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 (EFS).
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 ensure that the country’s economic potential remains unhampered.
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 percent of new domestic gas discoveries under the direct access policy approved by the CCI (Council of Common Interests). 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.
Copyright Business Recorder, 2025
PUBLIC SECTOR EXPERIENCE: He has served as Member Energy of the Planning Commission of Pakistan & has also been an advisor at: Ministry of Finance Ministry of Petroleum Ministry of Water & Power
PRIVATE SECTOR EXPERIENCE: He has held senior management positions with various energy sector entities and has worked with the World Bank, USAID and DFID since 1988. Mr. Shahid Sattar joined All Pakistan Textile Mills Association in 2017 and holds the office of Executive Director and Secretary General of APTMA.
He has many international publications and has been regularly writing articles in Pakistani newspapers on the industry and economic issues which can be viewed in Articles & Blogs Section of this website.
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