Pakistan’s Industrial Collapse: How Energy and Fiscal Policies Are Driving Deindustrialization

Editorial

Pakistan’s industrial sector is on the verge of collapse, with the government’s policies, particularly regarding energy costs, acting as key drivers of this decline. The energy sector, in its current dysfunctional state, has made industrial operations prohibitively expensive, causing a significant competitive disadvantage for local manufacturers. Without urgent reforms to align energy costs with global standards, Pakistan risks further stagnation and missed opportunities for industrial growth, export expansion, and long-term economic development.

Energy prices in Pakistan are nearly double those of its competitors, with grid tariffs ranging from 13 to 16 cents per kWh, compared to just 5 to 9 cents in neighboring countries. Given that energy accounts for up to 54% of conversion costs in the textile sector, this disparity has made domestic production uncompetitive, even with tax exemptions like the Export Facilitation Scheme (EFS) in place. Furthermore, recent policy changes, such as the removal of the zero-rating and sales tax exemption on local supplies for export manufacturing, have worsened the situation. This policy unfairly taxes domestic inputs while leaving imports untouched, further distorting the market and weakening the competitiveness of local industries.

The textile sector, which forms the backbone of Pakistan’s economy, is a prime example of how these policies are accelerating deindustrialization. Despite having a complete textile value chain—from cotton farming to garment manufacturing—Pakistan’s textile products struggle to compete on the global stage due to high energy costs. Even when adjusted for customs and regulatory duties, locally produced yarn and cloth cannot match the prices of imports, making export growth a challenging feat.

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The ongoing deindustrialization of sectors like textiles has devastating consequences for employment and economic stability. As industries collapse, millions of jobs are at risk, with no immediate replacements in sight due to the lack of investment in productive sectors. This results in a growing reliance on imports, which exacerbates the country’s foreign exchange deficit while weakening the industrial ecosystem.

Pakistan must urgently overhaul its energy and fiscal policies to revive its industrial sector. Reducing energy costs to globally competitive levels, particularly by lowering grid tariffs to 9 cents per kWh, is essential. Additionally, allowing industries to access cleaner, more affordable energy through mechanisms like the Competitive Trading Bilateral Contract Market (CTBCM) could help mitigate the energy crisis.

In the gas sector, reforms are needed to ensure continued supply to captive power plants and reduce inefficiencies in procurement. The government must also liberalize the energy market to give industries the freedom to choose the most cost-effective energy sources.

The current policies are dismantling Pakistan’s industrial foundation, hindering growth and limiting export potential. To reverse this trend, policymakers must act decisively to rationalize energy costs, implement fiscal reforms, and create a level playing field for local industries. Only then can Pakistan’s industrial sector thrive, generate employment, and drive sustainable economic growth.

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