Only a few businesses in Pakistan have attained regional and global recognition while managing to thrive in the long run. One such success story is Interloop, one of Pakistan’s largest publicly listed textile firms and now country’s largest exporter. This article draws on insights shared by its founder, Musadaq Zulqarnain, who highlighted the business environment and policy challenges in Pakistan and emphasized that fiscal discipline and a business strategy, not financial privilege, are required to run a business.

Challenges in the textile sector are well known: the lack of scalability, little value-addition in the products, and dependence on cotton-based products. Pakistan also struggles to compete with neighboring countries due to higher energy costs.

Musadaq proposed certain solutions to ensure the smooth operation of the textile and other industries in Pakistan. He believes in allowing free-floating capital flows which can significantly enhance economic efficiency by allocating resources to the most productive uses. It reduces distortions caused by government-imposed capital controls, enabling a more dynamic and competitive economy. When individuals and businesses have the freedom to invest their earnings without bureaucratic hurdles, capital can flow into sectors that promise higher returns and innovation.

For Pakistan, removing restrictions on capital flows could attract foreign investments, increase financial market participation, and integrate the economy into global value chains. However, robust regulatory frameworks are needed to mitigate capital flight risks and economic instability.

Pakistan’s reliance on imported raw materials for the textile industry has been often identified as a challenge. Producing these materials locally is theoretically a more sustainable solution. Still, according to Musadaq, high production costs of materials domestically often surpass the cost of imports due to outdated agricultural practices, low yields, and inefficient supply chains. The lack of modern infrastructure for processing raw materials increases costs, another factor contributing to the import of raw materials.  For local production to replace imports, the final price of locally produced goods should be lower than that of imports, which is not currently the case. However, if the country’s unable to substitute the imports, it should utilize the imported raw materials efficiently.

Our entrepreneur believes that Pakistan should discourage wealth creation in static sectors. Pakistan’s real estate sector has often served as a haven for wealth storage rather than an engine of economic growth. The under-taxation of real estate encourages speculative investments, which inflate property prices without contributing significantly to productive economic activity. The government should implement progressive real estate taxes and introduce and enforce taxes on idle and speculative property holdings to redirect wealth into more dynamic sectors.

Commenting on the country’s youth bulge, Musadaq believes that Pakistan faces the paradox of many university graduates struggling to find employment. The root causes include a mismatch between educational outputs and market demands, outdated curricula, and insufficient emphasis on practical skills.

Finally, Musadaq identified key areas that can help Pakistan in terms of growth include promoting entrepreneurship in agro-tech to modernize the agriculture sector. Similarly, the importance of services and the IT sector cannot be emphasized enough, which requires relatively less cost to be established and maintained, unlike the manufacturing sector. Pakistan can thus expand the services sector by incentivising logistics, retail, and healthcare industries. Similarly, it should provide vocational training to enhance employability and increase investment in IT infrastructure and training programs to create a competitive edge. Capitalizing on Pakistan’s rich cultural and natural heritage by developing eco-tourism and adventure tourism while improving tourism infrastructure and safety standards can help flourish tourism in the country.

The article draws heavily from episode 414 of Muzamil Hasan’s Thought Behind Things (TBT) podcast, a podcast featuring Musadaq Zulqarnain.

Introduction

Privatization, a policy shift aimed at rebalancing the roles of the public and private sectors in government policies (Smith & Lipsky, 2009), has been a prominent focus for decades. Auctions, divestitures, tenders, initial public offerings, and global depository receipts are some of the common methods employed for privatization (Qureshi, Iftikhar, & Raza, 2020). Auctions have been the most popular method, accounting for 37.5% of privatization efforts, followed by divestitures at 13.6% and tenders at 15.91%.

The paradigm shift towards privatization gained momentum following the oil price shock and economic crises triggered by state-owned enterprises. This shift led to a widespread endorsement of privatization by international donor agencies, the International Monetary Fund, and the World Bank. In the late 1980s, many countries, including New Zealand, Czechoslovakia, Latin American nations, and sub-Saharan African countries, began to sell off their state-owned enterprises.

However, underdeveloped and emerging economies continue to rely heavily on state-owned enterprises. Globally, there are still 1500 state-owned multinationals with over 86,000 subsidiaries (Karimkhan, 2018). Half of these multinationals are based in emerging economies, while one-third are in Europe. In Pakistan, as of 2018, state-owned enterprises contributed 10% to the GDP and generated 0.5 million jobs. Unfortunately, the losses incurred by these enterprises have placed a significant burden on the budget, consuming nearly Rs 1.3 trillion of taxpayers’ money in total liabilities and debt. The annual average losses of state-owned enterprises have reached Rs 900 billion.

Overview of Pakistan’s Economic Structure and Privatization

Privatization is crucial for discouraging rent-seeking behavior by the government and promoting firms’ profit maximization. However, the government may retain strategic sectors or commodities where social optimality differs from that of private firms (Naqvi & Kemal, 2002). The primary objectives of privatization include reducing the fiscal deficit caused by state-owned enterprise losses, improving production efficiency, increasing employment opportunities, boosting investment and savings, and stimulating economic activity.

Privatization is essential for enhancing market structure, and the goals of small-scale and large-scale privatization differ. The effectiveness of privatization varies depending on the economic conditions, such as unemployment and inflation levels. Small-scale privatization is generally more beneficial in economies with high unemployment and low inflation, while large-scale privatization is more suitable for addressing significant fiscal deficits.

The presence of state-owned enterprises has deterred foreign investors from investing in Pakistan due to the substantial stakes involved. To attract foreign investment, Pakistan needs to create a free and competitive market environment. Mehmood and Faridi (2013) analyzed the minor effects of privatization on Pakistan’s economy, using figures, descriptive statistics, a correlation matrix, and year-wise percentage changes in selected variables due to a lack of data. The government has divested state-owned enterprises through 167 transactions worth Rs 467.421 billion. Their analysis suggests that privatizing state-owned enterprises can benefit the government by increasing revenue. They emphasize the importance of transparency in privatization to achieve the goals of a competitive market and nation-building.

A robust financial system is essential for a country to mobilize domestic savings towards efficient businesses. Khalid (2006) highlights that Pakistan’s financial sector, particularly the banking sector, was nationalized in the early 1970s. In contrast to the 1970s policies, the government reversed its stance and initiated privatization and reforms in the banking sector during the 1990s. By the end of 2002, the public sector’s share in banking had decreased to 41% from 92% in the 1990s.

Khalid (2006) analyzed the impact of liberalization and privatization on the banking sector using the CAMEL framework (capital adequacy, asset quality, management soundness, earning and profitability, liquidity, and sensitivity to market risk). The study concluded that privatization had a positive effect on the banking sector, leading to increased transparency and efficiency in operations.

An empirical study by Qureshi, Iftikhar and Raza (2020) found that the fiscal deficit is a key factor influencing the decision to privatize. They also identified other exogenous variables that influence privatization decisions, such as government will, the influence of international institutions like the World Bank and IMF, and inflation rates. They concluded that privatization tends to increase when inflation rises but can be hindered by increased GDP.

Historical Perspective of Pakistan’s Economic Structure and Privatization

Pakistan has experienced a history of economic ups and downs. Economic challenges have persisted since its independence, with each government adopting different approaches. Understanding the historical context provides valuable insights into Pakistan’s economic journey.

Pakistan in 1947-71: Pakistan’s economy experienced moderate growth during the era of General Ayub Khan (1958-1969), with GDP growth rates exceeding 5%. However, this growth was concentrated in the hands of a few wealthy families, leading to a significant disparity between the rich and poor. The private sector was efficient during this period, despite being controlled by a select group of 22 families.

Pakistan’s Nationalization in 1971-78: The Zulfiqar Ali Bhutto era witnessed a shift towards socialism and the nationalization of key industries. This policy had negative consequences for businesses, industries, and investors, deteriorating the market structure. The transition from a capitalist approach to a partially communist one led to increased tensions between labor unions and the business class. The nationalization program, implemented in three phases, encompassed various industries, including metal, engineering, petrochemicals, cement, and public utilities. However, the nationalization resulted in significant losses for the economy, including inefficient production techniques, bureaucratic involvement, and increased fiscal burdens.

Reversal of Pakistan’s Nationalization in 1978-88: General Zia ul Haq, who became president in 1978, reversed the nationalization policy initiated by Zulfiqar Ali Bhutto. Despite his limited economic expertise, Zia entrusted economic management to a team of technocrats. He successfully denationalized several industries, particularly ginning mills, but faced challenges in privatizing others due to various factors, including lack of private sector interest and conditions set by previous owners.

Pakistan’s Privatization in 1988-90: The Pakistan People’s Party, led by Benazir Bhutto, won the 1988 elections and prioritized privatization. A British advisor, Rothschild, recommended a widespread ownership model involving small savers to enhance the capital market. The government initiated privatization of several key assets, including Habib Bank, Muslim Commercial Bank, PNSC, PIAO, PSO, SSGC, and SNGPL. However, some privatization efforts were abandoned due to a lack of private sector interest.

Pakistan’s Privatization in 1990-93: The Islamic Jamhuri Ittehad (IJI) government, which came to power in 1990, continued the privatization agenda. Their objectives included reducing government expenditure, expanding the private sector, modernizing state-owned enterprises, and creating a liberal and competitive market. They planned to privatize 118 state-owned enterprises through a bidding process, but only managed to privatize 69 units during their tenure.

Pakistan’s Privatization in 1993-95: The Pakistan People’s Party, under Benazir Bhutto, again prioritized privatization upon their return to power in 1993. They established a privatization commission to accelerate economic development and reforms. The commission categorized state-owned enterprises into three groups and implemented three privatization methods: open bidding, stock exchange, and strategic investors. During this period, several major SOEs were privatized, including General Refectories Limited, Harnai Woolen Mills Limited, Lyllpur Chemical and Fertilizer Limited, Republic Motors Limited, Spinning Machinery of Pakistan, and Hazara Fertilizer.

Statistics Relevant to the Period 1988-1995

Privatization was a common theme among all political parties that ruled during the period 1988-1995. The government received Rs 34.531 billion through privatization, but a significant portion, Rs 600 billion, was used to pay off debt. Additionally, Rs 1600 billion was allocated to the Social Action Program (SAP), a public sector development plan.

Conclusion

The three-phase privatization process from 1988 to 1995 faced several challenges, including a lack of consensus among relevant parties. The government’s failure to involve labor unions and social partners in the policy-making process contributed to resistance and opposition. While there is a perception that public enterprises are inefficient, many private enterprises also struggle to meet the requirements of the Privatization Commission of Pakistan.

Common issues associated with privatization include regulatory reforms, job losses, monopolistic behavior by private firms, and the establishment of inadequate regulatory frameworks. It is crucial to implement a comprehensive legal framework and operating mechanism for privatized state-owned enterprises.

Many governments in Pakistan continue to prioritize privatization, but the lack of a long-term implementation program is hindered by political and economic uncertainties.

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Author: Maaz Khan is currently pursuing his M.Phil. in Economics from PIDE, Islamabad.