Textile is the most important manufacturing sector of Pakistan and has the longest production chain, with inherent potential for value addition at each stage of processing, from cotton to ginning, spinning, fabric, dyeing and finishing, made ups and garments.
The sector contributes nearly one-fourth of industrial value-added, contributes 8.5pc of GDP and provides employment to about 40 percent (about 19 million) of countries workforce. The industry also provides support for over 10 million farming families, reflecting Pakistan’s status as a major producer of raw cotton. Barring seasonal and cyclical fluctuations, textiles products have maintained an average share of about 62 percent in national exports.
Pakistan’s economy is currently facing multifaceted challenges, spanning an economic downturn, high inflation and political turbulence. Enhancing exports is crucial for Pakistan to stabilize its economy.
Moreover, Pakistan needs to improve its foreign exchange reserves, and reduce the balance of payments deficit. We have the proven examples of Sri Lanka and Bangladesh who have safeguarded their economies by focusing on exports and other sectors and pulled their economies out of crisis in most challenging times.
Bangladesh’s export sector has faced severe challenges in recent times, including disruptions due to political movements, student protests, and global economic shifts. To safeguard and strengthen its export sector, the country has taken several steps including fostering conducive business environment, strengthening export infrastructure, policy interventions & reforms, and building resilience in garment sector.
By focusing on these strategies, Bangladesh has been able to secure its export sector and mitigate the impact of student movements and other domestic challenges. Similarly, Sri Lanka following its worst economic crisis in 2022, implemented a range of strategies and reforms to overcome the grim situation.
These strategies include diversification of economy, social and economic reforms, currency stabilization, export promotion, spending cuts, debt restructuring and tax reforms. Given the current economic challenges, Pakistan also needs to adopt a multifaceted approach to improve its export performance and initiate moves like promoting branding and marketing initiatives, diversifying export products, improving product quality, developing infrastructure, enhancing competitiveness, and strengthening trade relationships by signing free trade agreements with other countries.
Pakistan needs to foster innovation to stay competitive in the global economy. To achieve this, the government can create incentives for research and development, and promote collaboration between universities, businesses, and research institutions.
It can also establish technology parks and incubators to promote innovation and entrepreneurship. Besides, Pakistan needs to foster collaboration, establish innovation districts, create innovation challenges, focus on sustainable innovation, develop innovation hubs, foster open innovation, and invest in digital infrastructure.
Thriving examples of innovation initiatives from other countries can serve as a model for Pakistan to enhance its external earnings. Our exports are highly concentrated in a few sectors, particularly textiles and agriculture. To boost exports, Pakistan needs to diversify into non-traditional sectors like Information Technology (IT), pharmaceuticals, engineering goods, and value-added agricultural products. Pakistan’s economic crisis can be addressed by reducing the high cost of doing business in the country, which can be achieved by simplifying bureaucratic procedures, providing tax incentives, improving infrastructure, and reducing energy costs. By learning from successful countries, Pakistan can create a more favorable business environment, attract more investment, and ultimately improve its economy.
Strengthening the investment climate to attract more Foreign Direct Investment (FDI) and diversifying the sources of FDI is also important for promoting economic growth, given the declining trend of FDI in recent years and concentration in a few sectors and countries of origin, which makes Pakistan vulnerable to adverse shocks.
Many countries have implemented measures to improve their business environments, such as New Zealand’s reduced regulatory burden and transparency, Singapore’s streamlined regulations and tax incentives, Denmark’s stable business environment with tax incentives and subsidies, the UAE’s attraction of foreign investment through tax incentives and investment in transportation and logistics infrastructure, and South Korea’s efforts to reduce bureaucracy and corruption and invest in innovation and technology.
High priced energy, which accounts for approximately 30-40pc of production expenses, has immensely damaged the export growth and adversely impacted the textile industry. There is a significant difference in energy tariffs of Pakistan with competitive countries in the region. Electricity charges in Vietnam, India, and Bangladesh are US cents (kWh) 7.2, 10.3 and 8.6 respectively. While in Pakistan, power tariff has exceeded a critical threshold of 14 cents/KWh, which makes the industry unviable within the region. Similarly, there is also a significant difference in gas tariffs. Gas rates in Vietnam, India and Bangladesh are 9.8, 6.5 and $7.5/MMBTU whereas in Pakistan, this is 12.08 $/MMBTU for Industrial sector and $12.88/MMBTU for captive. Further, economic inefficiencies like cross subsidies and stranded costs embedded in power tariffs cannot be passed on to international consumers. The Government must review power tariff policies to reverse the further catastrophe; rationalize cross subsidies on industrial energy tariffs to support growth.
Industries often require working capital to fulfill their orders, purchase raw materials, and cover operational expenses. However, due to various reasons such as delayed payments, high borrowing costs, and limited access to credit, these industries frequently find themselves in a cash crunch.
Liquidity crunch can severely hamper their ability to fulfill orders on time and meet the growing demand for their products. This liquidity crunch faced by industries is due to delay in the disbursement of tax refunds and other incentives by the government. For instance, a significant portion of textile industry’s working capital is stuck in the refund regime. Textile exporters often rely on these refunds to finance their operations and investments.
The high interest rate, which is currently at a record high of 17.5pc, is adversely affecting the export sectors in Pakistan. This high interest rate in a low growth environment is creating bad debts in the private sector, squeezing fiscal space for development and stifling capital formation both in the public and the private sectors.
Policy rates of regional countries, such as Bangladesh, India, Vietnam, and Sri Lanka ranges from 4.5pc to 11pc, highlighting the disadvantage faced by Pakistan. The high interest rate is creating uncertainty in the business environment and hindering long term plans and investments due to hefty borrowing costs. The policy rate must be brought down to 14pc to continue the movement of industrial wheels.
Inconvenient tax changes have been introduced under the Finance Act 2024 which will significantly hurt the export pace. Under the Finance Act 2024, an additional Advance tax 1% u/s 147 has been levied on exporters on their foreign remittance received against exports. In previous regime, exporters were paying 1pc Income tax u/s 154 on their export remittances as fixed tax in addition to 0.25pc Export Development Surcharge (EDS). Moreover, a super tax up to 10pc based on income has already been imposed on exporters.
The average profitability of exporters is around 4pc, thus their effective tax rate in the previous tax regime was over 31pc tax. With the imposition of a further 1pc advance tax, their tax ratio has been increased to 56pc, which is quite unjust. Exporters cannot transfer the cost increase to foreign buyers. EDS should be held in abeyance until the surcharge already collected is spent on export development.
With such tax changes, the export sector has been much burdened than the non-export sector as total tax deduction from the export sector is 2pc, whereas non-export sector’s tax deduction is 1pc.
In conclusion, while the industries of Pakistan, including textile export industry, faces several challenges, there are also opportunities for growth and development. So, it is essential for government and relevant stakeholders to address these issues by streamlining refund processes, introducing consistent policies, improving access to credit, and providing a conducive business environment for businesses to thrive.
Pakistan can significantly enhance its exports despite the current economic challenges. A focused, export-driven growth strategy can help the country overcome its balance of payments crisis, create jobs and build long-term economic resilience.