We are our own worst enemy

Almost three years into Pakistan’s economic crisis, the illusion of stability in indicators like the exchange rate and inflation without a resurgence of capital and forex inflows offers little reassurance about the future of the economy and the country.

Rather than recovery, the current stability is more a function of stifled growth. Inflation was reported at 4.1 percent in December 2024, but this owes more to a demand-side recession than meaningful progress. The economic slowdown has subdued price increases as incomes and purchasing power remain well below pre-crisis levels, reflected in dismal GDP growth of 0.92 percent for the first quarter of FY25, including a 1.03 percent contraction in industrial output.

The underlying fragility of this stability amidst the absence of growth is unmistakable as economic policies appear to be a deliberate recipe for economic self-destruction. Manufacturing industries are buckling under the weight of exorbitantly high energy prices, compounded by uncertainty regarding continuation and affordability of gas supply for captive power generation.

At the same time, following changes in the Export Facilitation Scheme, local industry has been subjected to an 18 percent sales tax on inputs for export manufacturing, while imports of the same remain exempt from both duties and taxes. This dual pressure has brought industrial sectors, particularly the textile value chain, to the brink of collapse.

The government’s withdrawal of the sales tax exemption on local supplies under EFS (export facilitation scheme) has placed Pakistani cotton growers, spinners and weavers at a significant disadvantage. This mindless policy has crippled domestic producers, leaving them unable to compete with counterparts in the United States, Brazil, China, Uzbekistan, and beyond. Unsurprisingly, the consequences have been devastating. Around 25 prcent of spinning mills have already shut down, and others are operating at less than half their capacity.

The spinning sector now stands at the edge of ruin. With over 12 million installed spindles, the sector has the capacity to consume more than 16 million bales of cotton annually. Its collapse would unravel the entire textile value chain, starting with cotton farmers, whose livelihoods depend on a thriving spinning industry to sustain demand for their crop.

Cotton farming, which injects USD 2–3 billion annually into the rural economy, provides a lifeline to some of Pakistan’s most vulnerable communities. The ripple-effects of its decline would exacerbate rural poverty, disproportionately impacting women, who form a significant share of the labour force in cotton-picking and related activities. A deteriorating rural economy would further depress household incomes, reduce spending power, and deepen the already stark inequalities in marginalized regions.

It also puts at risk the government’s agricultural revival initiatives like the Green Pakistan Initiative that include large-scale cotton cultivation as a cornerstone. These plans are doomed without a robust spinning sector to sustain demand for domestic cotton.

The IMF’s prohibition on crop support pricing has further exacerbated the challenges faced by farmers. Without guaranteed profitability, farmers have little incentive to cultivate cotton, particularly as the industrial base that once supported them crumbles. It is important to recognize that Pakistan’s cotton, characterized by higher trash and moisture content and smaller bale sizes, is not suited for international markets. Its primary utility lies in local consumption, making domestic demand critical to sustaining the cotton economy.

By mid-2024, domestic production of yarn was down by over 40 percent YoY, and the situation has significantly worsened since then. This sector has absorbed billions of dollars in investment over the years, most recently under TERF (temporary economic reliance facility) of State Bank of Pakistan (SBP), and plays a pivotal role in supporting the country’s export-oriented economy. Its collapse would represent not just a devastating loss of industrial capacity but also a sunk cost of over $15 billion. The spinning sector is the key link between the cotton economy and downstream industries like weaving, dyeing, and garment manufacturing. If this sector is allowed to wither, it will trigger a catastrophic loss of employment and economic activity.

The onslaught does not end with domestic policies. Chinese cotton yarn, largely produced using Xinjiang cotton, has flooded Pakistani markets at prices local producers cannot match. With significantly lower energy (electricity priced at 5 cents/kWh) and other input costs, and much higher productivity, China’s dumping of cheap yarn has further devastated Pakistan’s spinning industry.

This issue is now also complicated by geopolitical risks. Xinjiang cotton faces sanctions from the United States, and the incoming US administration’s hardline stance on China could expose Pakistan’s economy and textile sector to additional vulnerabilities if domestic yarn continues to be replaced by imported, predominantly Chinese, yarn.

The energy crisis further compounds these challenges, rendering Pakistani spinning—where energy now accounts for around 54 percent of conversion costs, up from 35 percent two years ago—even less competitive. International competitors enjoy electricity tariffs ranging 5-9 cents/kWh while Pakistan’s industries face rates ranging13-16 cents/kWh. Natural gas prices present a similar disparity, with local industries paying over USD 12/MMBtu, compared to USD 6–9/MMBtu in competing countries. These input costs make Pakistani exports uncompetitive in global markets, even before factoring in duties and taxes.

The looming disconnection and price hikes of gas supply to industrial captive generation facilities has created further uncertainty regarding the future of the textile industry. The IMF is bent on forcing industries to transition to a prohibitively expensive and unreliable grid.

The proposal of raising gas/RLNG prices to Rs 4,100 per MMBtu plus a 5 percent levy, with plans for further hikes and additional levies, is equally disastrous as shutting off gas supply to captive power plants. Such measures would render in-house power generation financially unviable. Major textile companies have already begun shifting to alternatives like furnace oil-based generation—costlier and environmentally damaging options necessitated by the uncompetitive energy landscape.

Instead of enforcing unsustainable energy policies, the government should allow market principles to guide resource allocation. Industries must be permitted to import their own RLNG and operationalize the Council of Common Interests’ approved policy for direct procurement of up to 35 percent of new domestic gas discoveries. Only by securing access to competitively priced inputs can Pakistan’s industrial sectors grow, compete in global markets, and create jobs.

The economic implications of inaction are dire. If the spinning and cotton sectors collapse, Pakistan will be forced to increase reliance on imported inputs, eroding any gains from value-added textile exports. The resulting structural imbalance would undermine efforts to reduce the trade deficit and weaken the competitiveness of Pakistani exports.

International buyers are also changing their sourcing preferences. Recent disruptions to global value chains—ranging from the COVID-19 pandemic to the Ukraine war and climate change—have prompted buyers to favour suppliers capable of offering end-to-end solutions. This shift toward “super vendors,” who provide fully integrated supply chains from raw material to finished product, puts Pakistan at a disadvantage. The decline of the spinning sector would fragment the country’s textile value chain, diminishing its appeal as a sourcing destination and further shrinking its share of global markets.

Allowing this critical industry to wither would represent a colossal failure of governance, with far-reaching consequences for Pakistan’s economy. High energy costs, inequitable tax policies, and poor planning have placed the industry in a chokehold. The current trajectory is unsustainable. Without immediate corrective action, the destruction of Pakistan’s spinning and cotton sectors will trigger a cascade of economic and social devastation.

Millions of jobs are at risk, particularly in rural areas, where alternative employment opportunities are scarce.

The path forward is clear: the government must prioritize the survival of local industries. This means addressing the energy crisis, ensuring equitable tax policies, and fostering an environment where domestic producers can compete on a level playing field with international rivals, which is most optimally achieved by restoring the Export Facilitation Scheme to its pre-Finance Act 2024 form, including the zero rating/sales tax exemption on local supplies for export manufacturing.

The time for half-measures has passed. Failure to act will leave Pakistan as its own worst enemy.

Copyright Business Recorder, 2025