addition. Import dependence erodes the broader industrial ecosystem and does not add enough to, if not taking away from, foreign exchange reserves, leaving the country even more vulnerable.

A comprehensive and urgent overhaul of energy and fiscal policies is essential to halt the ongoing deindustrialization and unhamper the country’s economic potential. Restoring the zero-rating and sales tax exemption for export-oriented local supplies is a necessary first step to level the playing field for domestic industries. However, fiscal adjustments alone will not suffice. The energy sector demands radical reform to enable globally competitive costs for industrial consumers.

Most importantly, grid power tariffs must be reduced to a competitive 9 cents/kWh for industrial users. Second, the Competitive Trading Bilateral Contract Market (CTBCM) must be operationalized. This would enable industrial consumers to procure clean electricity at competitive prices through B2B contracts while also meeting net-zero requirements and preparing for the EU’s Carbon Border Adjustment Mechanism. To make it successful, however, the use of system/wheeling charge must be set at a financially viable 1-1.5 cents/kWh, excluding cross subsidies and stranded costs, as opposed to proposed charge of ~10 cents/kWh by the CPPA-G that is unsustainable, negates the benefits of competitive electricity procurement, and is more than the full cost of electricity in competing countries.

In the gas sector, the government must refrain from shutting off gas supply to captive power plants only to force their users to the grid. Power availability and grid infrastructure is not equipped to absorb the additional load from captive users, as acknowledged by the Secretary Power Division before the Senate Standing Committee on Energy. In Karachi, for instance, there is not enough physical space to install grid stations to service current captive users, while the grid infrastructure under HESCO is too old and outdated to support large industrial loads. Many industrial users across the country lack grid connections or sufficient sanctioned load and face prohibitive costs and delays of up to three years for new connections and load enhancement. Until the necessary grid infrastructure is in place and power tariffs are reduced to a competitive 9 cents/kWh that automatically incentivize a transition to the grid, policies that restrict gas supply to captive generators and force an unnatural switch to the grid will only exacerbate the challenges faced by industry.

Grid reliability is another critical issue. Export-quality textile production cannot tolerate frequent power outages, fluctuations, or blips, which cause costly disruptions and damage sophisticated machinery. Many industries have also invested in high-efficiency combined heat and power (CHP) plants that not only generate electricity but also produce the steam and hot water required for industrial processes. Forcing these industries to rely solely on grid electricity would require additional investment in inefficient gas-fired boilers, raising operational costs and wasting valuable gas resources. In any case, “captive” gas tariffs are just a misnomer invented to justify discriminatory pricing for different industrial uses. In-house power generation, as also declared by the Supreme Court, is in fact an industrial process just like other industrial applications as long as the power generated is used to add value within the same industrial facility.

Gas supply to captive users must thus continue to such units at ring-fenced RLNG prices with rationalized UFG and no gross subsidies in the immediate term. Simultaneously, the gas sector must be liberalized to reduce inefficiencies and encourage competitive procurement. Industrial users should have the option to import RLNG directly and access 35% of new domestic gas discoveries under the direct access policy approved by the CCI. It is of utmost importance to open up the energy markets and allow industries to choose whichever energy source makes them competitive, be it grid electricity or gas-fired captive generation.

Pakistan’s economic crisis cannot be resolved without addressing these systemic issues crippling industrial sectors. A vibrant, competitive industrial base is the foundation of sustainable economic growth, employment, and export earnings. Current policies are dismantling this foundation, with energy costs and fiscal distortions driving deindustrialization. Policymakers must act decisively to create a level playing field for local industries, rationalize energy costs, and foster an environment conducive to exports, investment and economic growth.

Pakistan’s economic management, particularly its treatment of export-oriented industries, is nothing short of complete madness.

At a time when Pakistan is facing its worst-ever economic crisis—with a foreign exchange shortfall exceeding $25 billion per annum for the next five years, extreme uncertainty surrounding the IMF program, and struggling to secure rollovers and additional financing amidst a junk credit rating—the government is stifling sectors capable of delivering upwards of $15 billion in additional export revenue if the policy mess is addressed. Whether it’s IT, textiles, leather, or other key industries, every sector is being squeezed under the weight of misguided policies, eroding their capacity to contribute to economic recovery.

Presumptive tax measures to increase revenue collection have instead crippled businesses that are otherwise drivers of economic stability and growth towards collapse. The textile and apparel industry, a once thriving sector responding for over 60% of export revenue, finds itself suffocated under the weight of an incoherent tax regime, delayed refunds, skyrocketing energy prices, and a failure by the government to respond to its repeated calls for action.

As economic activity collapses, tax revenue inevitably declines; expecting higher collection from a dwindling economy is completely irrational. This is not just a story of mismanagement but a case study in how flawed government policies can bring even the most resilient industries to their knees.

Perhaps one of the most mind-boggling decisions in recent months was the withdrawal of zero-rating on local supplies under the Export Facilitation Scheme. This single policy move has nearly wiped-out Pakistan’s spinning and weaving sectors that were already struggling to compete due to prohibitive energy prices. By imposing sales tax on domestically manufactured inputs, the government has effectively afforded protection to imports of yarn and cloth. Why would exporters buy local inputs and then wait months, or perhaps indefinitely, for refunds? As expected, they’ve shifted to imports, leaving the local upstream industry high and dry with no market for their goods.

Pakistan was once home to a full textile and apparel value chain, a rare asset in the global market. Apart from India and China, no other country has this capability. But it’s better to speak of this in the past tense because these sectors are now on life support thanks to blundersome government policies. As international markets move towards “super-vendors”—large, vertically integrated and horizontally diversified companies or groups of companies that can provide end-to-end solutions—Pakistan’s textile industry is being left behind.

Super-vendors are becoming the future of global value chains. These are firms that can handle everything from design and raw material sourcing to production, logistics, and even marketing. In a world where geopolitical and climate risks are disrupting global supply chains, retailers and buying houses want fewer, more reliable partners. Pakistan should have been at the forefront of this shift, but instead, it is missing yet another train, thanks to an inept policy apparatus.

Another major factor contributing to the economic turmoil is the dysfunction of Pakistan’s tax system, especially with respect to the Federal Board of Revenue (FBR). The current tax regime has become an elaborate exercise in futility—ineffectual for businesses and a disaster for government revenue collection.

Since the implementation of SRO 350, every month, businesses across Pakistan brace themselves for the chaotic routine of filing sales tax returns. Like clockwork, government and public-sector entities fail to file their own returns on time, resulting in cascading delays for everyone else. This causes a ripple effect where businesses are unable to file their returns, and in-turn their customers and then their customers are unable to file their returns, leading to undue penalties for all. Repeated pleas from the private sector, as well as explicit directives from the Prime Minister himself, have been met with indifference by the FBR. It’s as if the state has abandoned any pretence of collaboration with sectors that drive the economy.

After businesses spend precious time and resources meticulously filing their returns, the expectation would be that sales tax refunds, particularly under the FASTER scheme, are processed in a timely manner. The law is clear on this: Rule 39F of the Sales Tax Rules 2006 mandates that refunds under the FASTER system should be processed within 72 hours. Yet, the FBR now routinely delays these payments, holding hostage the liquidity that exporters desperately need. For the government, this is a cash-flow management tactic. For businesses, it’s a chokehold, stifling their ability to function. The opportunity cost is staggering—if these funds were simply parked in banks, the return would be 20%. But as working capital or for reinvestment in production, that figure would be much higher.

What kind of economic strategy is this? The government squeezes the lifeblood out of exporters to pay for bureaucratic inefficiencies. It’s a cruel irony that businesses, trying to contribute to national growth, are being taxed to pay for the very apparatus that’s dragging them down. How does the FBR justify sacrificing industry liquidity to fund its sprawling, inefficient structure—epitomized by the 172 malis mowing its lawns?

Pakistan’s textile and apparel sector is a high-volume, low-margin business. Between an 18% tax on all inputs, a 1.25% minimum turnover tax, and a 1.25% tax on export proceeds (including the EDF surcharge), the cumulative burden on businesses is unsustainable. When the government effectively drains 20% of a company’s revenue through various taxes while simultaneously blocking access to refunds, how can any business survive? It’s a marvel that any manufacturers are still surviving.

And the worst is yet to come. As pointed out by notable economist Dr. Hafeez Pasha in his recent op-ed, the FBR’s tax collection numbers for FY2024 are, predictably, fudged. As a result, there are already considerations of additional withholding taxes being imposed starting October. Worse, there are strong indications that sales tax refunds to exporters are going to be severely curtailed, if not entirely frozen. Despite being repeatedly warned that this punitive tax regime will not work—especially with rampant inflation and soaring energy prices—the government has ignored all advice.

It’s not that there isn’t demand in international markets. With the West decoupling from China and Bangladesh grappling with its own crises, Pakistan has a golden opportunity to expand its export base. Yet, businesses lack the working capital to take advantage of these opportunities. The export orders are there, but the liquidity and business environment aren’t.

And perhaps the biggest nail in the coffin is energy. The government talks a big game about resolving the power sector’s woes, but for the private sector, the situation has gone from bad to worse. Power tariffs exceed 15 cents/kWh, rendering grid electricity financially unviable for most industrial players given their competitors in India, Bangladesh and Vietnam get the same for 6-9 cents/kWh. What’s left of the sector has only managed to survive on gas-fired captive power plants. Now, the government is gunning for those too.

Captive power plants are an integral part of industrial processes worldwide. The government’s attempt to phase out captive generation is not only misguided but also destructive. Co-generation is far more efficient than grid power, and advanced economies like the U.S. and EU actively promote it as a greener, more sustainable alternative. Emerging markets like Indonesia are doing the same. Yet here we are, in Pakistan, bent of shutting down the very systems that the world is promoting, and which help keep industry alive.

Activities taking place within the walls of a factory are part of the manufacturing process. Forcing businesses to abandon captive power in favour of a dying grid makes no economic sense. At current grid prices, businesses will either transition to other alternatives—such as biogas, coal, or furnace oil—or they will shut down, as many have already done. Captive power, particularly combined heat and power, doesn’t just generate electricity; it also produces heat, which is vital for many industrial processes. It is imperative that captive be classified under the industrial gas tariff category, as the gas used in these systems is integral to the industrial process itself, not merely for power generation. Penalizing captive users by making them pay punitive tariffs for gas, rife with cross-subsidies and the gas companies’ losses, is nothing short of self-sabotage.

The picture couldn’t be clearer: the government is at war with its own economy. Instead of fostering an environment where businesses can thrive, it is systematically draining them of their resources, cutting them off from markets, and punishing them for trying to compete globally. The tax regime is broken, the energy policy is a disaster, and despite countless warnings, there seems to be no end to the madness.

Yet, the choice is still there, but ever fleeting. On one path lies an opportunity to capitalize on global market trends, attract international buyers, and solidify Pakistan’s position as a key player in the global textile and apparel value chain. On the other lies continued stagnation, driven by shortsighted policies that choke the very businesses they are supposed to support. If the government doesn’t get its act together soon, there won’t be much of an industry left to save.

Population growth can be a double-edged sword: it can either provide a growing labor force that drives economic growth or become a ticking bomb waiting to implode.

As the population rises, so does the demand for goods and services—especially for necessities like food, water, energy, and public services such as health and education, creating a need for increased business activity to meet increasing demand.

Business activities, in turn, generate labor demand, which is fulfilled by an expanding workforce from within the same population that initiated the cycle. This creates a mutually beneficial cycle that circulates wealth in the economy: money flows from population to industry when goods are consumed and returns to population in the form of wages for the labor supplied.

As the economy grows, the role of government regulation and public policy becomes increasingly crucial for this process to work smoothly.

Population growth must remain within levels sustainable by economic development.

In the absence of comprehensive long-term planning, as is the case in Pakistan, population growth creates a strain on resources that a low-performing economy cannot support, ultimately leading to socio-economic deterioration. If Pakistan continues to grow at its current rate, its ability to sustain its people will diminish, plunging the nation further into poverty, inequality, and social chaos (Figure 1).

Figure 1.Pakistan’s population is projected to double by 2050 if the current growth trend prevails.

 

The latest population census of Pakistan reports an average annual growth rate of 2.55% from 2017 to 2023, three times the global rate of 0.88%. In contrast, other South Asian countries have reduced their growth rates to align with the middle-income average of 0.8%. Pakistan nearly achieved this milestone as well, lowering its growth rate from 3.1% in 2000 to 1.2% in 2016.

However, since then, the trend has reversed, moving closer to the average of low-income countries (Figure 2). The population growth rate has consistently climbed in the years following 2016, raising the question: What happened post-2016 that unraveled decades of progress?

Figure 2. From 3.1% in 2000, Pakistan’s population growth was reigned in to 1.2% in 2016 but has been on the rise ever since.

 

Frequent political, economic, and social turmoil has shifted national focus away from human development to survival.

In the hallways of policymaking, population is then a forgotten agenda. To date, there has been no national population policy that streamlines and guides efforts towards realization of Pakistan’s international commitments, including universal access to family planning services, addressing information needs, ensuring contraceptive commodity security, and mobilizing funds for family planning and reproductive health activities.

Statements expressing concern are made every now and then by government officials, but these remain futile without policy prioritisation of population planning.

To put the gross neglect in perspective, the government spent $38.6 million on contraceptive procurement1 from 2014 to 2019 – an average of $7.72 million per year. In comparison, USAID invested about $18 million annually from 2010 to 2016 in contraceptive provision under the USAID|DELIVER Project.

After the USAID project ended, subsequent governments failed to maintain stock availability uniformly, diverting two-thirds of the funds planned for contraceptive procurement elsewhere (Figure 3).

This highlights the underlying problem in population planning: most progress made is contingent upon donor efforts, as the government appears to waive the cause in favor of other purposes.

Funds in this country tend to flow towards projects with the highest political returns, and population planning simply does not make the cut.

The provinces of KPK and Balochistan that exhibit higher population growth2 rates than the rest of the country spent the least in this regard, despite having greater reliance3 on public sector provision of reproductive health services.

Both supply and demand side problems are at play here: low prioritization of family planning by the government leaves the provinces with higher unmet need for contraceptives (21% in KPK and 22% in Balochistan, compared to 16% in Punjab and 18% in Sindh as of 2018), while cultural norms and remoteness of areas limit access to facilities.

Desired fertility (the number of children an individual or couple wants) remains high; UNFPA4 finds that most couples initiate family planning after the third or fourth child.

Demand creation for reproductive health services remains a significant challenge as social norms and geographical isolation create hurdles for service delivery teams, particularly those engaged in door-to-door outreach. This calls for robust public awareness and accessibility programmes that encourage and facilitate the use of family planning services.

Figure 3. Funds spent on contraceptive procurement are significantly lower than the allocated budget, especially in Balochistan and KPK.

Low prioritisation of population planning is one issue, but another significant challenge is the inefficiency stemming from its poor integration into the broader economic development strategy.

Population growth is tied to human development, particularly to gender equity and rights. Women who are educated, independent, and have the freedom to make decisions regarding reproduction have lower fertility rates and improved health.

Investment in empowerment and autonomy of women through creation of education, employment, and participation opportunities is imperative for the success of population programmes5.

Public investment in human development avenues remains dismal in Pakistan, and socio-economic factors further limit women’s ability to benefit6 from even these limited opportunities. Education and health expenditure are significantly below regional averages7.

Female literacy stands at 49%, only 27% of women aged 15-49 years are using any family planning method, and only 25% of women participate in the labor force.

Due to lack of employment opportunities, mobility restrictions, workplace insecurity, and a conventional view of gender roles, educated women display lower economic participation – only 25% of women with degrees are working8.

The impact of low public spending is exacerbated by the glaring gender disparity among beneficiaries, resulting in subpar performance on development fronts.

A quick look at human development indicators shows that Pakistan is lagging in education, gender rights, and family planning compared to its regional neighbors.

Countries like India and Bangladesh have much higher use of modern contraceptive methods, greater autonomy for women to exercise their reproductive and health rights, and better enrollment rates at all educational levels (Figure 4). It is no surprise, then, that Pakistan’s fertility rate is significantly higher than both India’s and Bangladesh’s (Figure 5).

Figure 4. Pakistan consistently lags India and Bangladesh in key drivers of population growth.

Figure 5. Despite an overall decline, Pakistan’s fertility rate remains ~1.5 times that of comparator countries.

 

Bangladesh is hailed as an exemplary model of population control, owing to its gender and social transformation. It augmented its family planning program with gender-focused initiatives9 that improved literacy among girls, enhanced access to contraceptives, and dispelled traditionally held reservations regarding family planning.

India, too, brought its fertility rate below the middle-income average through a framework focused on healthcare services and meeting needs, such as the unmet need for contraceptives.

It is important to note that Bangladesh and India did not achieve these results solely on the back of higher spending. In fact, their expenditure proportions are quite similar to Pakistan’s10.

The key difference lies in the integration of human development efforts—particularly gender equity—with population planning, coupled with a visible commitment to both causes. These two are not the only lesson in successful population planning despite having limited resources; Thailand, Rwanda, and Costa Rica also share tales of success11 with three things in common: investment in education and health, increased access to contraceptives, and women’s empowerment.

1. Landscape Analysis Of Contraceptive Commodity Security In Pakistan, UNFPA (2020)
2. Population Census 2023, Pakistan Bureau of Statistics
3. Pakistan Population Situation Analysis 2020 (UNFPA)
4. Pakistan Population Situation Analysis 2020(UNFPA)
5. Issue 7: Women Empowerment (UNFPA)
6. National Report On The Status Of Women In Pakistan, 2023 (NCSW & UN Women)
7. Economic Survey of Pakistan 2023-24
8. Policy Brief on Female Labor Force Participation in Pakistan (Asian Development Bank, 2016)
9. Gender and Social Transformation in Bangladesh, World Bank (2008)
10. Social spending in South Asia—an overview of government expenditure on health, education and social assistance (UNICEF, 2020)
11. Population policies that work (Population Matters, 2023)

Amidst a deepening economic crisis, the government seems intent on pushing the economy’s most vital sector—the textile industry—off a cliff. Instead of confronting real issues, officials are choosing policies that strangle an industry capable of driving economic growth and stability and supporting millions of livelihoods through productive jobs.

The slow asphyxiation of textile manufacturing, however, isn’t just a policy failure; it is more and more a deliberate dismantling of the very engine that could power Pakistan’s economic revival. If there is a strategy behind this, it is one that sacrifices long-term growth for short-term survival, with devastating consequences unfolding in real time.

Energy costs, whether for electricity or gas, remain prohibitively high. While the government has removed a substantial portion of the Rs 240 billion cross-subsidy from industrial power tariffs, Rs 75-100 billion remain. The economic downturn and escalating grid tariffs have also suppressed power demand so much so that around 30% of the power tariff is now comprised of stranded costs, which represent capacity payments for unutilized capacity, as only around half the generation capacity is ever used.

Moreover, the power sector is rife with inefficiencies—high line losses, under-collection of billing, outdated and inadequate infrastructure—that further inflate power costs, making industrial grid tariffs around twice the regional average and rendering manufacturing sectors internationally uncompetitive. We estimate that the stranded cost and other inefficiencies account for around 50% of the final consumer tariff and should these be managed correctly power tariffs can be easily brought within the regionally competitive range.

When government officials are confronted with this issue, however, their scripted response highlights the recent reduction in the cross-subsidy, without ever discussing the inefficiencies nor their economic consequences. This completely misses the point.

The question is simply whether Pakistani manufacturers face energy costs at par with their regional competitors—they do not. Until the spectrum of power sector inefficiencies is wholly addressed, industrial growth in Pakistan, particularly in the textile sector, remains a distant reality.

The situation with gas is equally dire. With an unreliable and unaffordable power grid, around 80% the industry that has survived has done so only through gas-fired captive generation. Captive power plants are an integral part of the industrial process as most are high efficiency combined heat and power plants that, in addition to power, provide hot water and steam for use in various applications across manufacturing value chains. Manufacturing export-quality products requires a stable and reliable supply of electricity which the grid, in its present form, cannot provide.

Over the past year, gas/RLNG prices for captive consumers have surged to well over $13/MMBtu. RLNG is being sold at significantly above cost, with explicit overcharging to offset revenue shortfalls from supplying highly subsidized RLNG to the fertilizer sector.

Additionally, despite clear ECC directives specifying that RLNG volumes and prices should be ring-fenced for UFG benchmarking, with transmission losses capped at 0.5% and distribution losses based on actual figures, OGRA has failed to establish a UFG benchmark for RLNG. Instead, the excessive UFG standards for natural gas are being applied to RLNG consumers, imposing undue financial burdens.

Adding fuel to the fire, the government has also committed to the IMF that it will cut off captive gas supply by January 2025, without any consideration of the catastrophic economic consequences this will have. Pakistan is already locked into long-term LNG contracts, with the power sector and captive consumers being main off-takers.

However, because of various factors, including mismanagement and outdated planning methods, the system regularly faces surplus RLNG, which must then be diverted to highly subsidised domestic consumers at a significant cost to the exchequer.

If captive consumers are cut off from the network, this will severely exacerbate the surplus RLNG issue, forcing the surplus to be diverted to domestic consumers, adding to the circular debt which is already at ~Rs 3 trillion, or to the power sector, forcing deviations from the economic merit order with additional costs passed on to consumers through higher fuel prices. A price-reopener for these contracts is scheduled for next year and this opportunity should be used to significantly reduce the price and volumes of contracted LNG, thereby creating space for a market-driven gas system.

Moreover, as acknowledged by power sector officials, there is simply not enough power available in the South to meet the energy demand currently being fulfilled through captive generation. Similar issues plague the North, where several industrial applications for load enhancement have been pending for over three years.

And finally, with gas/RLNG priced at over $13/MMBtu for captive consumers, they are the highest-paying customers of SSGC and SNGPL, effectively cross-subsidizing all other consumers. Cutting off gas to captive consumers will financially cripple both Sui companies, with high risk of cascading default across several state-owned entities, which will eventually reach the Government of Pakistan.

In the taxation domain, the Finance Act 2024 has shifted from a 1% fixed tax on export proceeds plus 0.25% export development surcharge to a 1% tax on export proceeds, 0.25% export development surcharge and 1.25% minimum turnover tax, adjustable against a 29% normal income tax and up to 10% super tax. Combined with various other taxes and surcharges such as the Worker’s Welfare Fund and Worker’s Participation Fund this step results in effective tax rates of up to 135% depending on the original margin for the product.

The textile sector operates on low margins and high volumes. This inexplicable tax burden erodes all profitability, leaving businesses with insufficient capital for operations and investment. This financial strain cannot be passed on to international customers, who are already wary due to high operational costs. Low regional tax rates for competitor firms further disadvantage Pakistan’s exporters, inevitably leading to a loss of both business and FDI to more favourable economies.

Similarly, the withdrawal of zero-rating on local supplies for export manufacturing under the EFS has further harmed domestic manufacturers. Exporters are finding it increasingly cost-effective to import duty-free and sales tax-free raw materials and inputs instead of sourcing domestically.

This has had a devastating impact on local producers of upstream products, with imports of cotton yarn, for instance, rising from ~2 million KG in July 2023 to over 15 million KG in July 2024. Procuring the same domestically, already uncompetitive due to high energy and operational costs, now entails paying 18% sales tax and waiting months for a refund—when and if it is processed—incurring an opportunity cost of at least 20% per annum. Over 40% of domestic yarn production has shut down as a result, with similar trends across other sub-sectors of the textile industry. This has severe implications for employment, government revenue, and external sector stability.

Simultaneously, the incomprehensible SRO 350 remains in force, despite explicit instructions from the Prime Minister to suspend it until it is made workable for all stakeholders involved. The new requirement of linking the entire supply chain to file sales tax returns has created chaos, where firms across the country are unable to file their returns within the deadline.

Input tax claims of the buyer are restricted based on the seller’s timely filing of their returns, even when the buyer has paid the full amount, including sales tax, to the seller. Buyers are being penalized for circumstances beyond their control, and are forced to pay additional taxes and penalties, which are otherwise not their liability. The rule has a cascading effect: when a buyer is unable to file their return due to the above situation, their customers are also unable to claim input sales tax, leading to a widespread inability to file returns.

For the sake of increasingly expensive foreign loans and rollovers, the government is decimating a sector capable of generating $25 billion annually at current installed capacity, with the potential to expand to $50 billion per year within five years—if only it were supported by a conducive policy environment.

Given the multitude of issues decimating Pakistani products’ international competitiveness, if the unintended consequences of an economic shutdown are not understood, then perhaps a swift and decisive end would be less cruel than the slow poison being administered to the industry.

Dragging this process out only prolongs the suffering of millions whose livelihoods depend on a once-thriving sector. The path we’re on leads only to economic collapse, and it’s time for those in power to choose: either commit to genuine reform that allows industry to thrive, or be honest about the fatal trajectory that has been set in motion.

Yet, even now, there is hope. With the recent turmoil in Bangladesh, Western decoupling from China, and growing calls for sourcing diversification amidst heightened GVC risks, Pakistan is well placed to capitalize on these opportunities if market distortions are addressed and manufacturing is made financially viable again; but the window of opportunity is already closing fast.