Effective Energy Allocation for Export Growth

July 6, 2022

Effective Energy Allocation for Export Growth

July 6, 2022

Shahid Sattar and Eman Ahmed

Pakistan’s immense economic potential will remain elusive as long the most productive sectors that enable export-led growth are deprived of energy availability and consistency. Despite the textile exporting sector’s capacity to deliver over $2 billion per month in exports, recent government decisions to suspend gas supply to the sector have jeopardized the sector’s capacity to deliver.

Gas/ RLNG to the textile industry has been suspended from July 1st to July 8th, which will be followed by shutdowns for Eid from 9th to 14th July. This shutdown of 15 days will translate to a loss of at least $1billion that would have otherwise positively impacted the Balance of Payments. More than 50% of output is likely to be lost in the month of July, with the very real risk of losing orders on a permanent basis.

The textile industry has achieved a new record in terms of exports reaching $19.5 billion from $ 12.5 billion just two years ago. This fantastic growth was enabled by implementation of Regionally Competitive Energy Tariff (RCET), investment of over $ 5 billion in expansion and establishment of 100 new textile units resulting in enhanced export capacity of $ 500 million per month.

Textile exports were expected to increase to $25 billion plus in the coming fiscal year. If this momentum is lost due to energy supply and cost constraints, Pakistan will be forced to seek additional $6 billion in loans from abroad which under the circumstances may not even be possible. Textiles have repeatedly delivered their commitments and proven that they are a viable and long-term solution towards economic stability. However, energy unavailability, uncompetitive pricing of critical inputs and unjustifiably high taxes continue to jeopardize export-led growth.

The government has been no stranger to taking bold steps that are intended for economic stabilization, such as increasing the fuel price substantially over the past several weeks. In the same vein, we urge the government to consider its misallocation of resources as a detriment to this very goal of stability. There must be an equally bold decision to aptly prioritize the gas supply for export-oriented sectors which are the greatest contributor to economic stability and growth, rather than allowing heavy gas usage in the domestic sector, which is unproductive and does not make any contribution to the national exchequer.

Gas remains the major or only source of energy for 75 percent of the textile industry in Pakistan but still consumes only 8.6 percent of the total national gas supply. Processing mills have the highest use of gas and accounts for 75 percent of their energy mix—while 67 percent of the electricity in composite firms is being generated through gas.

Source of Power Generation for Textile Industry-Pakistan (Survey Sample)

Average Use of Gas in Energy Mix (Survey Sample)

The full potential of our energy resources is not unlocked because of overuse in non-exporting sectors. A policy to ensure pure economic use of the scarce resource has to be implemented in order to ensure a sustainable economic future. For domestic users, single point source i.e. electricity should be implemented to prevent overuse and wastage.

Good business sense dictates that policy needs to be holistic and prioritize the largest value addition to society, so that economic disasters can be prevented. However, policymakers in Pakistan tend to be caught up in rectifying mistakes of the past and by the time a useful policy is implemented, plenty of damage has already been done e.g. exports have already sunk and buyer relationships have been destroyed due to an inability to meet orders.

While the manufacturing and consumer goods sectors have a moderate need for reinvention and innovation, what they really need is minimal disruptions in the form of regulatory limitations, to be empowered to keep up with new technologies, and the ability to stay abreast of the competition, and the role of the government is central in each of these aspects. It is no surprise that Pakistan ranks low in the ease of doing business and competitiveness indices, as many potential startups are burdened by overregulation that hinders them from taking off. Meanwhile, the textile sector remains under immense pressure to maintain the majority of Pakistan’s exports, and therefore must be considered critical for Pakistan’s economic prosperity. These policy recommendations are synergistic – they can only be fruitful if implemented simultaneously. As the textile value chain is fragmented, there is a need for uniformity and facilitation at each step of the process, and any incentives that are provided must be available across the chain.

Earnings through exports serve as a crucial inflow to the economy. Policy support is an absolute requirement that ties into this, but the measures taken by the government are often insufficient. It is essential to direct our confidence and incentives towards our local business community as well as our entrepreneurs. We must also push for improvements in quality education, training and job opportunities for the youth. Considering the export-led economic prosperity that is taking Bangladesh and Vietnam to new heights, Pakistan must mitigate its reliance on primary and traditional commodities, prioritize free trade agreements, rationalize tariff structures and fast-track the shift towards manufactured, value added services and nontraditional goods for export.

The textile sector of Pakistan exports over 80% of its products, and the export-oriented industries are 25 percent more productive than non-exporting firms, and their productivity increases as exports increase. However, inefficiencies cannot be exported, so these must be mitigated from all input materials before results can be seen. Since exports in Pakistan are labor-intensive, expansion in this industry is a way to ensure large-scale job-creation, and an increase in foreign currency to pay for required imports. With the right policies in place, a diversified set of high quality exports will provide a crucial uplift to economic activity and lead to a cycle of development and improvement in perception. In the coming fiscal year, textile exports were expected to increase to over $25 billion. For this mission to be successful, consistently supportive energy policy is absolutely essential. Only then can we prevent the need to seek $6 billion in foreign aid in the coming year – a scenario which would lead Pakistan to default and sink the economy further into the debt trap.


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