The impact of reduced cotton production on rural economies and country’s balance of payments

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.

In conclusion, the declining cotton crop, coupled with contractionary fiscal policies and uncompetitive domestic inputs, has led to job losses and a potential increase in the import bill. The growing reliance on cheap imported inputs is alarming, as this trend might not stop here. This shift signals not only an increasing dependency on imports but also threatens the sustainability of the domestic value chain. Urgent reforms in agricultural practices, input pricing, and industrial policy can save the industry or lead to its further decline.

Copyright Business Recorder, 2024